EFFECT OF CREDIT RISK ON PERFORMANCE OF NIGERIAN BANKS

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CHAPTER ONE

 

INTRODUCTION

 

Background of Study

The increased competition associated with the process of capitalization, liberalization and globalization and the attempts of Nigerian banks to increase their presence in other markets may have affected the efficiency and credit risk of the Nigerian banking institutions. The first of these aspects, already analyzed in other studies, is based on the incentive to the banks to reduce costs and to improve the management of their resources in order to gain competitiveness. The second aspect, which has not yet been analysed, is explained by the poorer knowledge of the new markets by the newly entered banks and/or the greater permissiveness in the acceptance of risk with a view to increasing the market share in certain sectors and/or regions. Despite the importance of these two aspects, banking literature has usually analysed banking efficiency without considering them together.

 

The risk focused examination process has been adopted to direct the inspection process to the more risk areas of both operations and business. Skills in risk-focused supervision are continually being developed by exposing examiners to relevant training. By adopting this approach, the banking industry, and specifically the commercial banks are sensitized on the need to have formal and documented risk management frameworks. Notably, the more complex a risk type is, the more specialized, concentrated and controlled its management must be (Seppala, 2000; Matz&Neu, 1998; Ramos, 2000). Financial institutions are exposed to a variety of risks among them; interest rate risk, foreign exchange risk, political risk, market risk, liquidity risk, operational risk and credit risk. In some instances, commercial banks and other financial institutions have approved decisions that are not vetted; there have been cases of loan defaults and nonperforming loans, massive extension of credit and directed lending.

 

Credit risk is the possibility that the actual return on an investment or loan extended will deviate from that, which was expected (Conford, 2000). Coyle (2000) defines credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time. The main sources of credit risk include, limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor credit assessment, no non-executive directors, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank. To minimize these risks, it is necessary for the financial system to have; well-capitalized banks, service to a wide range of customers, sharing of information about borrowers, stabilization of interest rates, reduction in non-performing loans, increased bank deposits and increased credit extended to borrowers. Loan defaults and non-performing loans need to be reduced (Basel Committee on Banking Supervision, 2006).

 

Commercial banks employed different credit risk management policies majorly determined by; ownership of the banks (privately owned, foreign owned, government influenced and locally owned), credit policies of banks, credit scoring systems, banks regulatory environment and the calibre of management of the banks (Nworji, Olagunju&Adeyanju, 2011). Banks may however have the best credit management policies but might not necessarily record high profits. In addition, although there are industry standards on what is a good credit policy and what is not and further banks have different characteristics. The market may thus be seen to regard an individual banks’ poor performance more lenient when the entire banking sector has been hit by an adverse shock such as a financial crisis. Banks may be forced to adjust their credit policy in line with other banks in the market where a herding behaviour is practiced by banks (Altman, 2008 ). Looking at the emphasis that is laid on credit risk management by commercial banks the level of contribution of this factor to profits has not been analysed. Petersen &Rajan (1995) notes that expanding lending in the short-term boosts earnings, thus the banks have an incentive to ease their credit standards in times of rapid credit growth, and likewise to tighten standards when credit growth is slowing.

 

In Nigeria, commercial banks play an important role in mobilizing financial resources for investment by extending credit to various businesses and investors. Lending represents the heart of the banking industry and loans and advances are the dominant assets as they generate the largest share of operating income. Loans however expose the banks to the greatest level of risk. Many banks that collapsed in the late 1990’s and up to the recent restructuring of the commercial banks in Nigeria were as a result of the poor management of facility which was portrayed in the high levels of non-performing loans. Looking at the emphasis that is laid on credit risk management by commercial banks in the recent time, the level of contribution of this factor to financial performance has not been analysed which called for this study. Researcher has therefore turned to the study of credit risk management, which offers natural experiments for the betterment performance assessment of commercial banks in Nigeria.

 

Statement of Problem

The health of financial system has important role in the country (Das and Ghosh, 2007) as its failure can disrupt economic development of the country. Company’s financial performance is ability to generate new resources, from day – to – day operation over a given period of time and being gauged by net income and cash from operation. The bank performance measure can be divided into traditional measures and market based measures (Aktan and Bulut, 2008).

EFFECT OF CREDIT RISK ON PERFORMANCE OF NIGERIAN BANKS

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  • CATEGORY : ACCOUNTING
  • TYPE : PROJECT MATERIAL
  • FORMAT : MICROSOFT WORD
  • ATTRIBUTE : Documentation Only
  • PAGES : 108 Pages
  • CHAPTERS : 1 - 5
  • PRICE : ₦ 3,000.00

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The increased competition associated with the process of capitalization, liberalization and globalization and the attempts of Nigerian banks to increase their presence in other markets may have affected the efficiency and credit risk of the Nigerian banking institutions. The first of these aspects, already analyzed in other studies, is based on the incentive to the banks to reduce costs and to improve the management of their resources in order to gain competitiveness. The second aspect, which has not yet been analysed, is explained by the poorer knowledge of the new markets by the newly entered banks and/or the greater permissiveness in the acceptance of risk with a view to increasing the market share in certain sectors and/or regions. Despite the importance of these two aspects, banking literature has usually analysed banking efficiency without considering them together... accounting project topics

EFFECT OF CREDIT RISK ON PERFORMANCE OF NIGERIAN BANKS