ABSTRACT
Credit risk management, which is the basic of credit
application, is the most perfect embodiment in the bank credit application and
asset supervision. The ultimate purpose of credit risk management is to ensure
that credit fund is of safety, profitability and fluidity. At present it is
extremely important for banks to set up early bank, risk warning system. In the
content, this research is based on the finding for credit risk management and
the banking sector performance, which entails that banks should have a
department in charge credit management which will affect the profitability,
insolvency of bank and as well as paving
way for economic development and confidence of bank customers. This research made use of ordinary least
squares (OLS) regression method. The data contain the financial statement of
First Bank Nig. Plc for a period of twenty five (25) years. The research
reached a conclusion during the test of hypothesis that credit risk management
has a significant effect on banking performance in Nigeria. Hence, all
shareholders and government agencies must
make sure that banks adhere to credit management frameworks and directive. Based on the study the following
recommendations were suggested. Banks
should ensure that credit risk management department is functional and
effective. Banks should ensure that
credit policies are made practical and applicable. Banks should follow procedure guideline laid
down by the Central Bank of Nigeria.
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement
Abstract
Table of content
CHAPTER ONE
INTRODUCTION
1.1 Background
to the study
1.2 Statement of Problem
1.3 Objective of the study
1.4 Research Question
1.5 Research
Hypothesis
1.6 Significance of the study
1. 7 Historical
Background of First Bank Plc
1.8 Definition of terms
CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual framework
2.2 Corporate governance in banking sector
2.3 Theoretical frameworks
2.3.1 Risk and banking risk
2.3.2 Risk management
2.3.3 Banking risk management
2.3.4 Credit (lending)
2.3.5 Credit risk
2.3.6 Credit risk management.
2.4.1 Credit culture
2.4.2 Credit organization
2.4.3 Credit
polices 35
2.5 Commercial
bank lending and the Nigeria economy
2.6 Prudential
guidelines for licensed banks in Nigeria
2.6.1 Credit
portfolio classification system in Nigeria
2.6.2 Provision
for non-performing facilities
2.7 Central
bank of Nigeria credit risk management system
2.7.1 Objectives
of credit risk management system
2.8 Credit
risk management and bank performance
2.9 Bank
performance and profitability
2.10 Evaluation
of bank performance
2.11 Summary
of discussion
CHAPTER THREE
RESEARCHM ETHODOLOGY
3.1 Introduction
3.2 Area
of study
3.3 Source
of data
3.4 Restatement
of research hypothesis
3.5 Model
separation
3.6 Method of data analysis
CHAPTER FOUR
DATA PRESENTATION ANALYSIS AND INTERPRETATION OF RESULT
4.1 Introduction
4.2 Presentation of result
4.3 Evaluation of estimate
4.4 Apriori expectation
4.5 Test of significance
4.6 Test of autocorrelation using the Durbin Watson Statistics
4.7 Test of hypothesis
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Summary of findings
5.2 Conclusions
5.3 Recommendations
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 Background to
the Study
The financial sector across the globe experienced the
changes due to the impact left by the recession and economic trends. Reform was
the basic solution in which most countries used to perfect their economy. In
Nigeria, it is appreciated that the banking sector produced the well
performance through reforms. It is
acknowledged that the sound, and efficient financial sector is the key in the mobilization and improving risk
management. As compares to its
neighboring countries, Nigerians financial sector emerged through the
performance. The successful commercial
bank consolidation which started in 2005 resulted in both regional and
international expansion of well capitalized banks (USAID, 2008). However, the question is how effective is the
credit management being implemented in Nigeria banks especially in reducing the
poor performance and increasing the profitability
of the Nigeria bank?
The Government of Nigerian bank through its agencies have
been working round the clock to
ensure has banks performs their
obligations through guidelines and polities.
The government concerns itself more on the banking sector than other
sectors and some of the possible
reasons for the higher of government oversights in the sector are:
Ø Bank asset are usually opaque and lacking in transparency
as well as liquidity.
Ø Bank asset are usually opaque and lacking in transparency as well as
liquidity.
Ø Bank instability will lead to a contagion effect which would affect a class of banks
or the entire financial system and the
economy.
