6161Copernican Journal of Finance & Accounting e-ISSN 2300-3065 p-ISSN 2300-12402024, volume 13, issue 4 Date of submission: May 30, 2024; date of acceptance: October 20, 2024. * Contact information (corresponding author): ilelaboyecharles@gmail.com, Bank of Agriculture Ltd., Total Garden Ibadan, Oyo State, Nigeria, phone: +2348038242855; ORCID ID: http://orcid.org/0009-0007-4354-7048. ** Contact information: muyiwa.alade@aaua.edu.ng, Department of Accounting, Adekunle Ajasin University, Akungba Akoko, Ondo State, Nigeria, phone: +2348065339449; ORCID ID: http://orcid.org/0000-0002-6189-9318. Ilelaboye, C.S., & Alade, M.E. (2024). Monitoring Activities and Non-Performing Loans of Financial Institutions in Nigeria. Copernican Journal of Finance & Accounting, 13(4), 61–76. http://dx.doi. org/10.12775/CJFA.2024.017 charles segun ilelaboye* Bank of Agriculture Ltd. Muyiwa ezekiel alade** Adekunle Ajasin University monitoring activities and non-performing loans of financial institutions in nigeria Keywords: audit quality, board independence, monitoring. J E L Classification: G21, M41, H81. Abstract: Recent complexities in the Nigerian financial sector underscore the critical need for effective monitoring activities to mitigate the risks associated with non-per- forming loans (NPLs). This study investigates how monitoring activities, particularly focusing on board independence and audit quality, affect NPLs in Nigerian financial in- stitutions. Data were obtained from the annual reports of selected financial institutions covering the period from 2010 to 2022. The population includes all eleven categories of financial institutions in Nigeria as of December 31, 2022. However, a purposive sam- pling approach was employed, focusing on four specific categories, totaling 38 finan- cial institutions. The feasible generalized least squares regression method was used for data analysis to ensure a robust and reliable result. The findings reveal that while board independence negatively impacts NPLs, the effect is not statistically significant. http://dx.doi.org/10.12775/CJFA.2024.017 http://dx.doi.org/10.12775/CJFA.2024.017 Charles Segun Ilelaboye, Muyiwa Ezekiel Alade6262 Conversely, audit quality shows a negative and significant effect on NPLs. The findings suggest that both board independence and audit quality have the potential to mitigate the incidence of non-performing loans in Nigerian financial institutions. However, the significance of their effects varies. Recommendations include enhancing board mem- bers training and development, mandating high-quality audits, and strengthening reg- ulatory oversight to improve monitoring capabilities.  Introduction Introduction The financial institutions in Nigeria indeed play a crucial role in the economic growth, development, and stability of the country. They facilitate the alloca- tion of resources, mobilization of savings, and the funding of businesses and infrastructure projects. However, the persistent issue of non-performing loans (NPLs) within the sector remains a significant threat to its stability in some parts of the world despite the existing regulatory frameworks and monitor- ing activities. In Africa, Comoros, Kenya, Djibouti, and Zambia perform beyond a threshold of 5%, while in Europe, San Marino, Ukraine, Greece, and Cyprus perform beyond a single digit (World Database, 2020). According to Ojeka, Adegboye and Dahunsi, (2021), non-performing loans in Nigeria have shown a considerable fluctuation over the years. For instance, NPLs peaked in 2009 with a ratio of 37.25%, marking a period of severe finan- cial distress. The ratio subsequently fell to its lowest point of 2.96% in 2014, indicating a period of recovery and improved asset quality. However, this im- provement was not sustained, as the NPL ratio rose again to 12.82% in 2016 and further to 14.81% in 2017. By 2018, the NPL ratio had decreased slightly to 11.67%. In 2021, the rate of NPLs stood at 4.85%, demonstrating a signifi- cant improvement from the previous years and suggesting a positive trend to- wards financial stability. Zhao and Ooi (2023) argue that weak monitoring was at least partly responsible for the elevated levels of NPLs, which ultimately led to distress in the financial sector. The accumulation of NPLs in Nigeria’s financial sector has had severe re- percussions, including capital erosion, profit depletion, and the liquidation of numerous financial institutions (Bebeji, 2013). This issue has been persistent, with significant spikes observed at various intervals. For