ABSTRACT
The study appraised the effect of credit management on bank profitability in Nigeria from 1995 to 2017. Data used for the study was sourced from Central Bank of Nigeria Statistical Bulletin and Nigerian Deposit Insurance Corporation Annual Report. Bank profitability was proxied by return on assets while lending and credit management were measured by loans and advances, non-performing loans, lending rate and loan loss provision. The tool for data analysis was multiple regression based on Ordinary Least Squares technique. It was found that commercial banks loans and advances had a positive and significant effect on profitability, while non-performing loans ratio had a negative but significant effect during the study period. On the other hand, the effect of lending rate and loan loss provision were insignificant. Based on the findings, it was recommended among other things that commercial banks in Nigeria should strictly adhere to their credit appraisal policies which ensures that only credit worthy borrowers have access to loanable funds.
TABLE
OF CONTENTS
Title
Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table
of Contents vi
Lists
of Tables vii
Abstract viii
Title
Page
CHAPTER ONE
1.0 Introduction 1
1.1 Background
of the Study 1
1.2 Statement
of the Problem 3
1.3 Objectives
of the Study 5
1.4 Research
Questions 5
1.5 Research
Hypotheses 5
1.6 Scope
of the Study 6
1.7 Significance
of the Study 6
1.8 Limitation
of the Study 7
CHAPTER
TWO
2.0 Literature Review 8
2.1 Conceptual Framework 8
2.1.1 Overview of commercial banks’ lending and
credit management 8
2.1.2 Credit risk management 10
2.1.3 Indicators
of credit risk management 11
2.1.4 Principles
of bank lending and credit management 14
2.1.5 Credit risk
management strategies 16
2.1.6 The benefits of effective credit risk
management 18
2.1.7 Bank
profitability (Return on Assets) 19
2.2 Theoretical Framework 21
2.2.1 Loan pricing theory 21
2.2.2 Financial repression hypothesis 21
2.2.3 Financial
economic theory 22
2.3 Empirical Review 23
CHAPTER THREE
3.0 Research Methodology 38
3.1 Research
Design 38
3.2 Nature
and Sources of Data 38
3.3 Method of Data Analysis 38
3.4 Model
Specification 39
3.5 Description
of Research Variables in the Model 39
3.5.1 Dependent variable 40
3.5.2 Explanatory variables 40
3.6 Estimation
Procedure 41
3.6.1 Ordinary least
squares (OLS) technique 41
3.6.2 t-Statistic 41
3.6.3 F-statistic 42
3.6.4 Adjusted
coefficient of multiple determination
42
CHAPTER FOUR
4.0 Presentation of
Data, Analysis and Discussion 43
4.1 Presentation
of Data 43
4.2 Descriptive Analysis 44
4.3 Analysis, Discussion of Findings and Hypotheses Testing 44
4.3.1 Correlation Analysis 44
4.3.2 Regression Analysis 46
4.3.3 Test of Hypotheses 48
4.4 Discussion of Results 49
CHAPTER
FIVE
5.0 Summary of Findings,
Conclusion and Discussion 51
5.1 Summary of Findings 51
5.2 Conclusion 51
5.3 Recommendations 52
References 53
Appendix 57
LIST OF
TABLES
Table 4.1: Presentation of data used in the study 43
Table
4.2: Descriptive Statistics 44
Table 4.3: Correlation
Analysis 45
Table
4.4: Regression Analysis 46
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
The
main economic function of banks has been identified as mobilization of deposits
and channeling the same to the productive sectors of the economy. The surplus
economic units of banks' constitute their deposit liabilities, while the
deficit economic units form credits or loans, termed to be the bank assets
(Owusu, 2017). Banks should have the ability to contain the sudden and
unanticipated withdrawals by depositors and the likelihood of defaults from
debtors. The uniqueness of banking operations coupled with their ability to
create money make them highly regulated and to ensure stability in the
financial sector and conformity to the national objective of economic growth
and development (Timsina, 2017). The
proliferation of banks in the presence of paucity of investment opportunities
in the economy, bankers need to be extra cautions since the risks inherent in
banking operations are high particularly those associated with loans and
advances (Owusu, 2017; Bingilar & Priye, 2015). Hence for individual banks to
perform efficiently and effectively as custodians of public funds, they must
emphasize on effective risk management functions especially in lending (Timsina,
2017; Udoka, 2015; Ogunbiyi & Ihejirika, 2014; Agunuwa, Inaya & Proso,
2015).