Ø Bank depositors (particularly retail depositors) cannot
effectively protect themselves because they
do not have adequate
information, nor are they in a position to coordinate each other.
Ø Banks have a dominant position in developing economic
financial systems, and are important engines of economic growth (King and
Levine 1993, Levine 1997).
Credit risk management in banking is not a new activity.
Since banking began, mangers of banks have spent at least some of their time worrying about borrowers not being
able to repay their loan or some other disaster would prevent the bank from
been able to remain profitable or in extremis, from repaying the banks
depositors (illiquidity). Cynics say,
however that worrying is not a solution to satisfactory risk control, since the history of banking
in both developed and
under-developed countries has record of too many instances of bank losses and
failure, usually at a time of economic recession in concerned countries. Banks
and other financial institutions are
expected to remain fruitful even
in the midst of economic
uncertainties and financial crunches. The banking institutions' act as
financial link between the surplus and the deficit sectors of the economy.
Hence, banks take high risk which is commensurate with returns. Based on the
concept, we could say that the credit risk management and banking sector performance can be stated as
endogenous construct.
1.2 Statement of
problem
Since banks have to remain profitable, solvent and liquid
they are exposed ~ hi~ level of risk through their services and transactions. But we must
take note that the higher the risk, the higher the returns, whereas returns on
other hand is used to measure bank performances.
Therefore, problems associated with credit risk
management and bank performances are highlighted
below:
(i) Bad lending
decision and credit policies; these could be as a result of negligence by the
bank management and deceit by customers
(ii) Faculty
credit risk management by the borrower or bank management as the case may be.
iii) Nonchalant
or unconcerned attitude of the management and the regulatory bodies towards credit risk policies and its management.
(iv) Lack or unavailability of credit culture on
the part of the bank management:
(v) Inappropriate
or no provisions for loss of credit or default.
1.3 Objectives of the Study
The sole aim of this study is to figure but the intensity
of credit risk management as part of banks approach to profitability and sound performance. This study
is meant· to investigate the credit risk management and banking sector
performance in Nigeria. Hence, the relationship that may exist between credit
risk management framework and bank performance.
To achieve this alms and objectives, the study would
investigate the following:
Ø Firstly, we are going to' investigate the factors
underlying credit risk management in banks in Nigeria.
Ø We are also going to access the effect of credit risk management on banking
sector performance in Nigeria.
Ø We are going to measure the approaches of banks towards
profitability which will set an
argument towards their performance.
Ø Lastly, we are going to test the significance, thereby
drawing conclusion and giving recommendations.
1.4 Research
Question
The research questions to be answered are restated are
follows;
(1) How
does credit risk management help detect profitability in the banking-sector?
(2) To what extent do banks
ensure a strict credit risk management?
(3) Of what
relevance is credit risk management to the performance in the banking sector?
(4) To what
extent do banks use credit risk management in measuring its profitability?
1.5 Research
Hypothesis
The hypothesis to be stated has;
Ho: Credit risk
management has no significant effect on banking sector performance.
H1: Credit risk
management has significant effect on banking sector performance.
1.6 Significance
of the study
This study is designed to
show some essential information credit risk management and banking
'sector performance. Credit risk management
and banking sector performance is relevant because if credit risk is not managed properly it could cause poor
performance or illiquidity in the
banking sector. This study is to pivot, because since risk is inevitable in the banking
sector, due to the fact that the higher the bank task risk, the higher
the return. Therefore, that simply means that this study is going to
enlightening the populace about credit risk, its management and what banks are
doing to help curb it, so as to boost their
performances.
Also it is to believe that this study carried out will be
of benefit to the banking and financial institutions, government and also to the
present and future researchers, because,
the study is going to help analyze the
effect which proper credit risk management would have on banking sector
performance and also the internal and external factors that can help limit the
credit risk since researchers believe it can be averted.
1.7 Historical
background of First Bank Plc:
First bank can be traced back to 1894 was founded by Sir
Alfred Jones, a shipping magnate from Liverpool, the bank started out as a small
operation in the office of Elder Dempster & Company in Lagos. The
bank incorporated as a limited Liability Company on 31st march 1894,
with the head in Liverpool. It began trading under the corporate name of the
Bank of British West Africa (BBWA) started as with a paid-up capital of
£12,000, after absorbing its predecessors, the African banking Corporation, which had being established earlier, in 1892.