instance, Chijioke (2018) highlighted that weak monitoring activity, including breaches of gov- ernance rules and disharmony among board members, contributed to the de- terioration of risk asset quality at Diamond Bank Plc. This impairment in asset quality was significant enough that it eventually led to Diamond Bank’s take- monitoring aCtivitiEs and non-PErforming loans… 6363 over by Access Bank Plc in April 2019. Furthermore, Femi and Msugh (2021) identified that the Bank of Agriculture (BoA) faced challenges in recovering over ₦77 billion in loans due to inadequate monitoring activities. This issue was primarily attributed to the lack of an independent board to oversee and monitor the actions of the executive directors. While there is a substantial literature on the causes and determinants of NPLs, research focusing on the effectiveness of monitoring activities and their impact on NPLs in Nigeria remains scanty and needs further empirical inves- tigation. This gap hinders the development of effective strategies to attenuate the incidences of NPLs. To address the issue of NPLs and improve the stability of Nigeria’s financial sector, it is crucial to enhance monitoring activities. This can be effectively achieved through strengthening board independence and im- proving the quality of audits (Ofei, Owusu & Asante, 2020). The present study aims to evaluate the monitoring activities and the non-performing loans of fi- nancial institutions in Nigeria, seeking to fill the gap in previous research that focused exclusively on deposit money banks. Literature reviewLiterature review Non-Performing Loans: Nigeria’s PerspectiveNon-Performing Loans: Nigeria’s Perspective According to the Central Bank of Nigeria (CBN) prudential guidelines (2010), NPLs are defined as loans for which the interest or principal payments have not been made for 90 days or more. Additionally, loans can also be classified as non- performing if the interest payable is equal to 90 days or more and has been rolled over into a new loan. This definition underscores the significance of timely loan repayments and the challenges posed by non-performing loans to the stability and health of financial institutions. The CBN prudential guidelines classify non- performing loans into four categories based on the duration of their delinquency. This classification helps in determining the appropriate provisioning require- ments for these loans. The categories are substandard, doubtful, very doubtful, and lost. In the opinion of Wafula, Muli, and Bulla (2023), the accumulation of non-performing loans has significantly contributed to reduced profitability and, in some cases, the collapse of financial institutions. Scholars such as Wafula et al. (2023) and Ogbebor, Osundina and Oyamendan (2020) measured non-perform- ing loans as the amount of loan defaults divided by the total loan outstanding. Charles Segun Ilelaboye, Muyiwa Ezekiel Alade6464 Monitoring ActivitiesMonitoring Activities The monitoring function is very important to the success of financial institu- tions. Loans represent one of the riskiest assets being paraded by financial insti- tutions from time to time. With this, management needs to commit reasonable time and energy to monitor their loan portfolio (Oba, 2015). Monitoring in the line of thinking of Ahmed and Ng’anga (2020) includes the assessment of control structure in an organization every time. The objective of monitoring, as enunci- ated by Umar and Dikko (2018), is to assess if controls put in place by the man- agement are properly adhered to. Thus, monitoring entails the level of supervi- sion carried out by the management to ensure that assets created do not go bad. Board IndependenceBoard Independence As posited by Islam (2020), board independence represents another layer of monitoring activities, as it discourages the opportunistic tendencies of the Management who acts as agents. The role of independent non-executive direc- tors served as a monitoring mechanism for overseeing the performance and activities of executive directors and management. Overall, their presence was essential to enhancing the board’s effectiveness (Sanni, Shali & Kanwai, 2019). This structure not only ensures effective management and decision-making but also promotes transparency, accountability, and stakeholder confidence. By maintaining a balanced and well-functioning board, companies can better navigate challenges and achieve sustainable growth and success. Furthermore, Potharla and Kolpula (2023) opine that board independence engenders stable