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Product Code: 00007650

No of Pages: 65

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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.


Title Page                                                                                                           i

Declaration                                                                                                         ii

Certification                                                                                                       iii

Dedication                                                                                                          iv

Acknowledgements                                                                                            v

Table of Contents                                                                                               vi

Lists of Tables                                                                                                    vii

Abstract                                                                                                              viii

Title Page



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



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



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



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



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












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












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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