The
process of bank lending through financial intermediation is a core determinant
of banks profitability, efficiency and stability. The term financial
intermediation implies that banks accumulate deposits from the surplus unit
(savers) and channel the same to the deficit unit of the economy (borrowers)
who pay certain amount or percentage to the banks as interest. Banks do this
with the expectation of achieving targeted rates of returns on the extensions
of credit over a period of time, and eventually reclaiming their principal with
interest (Ujuju & Etale, 2016; Akinwumi, Ngumi & Muturi, 2016). Any extension of credit carries with it the
risk of non-repayment, under the terms of the financial relationship between
the financier and an individual or corporate organization. Based on this fact,
banks have a strong vested 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 (Kayode, Obamuyi, Owoputi
& Adeyefa, 2015; Uwuigbe, Uwuigbe & Oyewo, 2015).
Based
on the mechanism of bank lending, banks are entrusted with the funds of
depositors. These funds are generally used by banks for their business. The
fund belongs to the customers so a programme must exist for management of these
funds, because proper and prudent management of banks create and hence customer
confidence. The programme must
constantly address three basic objectives: liquidity, safety and profitability.
Successful management calls for proper balancing of all these three. Liquidity
enables the banks to meet loan demands of their valuable and long established
customers who enjoy good credit standing (Kaaya & Pastory, 2013). The
second objective being safety is to avoid undue risk since banks meet
responsibility of protecting the deposit entrusted to them (Abiola &
Olausi, 2014). The third being profitability which is aimed at growth and
expansion to meet repayment of interest charges on loans and advances, to
achieve the objective of maximizing wealth of shareholders and to survive
competition in the banking industry (Gizaw, Kebede & Selvaraj, 2015).
As
a matter of fact a bank cannot remain in business if it neglects the credit
function. Banks are profit-making organizations performing as intermediaries
connecting borrowers and lenders in bringing temporarily available resources
from business and individual customers as well as providing loans for those in
need of financial support (Owusu, 2017). Hence, among other risks faced by
banks, credit risk plays an important role on banks’ profitability since a
large chunk of banks’ revenue accrues from loans from which interest is
derived. However, interest rate risk is directly linked to credit risk implying
that high or increment in interest rate increases the chances of loan default
which could deteriorate banks profitability.
1.2 Statement of the Problem
The
economic well-being of a nation is a function of advancement and development of
her banking industry. Thus, economic activity could not be advancing/growing
without the continuing flow of money and credit facility. They provide the bulk
of the money supply as well as the primary means of facilitating the flow of
credit. Consequence of the new financial environment has been rapidly declining
profitability of the traditional banking activities. Thus in a bid to survive
and maintain adequate profit level in this highly competitive environment,
banks have tended to take excessive risks on depositors fund. But then, the
increasing tendency for greater risk taking has resulted in insolvency and
failure of a large number of the banks. Therefore, the banks are exposed to
risk such as credit, market, operational, interest rate and liquidity risk
(Uwuigbe, Uwuigbe & Oyewo, 2015).
The
major cause of serious banking problems continues to be directly related to lax
credit standards’ for borrowers and counterparties, poor portfolio management,
and a lack of attention to changes in economic or other circumstances that can
lead to a deterioration in the credit standing of a bank’s counter parties. For
most banks, loans are the largest and most obvious source of credit risk. Thus,
in a bid to survive and maintain adequate profit level in this highly
competitive environment bank have tended to take excessive risks. But, then the
increasing tendency for greater risk taking has resulted in insolvency and
failure of a large number of banks. It becomes clear that banks use a high
leverage to generate an acceptable level of profit (Gizaw, Kebede &
Selvaraj, 2015).