performance. Through independence, interest of the shareholders is adjudged protected and hence mitigates agency theory (Rashid, 2017). Audit QualityAudit Quality Illiemena and Okolocha (2019) explain that audit is the systematic examination of the financial accounts by an independent person (auditor) in a bid to express opinion regarding the truth and fairness of the accounting records. What this translates to is that auditors are involved in assurance engagement and em- phasis must be placed on audit quality. The pillar of audit quality as explained monitoring aCtivitiEs and non-PErforming loans… 6565 by Chaari, Belanès and Lajmi (2022) view audit quality from the totality of in- ternal audit, audit committee and external audit. From the perception of Lisa, Orbaningsih and Aditya (2023), audit plays important role in attenuating NPLs through credit assessment and improvement in the processes and procedures. However, there are lots of factors that determine audit quality of a firm. This in- cludes, and is not limited to, qualification experience, independence, audit fees, audit firm rotation, audit firm size, audit committee functions, and audit firm specifics such as competence (Illiemena & Okolocha, 2019). Muotolu and Nwa- dialor (2019) opine that the big audit firms have high exposure while carrying out audit assignment. As conceptualized in this study, audit quality represents a situation where the financial statements of the financial institutions are be- ing audited by one of the Big 4 audit firms. Theoretical reviewTheoretical review Agency TheoryAgency Theory This theory was propounded by Jensen and Meckling (1976) and has attracted attention from various disciplines, particularly accounting, finance, economics, law, and political science. According to Felix (2017), agency theory highlights the inherent conflicts of interest between business owners and managers and underscores the importance of mechanisms to align their interests. Sanni et al. (2019) reinforces the theory by recognizing the critical role of the board of di- rectors in mitigating these conflicts. Through independent oversight, regular audits, and robust governance structures, the board can effectively suppress opportunistic behaviors of management, thereby protecting the interests of shareholders and ensuring the long-term success of the organization. Review of Empirical Studies and Development of HypothesesReview of Empirical Studies and Development of Hypotheses This study examined the effect of monitoring activities on non-performing loans (NPLs) within financial institutions in Nigeria. Key findings are com- pared with analogous studies conducted in regions such as, e.g., Asia, the US, and other African countries to highlight similarities and differences. Charles Segun Ilelaboye, Muyiwa Ezekiel Alade6666 Board Independence and Non-Performing LoansBoard Independence and Non-Performing Loans Studies have shown varying impacts of board independence on non-perform- ing loans (NPLs) across regions. In Indonesia, Kartika, Sulistyyowati, Sep- tiawan and Indriastuti (2022) found a negative but non-significant relation- ship between board independence and NPLs. In the same region, Ramadhanti, Butar and Pangaribuan (2021) posited that board independence has potentials to dip NPL ratios of banks. Similarly, Ejaz, Aziz and Anam (2021) submitted that board independence significantly diminished NPLs in 129 Islamic banks across 29 OIC member countries, indicating better asset quality. Comparable findings were reported in the United States, where Islam (2020) proved effec- tiveness of board independence at reducing the incidence of NPLs in financial institutions. In Jordan, Al Zobi, Shubita, Alomari, Almatarneh and Alrawashdeh (2019) concluded that board independence significantly improves asset quality in commercial banks. Hence, these studies underscore the importance of board independence in curbing loans default in their various domains. Though, Ejaz et al.’s findings focus specifically on Islamic banks, contrasting with the broad- er scope of studies like Kartika et al. and Al Zobi et al. on Indonesian and Jor- danian banks. Comparable results were found in the United States, where spe- cific monitoring activity (board independence) in the study conducted by Islam (2020) proved effective in addressing NPLs of financial institutions, suggesting a universal applicability of this mechanism. Studies in various regions have shown contrasting effects of board inde- pendence on non-performing loans (NPLs). In Tunisia, Budetola, Nmari