The banking
industry in Nigeria is the business of providing financial capital to the
business community as well as individual customers. Banks do this with the
expectation of achieving targeted rates of retum on the extensions of credit
over a period of time and eventually reclaiming their principal with interest.
Any extension of credit carriers with it the risk of non-repayment, under the
term of the financial relationship between the financier an individual or
corporate organization. Based on this fact, bank have a strong rested interest
in performing extensive due diligence, prior to committing funds, and on a
regular basis to minimize credit risk and achieve an enhanced value for their
organization.
Since most banking
assets are loans and advances, the process of assessing the quality of bank
credit and its effect on the banks financial condition is critical. As rightly
observed by Sulaiman (2006), it is unfortunate that one of the serious
efficiencies prevalent among Nigeria bank has been the inability of their
management to identify problem asset. This, according to Ojo (2015), is bome,
perhaps out of ignorance or intense desire to declare huge profits at the end
of the financial year. As a result, balance sheet, often do not reflect the
banks true financial condition, while profit from which taxes and dividends are
paid. Whenever the banks supervisors and regulators discover such deficiencies,
the affected banks are often required to make up for the shortfall in provision
with adverse consequences for their financial statements. The profit for the
emerging period is usually wipe off while the resultant losses would negatively
affect the banks assets quantity as well as their capital adequacy ratios. Assets
quality reflect the state of existing and potential credit risks associated with
loan and investment portfolio, real estate owned, and other assets, as well as
those relating to off balance sheet transactions. The ability of management to
identify, measure, monitor and control credit risk is center to asset quality
because loans and advances constitute the largest risk assets carried by banks
(Ojo, 2015), consequently, a problem with the loan portfolio passes a guilty
verdict on the management, and it is synonymous with a problem with the bank.
Credit risk arises when an obligor fails to perform it's obligations under a
trading or loan contract or when it's ability to perform such obligation is
impaired resulting in an economic loss to the banks (CBN, 2006). It does not
only arise when a borrower defaults on re-payment of a loan or settlement of
principal and interest, but also when its repayment capability declines. Ojo (2015),
defined credit risk as the probability that a payment will not be fully settled
because the debtor become insolvent.
1.2 Statement of the Problems
There are many
problems associate with credit risk management in deposit money banks today.
Bank failures in Nigeria and other emerging economic have been attributed to
improper lending practice, lack of experience, organization and information
system to adequately assess credit risk in the falling economy (Gil-Diaz, 1994,
Aham and Ariff, zoolo, kolap, Ayeni and One, 2015). There is sufficient
empirical evidence that poor performance is manifest in banks as indicated by
low bank performance indicators including: high levels of credit risk, poor
quality loan, limited and or inadequate capitalization, operational
inefficiency, higher incidence of non-performing loans, higher level of
liquidity risk, and so on. Although these are mentioned as constraints
affecting banks performance, they are based on a few studies and non-elaborate
method to generate sufficient and valid conclusions. This study therefore
becomes an extension of the few studies under taken with a view to generating
more and further information based on empirical evidence on deposit money
banks.
1.3 Objective of the Study
The main objective
of this study is to assess the effect of credit risk management on financial
performance of deposit money banks the following are the objective of the
study.
- To
ascertain the effect of loan loss provision on financial performance of
deposit money banks.
- To
determine the effect of liquidity ratio on financial performance of
deposit money banks.
- To
assess the effect of non-performance loan on financial performance of
deposit money banks.
The purpose of
this research is to ascertain whether there is any significant relationship
between credit risk management and performance of deposit money banks in
Nigeria.
1) H0: loan loss
provision ration does not have any significant effect on financial performance
on deposit money banks in Nigeria;
H1: loan loss
provision ration has a significant effect on financial performance on financial
performance on deposit money banks in Nigeria;
2) H0: liquidity
ratio does not have any significant deposit money banks in Nigeria;
H1: liquidity
ratio has a significant effect on financial performance on deposit money banks
in Nigeria;
3) H0: non-performing loan ratio does not have
any significant effect on financial performance on deposit money banks in
Nigeria.
H1: non-performing
loan ratio has a significant effect on financial performance on deposit money
banks in Nigeria.