Failure
to adequately manage these risks exposes banks not only to losses, but may also
threaten their survival as business entities thereby endangering the stability
of the financial system. Apart from unbiased subscription to best practice in
credit management solutions, there is also the problem of inadequate training
of credit personnel in the Nation’s banking market. The Nigerian banks are
frequently undergoes reforms, and credit risk exposure is evolving at an
alarming rate and for the reforms to have meaningful impact, a conscious effort
has to be made to arrive at a reliable framework for banks to develop a
reliable credit risk management strategy, to provide a platform for efficient
and effective banking practices. Hence, this research work will provide a clear
understanding of the concepts of credit risk and bank performance, so as to
generate reliable information which the bank management could use to appraise
their strategies, plans, and underscores areas for improvement.
1.3 Objectives of the Study
The general objective for this study
is to appraise the effect of credit management on bank profitability in
Nigeria. The specific objectives are:
1)
To appraise the effect of
loans and advances on commercial banks return on assets in Nigeria.
2)
To assess the effect of
lending rate on commercial banks’ return on assets in Nigeria.
3)
To analyze the effect of non-performing
loan ratio on return on assets of commercial banks in Nigeria?
4)
To ascertain the effect
of loan loss provision on return on assets of commercial banks in Nigeria.
1.4 Research Questions
The study was guided by the following
research questions:
1)
How does loans and
advances affect return on assets of commercial banks in Nigeria?
2)
To what extent does
lending rate affect return on assets of commercial banks in Nigeria?
3)
What is the effect of
non-performing loan ratio on return on assets of commercial banks in Nigeria?
4)
How does loan loss
provision affect return on assets of commercial banks in Nigeria?
1.5 Research Hypotheses
The following hypotheses will be
tested:
Ho1:
Loans and advances does not have a significant effect on return on assets of
commercial banks in Nigeria.
Ho2:
Lending rate does not have a significant effect on return on assets of
commercial banks in Nigeria.
Ho3:
Non-performing loans ratio does not have a significant effect on return on
assets of commercial banks in Nigeria.
Ho4:
Loan loss provision does not have a significant effect on return on assets of
commercial banks in Nigeria.
1.6 Scope of the Study
The
study will be confined to the banking industry in Nigeria. It is restricted to
the appraisal of the effect of lending and credit management on bank
profitability in Nigeria. Therefore, considering the nature and characteristics
of banking today the study’s focus will be on commercial banks. The period
covered for the study will cover a period of 23 years of banking operation
(1995 – 2017).
1.7 Significance of the Study
The study will depict the benefits
derived by every bank or financial institutions that employ required techniques
in managing its lending and credit management and also reveal the relevance of
coordinating effort that contribute to the overall financial institutions
ultimate goal in order to minimize risk and maximize return. The result of this
study will be significant in the following areas;
1. Bankers: It will
equip bankers, staff and credit analyst with the knowledge to initiate and
manage risk assets profitably with minimal losses both for structured and
unstructured businesses in the corporate and middle market.
2.
Credit analysts: It
will provide information to credit analysts in coming up with strategies, plans
and design that will strategically position them in the highly competitive,
diverse and complex business environment that is experience at present.
3. Students/researchers: It
will contribute to existing knowledge and area of future studies that will create
a huge impact on the society by other researchers.
1.8 Limitation of the Study
The study focused on the commercial
banks in Nigeria. Thus, other banks (such as; microfinance banks) were not
included in our study. Besides, large banks could have mixed activities from
commercial banking and investment banking, e.g. the main risks faced by
commercial banks and investment banks are not usually identical. For instance,
from academic experience, lending and credit management is the largest risk for
commercial banks while market risk and credit risk are important to investment
banks. The difference between concentrations of lending and credit management
might make the study biased.
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