and Towo (2023) claimed that board independence tends to increase NPL levels in commercial banks, indicating a higher impact on loan defaults. Similarly, in Tanzania, Mwambuli and Mbuya (2020) demonstrated a positive relationship between board independence and NPLs, suggesting that board independence does not necessarily guarantee effective oversight in financial institutions. Likewise, in Sri Lanka, Balagobei (2019) concluded that board independence has no significant influence on NPLs, demonstrating its limited effectiveness as a control mechanism in this region. In Ghana, Akwaa-sekyi and Gene (2016) found a positive but statistically insignificant relationship between board in- dependence and NPLs, implying that board independence alone may not have a meaningful impact on performance in the Nigerian context. These studies demonstrate varying effects of board independence on NPLs across regions. monitoring aCtivitiEs and non-PErforming loans… 6767 While it often improves asset quality (e.g., in Indonesia, Islamic banks, the US, and Jordan), there are contexts (e.g., Tunisia, Tanzania, Ghana, and Sri Lanka) where the impact is negligible or even counterproductive. This suggests that the effectiveness of board independence depends on factors such as regulatory environments, cultural differences, and institutional structures. In the light of the above empirical and theoretical bases, the study advanced a hypothetical proposition in a null form as stated below: H1: Board independence has no significant effect on the non-performing loans of financial institutions in Nigeria. Audit Quality and Non-Performing LoansAudit Quality and Non-Performing Loans Various studies have shown convergent and divergent views on how audit qual- ity, through the use of Big 4 audit firms affects non-performing loans of finan- cial institutions. For instance, Handajani, Akram and Sakarina (2024) in a study conducted in Indonesia submitted that audit quality significantly reduced NPLs of banks. Additionally, Sen, Abedin, Hossain and Ghosh (2022) found in Bangla- desh that audit quality has a negative and significant effect on non-performing loans of banks in the region; Monametsi and Agasha (2020) in Botswana and Uganda found a negative and non-significant effect on audit quality and NPLs. In the study conducted in Tunisia among the commercial banks by Zgarni, Fe- dhila and Gaied (2018), the results showed that audit quality had a negative and not significant effect on asset quality, as measured by discretionary provisions. All these results suggest that audit quality has capacity to improve the assets quality of banks across regions. However, Koutoupis and Malisiovas (2023) in Vietnam and the United States found a positive and significant relationship between audit quality and cred- it risks, thereby highlighting regional differences in the impact of audit quality which could be attributed to factors such as economic environment, cultural fac- tors, firms’ characteristics, and institutional trusts. Thus, drawing from existing empirical submissions, the current study equally proposed in a null form that: H2: Audit quality has no significant effect on the non non-performing loans of financial institutions in Nigeria. Charles Segun Ilelaboye, Muyiwa Ezekiel Alade6868 Figure 1. Conceptual Framework Schema Various studies have shown convergent and divergent views on how audit quality, through the use of Big 4 audit firms affects non-performing loans of financial institutions. For instance, Handajani, Akram and Sakarina (2024) in a study conducted in Indonesia submitted that audit quality significantly reduced NPLs of banks. Additionally, Sen, Abedin, Hossain and Ghosh (2022) found in Bangladesh that audit quality has a negative and significant effect on non- performing loans of banks in the region; Monametsi and Agasha (2020) in Botswana and Uganda found a negative and non-significant effect on audit quality and NPLs. In the study conducted in Tunisia among the commercial banks by Zgarni, Fedhila and Gaied (2018), the results showed that audit quality had a negative and not significant effect on asset quality, as measured by discretionary provisions. All these results suggest that audit quality has capacity to improve the assets quality of banks across regions. However, Koutoupis and Malisiovas (2023) in Vietnam and the United States found a positive and significant relationship between audit quality and credit risks, thereby highlighting regional differences in the impact of audit quality which could be attributed