1.5 Significance of the Study
The work is
significant in many ways. First and foremost, is expected to make contribution
to knowledge. The research contribution to knowledge. The research will educate
student on how deposit money banks are managing their credit portfolio. It will
serve as an important references for future research and it is also expected to
stimulate further research in these and related areas. The work will identify
efficient credit management strategies that Nigeria and deposit money banks
could employ to enhance their management of credit and risk assets. This is
expected to translate into lower incidence of bad debt. Thus the outcome of the
research will be of immense significance to policy makers and banks management
on how to prove on the current level of risk management II Nigerian commercial
banks.
A bank exist not
only to accept deposit but also to grant credit facilities and therefore is
inevitably exposed to credit facilities and therefore is inevitably exposed to
credit risk. In other worlds, The intermediation function of a bank naturally
exposes them to credit risk: credit risk is by far the most significant risk
faced by banks and the success of their business depends on accurate
measurement and efficient management of credit risk is the degree of value
fluctuations in debt instruments and derivatives due to change in the
underlying credit quality of borrower and counter parties. Could (2005) defines
credit risk as losses from the refusal or inability of credit customers to pay
what is owed in full and on time. Credit risk is the exposure faced by bank
when a borrower (customer) default in honoring debit obligation on due date or
at maturity. This risk interchangeably called 'counter party risk' is capable
of putting the bank in distress if not adequately managed. The credit risk
management implications are mean minimize the adverse effect of credit risk. A sound
credit risk management framework is crucial for banks so as to enhance
profitability and guarantee survival.
1.6 Scope of the Study
The study cover
the period of the study is strictly within the frame work of the stated
objectives. It is not intended to carry out a complete evaluation of credit
management in the economy but focused on selected deposit money banks. Three
entire population of commercial banks, which are first, bank fidelity bank,
sterling Bank
1.7 Historical Background of the Selected Banks
1.7.3 First Bank PLC
First Bank PLC
incorporated 1894 in live pool as the bank for British West African. It
acquired African Banking corporation which was established in 1892.in the year
1896 first bank plc opened its first international branch in Accra, Ghana and
the incorporated locally as the standard bank of Nigeria Ltd in 1969.first bank
was listed on the Nigeria stock exchange in 1971.it established the first
offshore financial subsidiary of a Nigeria owned band in the Uk 2002.it also
acquired two banks ;MBC international Bank Ltd and FBN(merchant Bankers) Ltd
and announced the business combination
discussion with Eco bank in 2005,by the year 2007 first bank Nigeria PLC
floated its first ever hybrid capital offering out of Africa and floated
Nigeria's biggest offer.
l From
begin the only Bank in Nigeria force cade
l Weathered
the banking explosion of the 1930s to 1950s
l Followed
by an era of government owners hip and control
l To
a flurry of consolidation and then gradual growth in number of bank up to the
early 1980s
l The
yet another industry growth spurt in the early 1990s when the banking sector
was deregulate
l Leading
to an industry shake-up The late 1990s, which reduce the number of bank from
126 to 77
l And
later resuscitation and growth to 89 bank
l Leading
to the recent shake-up to 25 banks
First Bank has
solidified itself as a brand of fortitude, strength and innovation in the
Nigerian Financial sector since its inception in 1894.the iconic African
elephant with navy blue and ivory colors has been a national symbol of one of
the biggest international players in the financial services industry to date.
As the First Bank
Group moved into its second century of operations, on April 27 2004, the brand
unveiled a new corporate identity with a new logo and new colors. Entering into
a sophisticated and dynamic era in the life of First Bank, The brand seeks to
draw from our history of being one of Nigeria's biggest and most prosperous
financial services group and stream living with new age processes, technology
and most importantly group mind set.
First Bank was
rated a super brand in 2007,from a pool of 2000 highly graded brand in Nigeria,
by the super brand Nigeria council and the 2012 brand financial Banking League
table rated us in the top 500 most valuable banking brand worldwide and the
most valuable Nigerian banking brand in 2011.
Those rating show
that as the bank revolutionizes it's operations and dynamics with new product
and services, at the heart of the organization in the understanding that
customer services delivery and trust are the ultimate way to stay 'truly The
First, All through the seasons, First Bank has remained. Resilient dependably
dynamic (corporate web site "http;//www. First bank Nigeria. Com/about
us/our history /")
Fidelity Bank Plc
began operations in 1988, as a commercial banking and then become a universal
bank, in February 2001. The current enlarged Fidelity Bank is result of the
merger with the former FSB international Bank Plc and Manny Bank Plc (under the
Fidelity brand name) in December 2005.