to factors such as economic environment, cultural factors, firms’ characteristics, and institutional trusts. Thus, drawing from existing empirical submissions, the current study equally proposed in a null form that: H2: Audit quality has no significant effect on the non performing loans of financial institutions in Nigeria. Figure 1. Conceptual Framework Schema Independent Variables Dependent Variable Source: authors’ compilation. METHODOLOGY The study is a longitudinal analysis of non-performing loans in financial institutions in Nigeria, utilizing data obtained from secondary sources, specifically from annual reports spanning the Non Performing Loan Ratio Monitoring Activities  Board Independence  Audit Quality S o u r c e : authors’ compilation. MethodologyMethodology The study is a longitudinal analysis of non-performing loans in financial in- stitutions in Nigeria, utilizing data obtained from secondary sources, specif- ically from annual reports spanning the period 2010 to 2022. The base year was significant for the Nigerian financial sector, which saw continued banking reforms and recapitalization efforts aimed at ensuring stability and boosting confidence within the industry (Nwosu, Okedighba & Anih, 2020). The sam- ple frame of the study includes all eleven categories of financial institutions in Nigeria as of December 31, 2022. These categories are deposit money banks, development financial institutions, non-interest banks, and merchant banks. However, the study focuses purposively on four specific categories of these fi- nancial institutions, comprising a total of 38 elements based on their distinc- tive financial characteristics and roles within the Nigerian financial sector. Analyses were conducted using descriptive and inferential statistics, par- ticularly the feasible generalized least squares regression method, to address heteroscedasticity and autocorrelation in the pooled data. The model was adapted from Afolabi, Ogunleye, and Olukoya (2020), who studied the impact of internal control systems on the financial performance of deposit money banks in Osun State, Nigeria, suggesting a tailored theoretical framework for this study. The model is as follows: NPLRit = β0 + β1BIit + β2AQit + eit (1) Where: NPLRit = Non-Performing Loans Ratio (NPLR) of bank i at time t, as depend- ent variable monitoring aCtivitiEs and non-PErforming loans… 6969 BIit = Board Independence of bank i at time t, as independent variable AQit = Audit Quality of bank i at time t, as independent variable it2010–2022 = Annual time series of the pooled data β0 = Constant Parameter β1 = Parameter Estimate (Board Independence) β2 = Parameter Estimate (Audit Quality) eit = Stochastic error time Table 1. Measurement of Variables Variables Proxies/Notation Description Measurement Source Dependent Variables Non-performing Loan Non-performing Loan Ratio (NPLR) Loans that are classified in line with the CBN prudential guidelines. Non-performing Loan divided by Total loans Pham (2021) Independent Variables Monitoring Board Independence (BI) Scenario whereby outsider directors dominate the board structure Ratio of non- execu- tive directors / total directors. Abdulazeez et al. (2019) Audit Quality (AQ) External auditors belonging to Big 4 Dummy variables of 1 for the use of Big 4 audit firms and 0 if not. Ado et al. (2020) S o u r c e : authors’ collection. Results and DiscussionsResults and Discussions Descriptive StatisticsDescriptive Statistics As indicated in Table 2, the descriptive analysis showed that, on average, the non-performing loan ratio among the chosen Nigerian financial institutions hovers at approximately 10% over the period under review. This level is consid- ered high compared to the best international practices, which typically recom- mend an NPL rate of approximately 5% (CBN, 2010). The average mean score of 58% in Board Independence (BI) suggests a dominance of non-executive mem- bers in the board composition, which is beneficial for the sampled financial in- Charles Segun Ilelaboye, Muyiwa Ezekiel Alade7070 stitutions. The smallest observation was 0%, indicating an absence of non-ex- ecutive members on the board, while the highest was 94%. Audit Quality (AQ) has a mean value of approximately 0.88, implying that 88% of the financial institutions under review use one of the Big 4 firms for au- dit engagement. The minimum value of 0 suggests that some financial institu- tions do not engage a Big 4 audit firm, while the maximum value of 1 indicates those that do. The mean value of 24 years for Firm Age (FA) signifies that finan- cial institutions in Nigeria have been listed on the Nigeria Stock Exchange for over two decades. The minimum value of one year implies that some financial institutions have just been listed, while the maximum value of 53 years sug- gests that some banks in the sample have been listed for five decades. In ad- dition, all variables have positive kurtosis, which implies a distribution with more extreme values than the normal distribution. This indicates the presence of outliers or data points that are significantly higher or lower than the mean, suggesting greater variability in the dataset. Table 2. Results of Descriptive Statistics Variables Mean Std. Dev. Minimum Maximum Skewness Kurtosis NPLR 0.10 0.16 0 1.07 3.01 12.65 BI 0.58 0.21 0 0.93 -1.32 4.82 AQ 0.87 0.32 0 1 -2.29 6.25 S o u r c e : authors’ computation. Post-Estimation TestPost-Estimation Test The result from the Breusch-Pagan/Cook-Weisberg test, in Table 3 indicates the presence of heteroscedasticity in the regression model. The test result shows that the reported statistics have a p-value of 0.0000, which is less than the sig- nificance level of 0.05 (indicated by “< 0.005”). Similarly, the autocorrelation test conducted through Breusch-Godfrey LM test manifests serial autocorrela- tion with the reported statistics < 5%. Given the presence of heteroscedastic- ity and serial autocorrelation, the study recommends the use of feasible gener- alized least squares for regression analysis because it provides more efficient monitoring aCtivitiEs and non-PErforming loans… 7171 and reliable estimates of the regression coefficients and their covariance ma- trix under heteroscedastic conditions (Popoola, Ishaya & Aisha, 2021). Table 3. Diagnostic Test Diagnostic Test Test Method Test Statistic P-Value Heteroskedastic Breusch-Pagan Chi2(1) = 98.49 0.0000 Autocorrelation AR(1) Breusch-Godfrey LM Chi2 = 36.90 0.0000 S o u r c e : author’s computation. To investigate the effect of monitoring activities on the non-performing loans of financial institutions in Nigeria, the study employs the use of FGLS results to achieve the objective. From the result in Table 4, coefficient for board independ- ence is -0.0005 with a p-value of 0.971. This indicates that board independence has a negative but not significant effect on the NPLs of financial institutions in Nigeria. The high p-value suggests that the relationship is not statistically sig- nificant. The coefficient for audit quality is -0.0888 with a p-value of 0.000. This indicates that audit quality has a negative and significant effect on the NPLs of financial institutions in Nigeria. The low p-value indicates that this relation- ship is statistically significant, suggesting that higher audit quality is associat- ed with lower NPLs. The statistical outcome indicates that the null hypothesis, which states that monitoring does not have a significant effect on the NPL, is rejected. This conclusion is based on the Wald statistic, which are 42.91 with a p-value of 0.0000. The Wald statistic of 42.91 is significantly high, and the p- value of 0.0000 indicates that the probability of observing such a result un- der the null hypothesis is virtually zero. Therefore, we have strong evidence to conclude that monitoring does indeed have a significant effect on the NPL. Table 4. Regression Analysis of Monitoring Activities on NPLs NPLR Coef. Std. Err. P> |z| [95% Conf. Interval] BI -.0005 .0142 0.971 -.0284 .0274 AQ -.0888 .0136 0.000 -.1155 -.0621 _cons .1445 . .0152 0.000 .1147 .1744 Wald�Chi2(2) = 42.91 Charles Segun Ilelaboye, Muyiwa Ezekiel Alade7272 ��Prob.�>�chi2 = 0.0000 S o u r c e : authors’ computation. Discussion of the findingsDiscussion of the findings Effect of Monitoring Activities on Non-Performing LoansEffect of Monitoring Activities on Non-Performing Loans Statistical inferences from Table 4 indicate that Board Independence (BI) has a negative but not significant effect on NPLs of financial institutions in Nigeria. This suggests that an increase in board independence is associated with a re- duction in NPLs, although the relationship is not statistically significant. This finding resonates with the studies of Kartika et al. (2022), Ramadhanti et al. (2021) conducted in Indonesia, Motaz et al. (2019) in Jordan, Islam (2020) in the United States, and Ejaz et al. (2021). However, notable differences were ob- served when comparing this study’s result with those of Budetola et al. (2023) in Tunisia, Mwambuli and Mbuya (2020) in Tanzania, and Balagobei (2019) in