Fidelity Bank is
today ranked amongst the top 10 in Nigeria banking industry, with presence in
the major cities and commercial centers of Nigeria over the years, the bank has
been reputed for integrity and professionalism. It is also respected for the
quality and stability of its management.
Fidelity staffs
are also respected in the Nigerian banking industry for the quality of training
they receive on the job, as well as in good businesses school both in Nigeria
and overseas. The management is particular about the quality of people that
join the system. To quality as a member of team Fidelity, a candidate is
expected to possess three vital statistics, with the acronym TAC;
l Talent
(an innate mental aptitude)
l Ambition
(a desire to succeed) and
l Character
(a total quality of integrity which will guide the talent and ambition to
productive ends).
The management is
focused on building and maintaining a virile and well-respected brand that
caters to the needs, to it's growing corporate, commercial and consumer banking
clientele. For this purpose, the bank is leveraging it's pedigree in investment
banking (Fidelity was a merchant bank for 11years) and its structures and
services offerings for a retail populace.
Fidelity Bank also
enjoy the respect and partnership of a network of off shore institutions with
it has Correspondent banking, confirmation lines, credit and other relationship
those include, ANZ Landon, Afr-eximbank,
Bank, Frankfurt, Citibank, N. A. London and HSBC, US, Ex-im Bank, etc
Sterling Bank Plc
is one of the leading commercial bank established in Nigeria. It commended
operation as NAL bank, the nations per-eminent investment banking institution
in 1960, following the indigenization degree of 1972, it became a government
owned international finance company Illinois and American Express Bank Limited
between 1974 and 1992. in 1992, the bank was partly privatized and listed as a
public company on the Nigerian stock Exchange (NSE); and in 200 the government
sold its residuals interest in the bank, effectively making it a fully
privatized institution the consolidation of Nigerians banking industry saw NAL
bank completing a merger with four other Nigerian banks namely magnum trust
bank NBM Bank, Trust Bank Of Africa and Indo Nigeria Merchant Bank (INMB) in
January 2006.
The merger
entities were successfully integrated and have operated as a consolidated group
with the name sterling Bank ever since.
The bank recently
assimilated the entire business interest of the defunct equatorial Trust Bank
(ETB) towards the end of 2011. This effectively enhanced its position in the
hierarchy of respectable players in the Nigerian banking industry on all key
parameters. Today, with a capital base of N44
billion, over N508 billion in assets
and about 170 branches nationwide complemented by 200 Automated teller machine
points nationwide sterling bank has grown into a major financial solution
provider and justifiably pride itself as "the one customer Bank "that
celebrates every customer as a unique individuals (corporate web site
"http ://www. Sterling banking. com/about -corporate info. aspx")
1.8 Definition of Key Terms
The credit risk
management is measures employed by bank to avoid or minimize the adverse effect
of credit risk.
Deposit
Money Bank: is a type of bank that provides service,
such as accepting deposit, giving business loans, credit and basic investment
products.
Borrower:
a person that has applied, meet monetary loan from a lender.
Leander:
is a private public or institution entity which makes funds available to others
to borrow or lends money,
Central
Bank of Nigeria (CBN); is a national bank that provides
financial and banking services for its country's government and commercial
banking system.
Credit
Risk Management (CRM): credit management is the risk of
loss that may risk from the failure of a business partner (also known as
counter party) to reimburse a loan when it is due.
Probability
of Default (PD): is a parameter used in the calculation of
economic capital or regulatory capital.
Asset
Management Company (AMCON): a company that invests its client
pooled fund into securities that match its.
Return
On Equity (ROE): measure the rate of return on the
ownership interest (shareholders 'equity) of the common stock owners.
Return
on Assets (ROA): percentage shows how profitable a company
asset are in generating revenue.
Return
on Shareholders Funds (ROSF): ratio is a measure of
the profit for the period which is available to the ordinary shareholders with
the ordinary shareholders stake in a businesses.
Special
Purpose Vehicle (SPV): is a subsidiary of a company which
is bankruptcy remote from the main organization. The action of a SPV are usually
very tightly controlled and they are only allowed to finance buy and sell
assets.
Fair Issac Corporation (FICO) is a public company that provides analysis and decision making solution
including credit scoring.
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