Sri Lanka, showing that board independence tends to increase NPL levels in fi- nancial institutions, which indicates a higher impact on loan defaults. This di- vergence may stem from potential reason, such as differences in economic con- ditions, regulatory frameworks, cultural attitudes toward risk management and institutional characteristics. The information presented in Table 4 further highlights the effects of audit quality on Non-Performing Loans in Nigerian financial institutions. The result showed that the use of Big 4 audit firms has a negative and significant effect on NPLs. This suggests that employing Big 4 auditors can lead to a reduction in the incidence of NPLs. In tandem with this outcome were the studies of Handa- jani et al. (2024) in a study conducted in Indonesia, Sen et al. (2022) in Bangla- desh, Monametsi and Agasha (2020) in Botswana and Uganda, including Zgar- ni et al. (2018) in Tunisia. The underlying reason is that audits by these firms provide a high level of assurance regarding compliance with effective control mechanisms. However, Chaari et al. (2022), notes that Big 4 audit firms pos- sess extensive exposure, experience, and superior human resources, enabling them to handle complex audits more effectively. At variance with the result of this study were Koutoupis and Malisiovas (2023) in the study conducted in Vi- monitoring aCtivitiEs and non-PErforming loans… 7373 etnam and the United States that found a positive and significant relationship between audit quality and credit risks. In summary, the effectiveness of audit quality at reducing non-performing loans is occasioned by its direct role in enhancing the accuracy of financial re- porting, strengthening internal controls, and identifying the potential risk ar- eas. Board independence, though crucial for overall governance, does not have the same immediate impact on credit risk management because they are not directly involved in the day to day risk assessment and credit decision process. The mechanisms underscoring audit quality’s stronger role are embedded in its direct impact on financial reporting accuracy, internal controls, risk as- sessment, and regulatory compliance. These factors make audit quality a more effective tool in managing credit risk and attenuating non-performing loans in financial institutions.  Conclusion and Recommendations Conclusion and Recommendations The objective of the study was to investigate the effect of monitoring activities on the non-performing loans of financial institutions in Nigeria using board in- dependence and audit quality as proxies of investigation. The results obtained through the use of the FGLS method suggest that the increase in board inde- pendence might be linked to the reduction in NPLs. However, the effect is not strong enough to be statistically significant. Similarly, audit quality, on the oth- er hand, was found to have a negative and significant effect on NPLs. This indi- cates that higher quality audits are effective in reducing the incidence of NPLs, highlighting the importance of rigorous and high-standard auditing practices in financial institutions. The implication of the findings highlights the importance of robust monitor- ing mechanisms in maintaining the health of the financial sector. By improving board independence and audit quality, financial institutions can better man- age risks associated with non-performing loans. These measures will not only enhance financial stability but also bolster investor confidence in the Nigerian financial sector. In view of this, the study recommends strengthening of mon- itoring capabilities through training and development for board members to improve their effectiveness, as independence alone does not show significant impact. In addition, policy makers should mandate the use of high quality au- dits and strengthening of regulatory oversights. By adopting these recommen- Charles Segun Ilelaboye, Muyiwa Ezekiel Alade7474 dations, financial institutions, regulators can work together to enhance quality of monitoring leading to reduction of non-performing loans. Future research should consider including a broader range of financial institutions such as mi- crofinance banks, insurance companies, and non-bank financial institutions to see if the findings hold across different segments of the financial sector.  References References Abdulazeez, D.A., Lawal, T., & Yabagi, M. (2019). Board structure and asset quality of listed deposit money banks in Nigeria. 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