BBWA went on to establish a leading
position in the banking industry in West African, recording impressive growth
and working closely with the Colonial Government in its role as a Central
Bank. Marking the creation of the Bank's
international banking operations, a branch
was opened in Accra, Gold Coast
(now Ghana) in 1896, and another in Freetown, Sierra Leone
in 1898. A second Nigeria branch was opened in the old Calabar in 1900, and two
years later services were extended to
Northern Nigeria.
In 1957, it changed its name from Bank of British West
Africa (BBWA) to Bank of West Africa (BWA)
after Nigeria's independence in
1960; the bank to extend more credit to indigenous Nigerians. At the same time, citizens began to trust
British banks since there was an independence financial control mechanism and
more citizens began to patronize the new bank of West Africa. In 1965, Standard
Bank acquired Bank of West African and changed its acquisition name to Standard Bank of West African. In 1969, it was incorporated locally as the Standard Bank of Nigeria Limited, in
line with the Companies' Decree of 1968. In March 1971, the bank obtained a
listing on the Nigeria Stock Exchange.
Furthermore names changes took place in 1979 and 1991 to
First Bank of Nigeria Limited, then First
Bank plc. In 1985, the bank introduced a decentralized structure with five
regional administrations, and this was reconfigured in 1992 to enhance
operational efficiency. The Bank has continued to be a leader in financing the
long-term development of the Nigeria economy. Ever since 1947, when it advanced the first long-term loan
to Government, it has kept broadening
its loan and credit portfolio to various sectors of the economy. In
satisfying the needs of its customers, First Bank has diversified into range of
banking activities and services.
The current Chairman is Dr. Ayoola Oba Otudeko, OFR. The
bank is the largest retail lender in the nation, while most banks gather
funds from customers and loan it out to
corporations and multinationals, First Bank has created a small market
for some of its retail clients. At the end of September 2011, the bank had
assets totaling approximately US$18.6 billion (NGN: 2.9 trillion). The bank's
profit after tax, for nine months ending 30 September 2011 was approximately US$270.2
million {NGN 42.2 billion}.
First Bank of Nigeria maintains a subsidiary in the
United Kingdom FBN Bank (UK), which has a branch in Paris. The bank also has representative office in South Africa and
China. In October 2011, the bank acquired Banque International
de Credit (BIC), a lending in the Democratic Republic Of Congo (DRC) the
company was named the best in September· 2006. The firm's auditors are
PricewaterhouseCoopers (Chartered Accountants). The bank has a long solid and
long term ratings from Fitch and the Global Credit Rating Company partly due to
its low exposure to non-performing loans. The firm's compliance with financial
laws has also strengthened with the economic Financial Crimes Commission giving
it a strong rating.
1.8 Definition
of Terms
There many terms used in this study, but we are going to
define the most important terms used in this research work.
1 Credit: It
is a contractual agreement in a borrower receives
something of value now and agrees to repay the lender at some later day. From the Oxford learners
Dictionary credit is defined as
money that one borrows from a bank, a loan or advance.
2 Risk: It is the probability that the
actual return on an investment or security will deviate from the expected
return. Risk in this study as related to credit simply means the probability of a default from customers
when credit facilities are granted to such customer.
3 Credit Risk Management:
Credit risk management is a tool or measurement used by the bank in order to
regain the confidence of the
public through optimization of risk.
4 Non-Performing Credit Facilities: This
represent credit facilities whose
interest or principal is due for payment and is yet unpaid for
90 days or more. Non-performing credit facilities can be categorized under
sub-standard, doubtful, and lost credit facilities.
5 Non-Performing Loan (NPL): This is a
loan that is in default or close to be in default. A high non-performing
loan indicates that the bank \s
taking more risk in their operation and investment.
6 Non-Performing Loan Ratio: It is
a ratio of managerial risk-taking
behavior relative to all organization resources.
7 Basel Agreement/Account: A negotiated
agreement between regulatory authorities in the United States, Canada,
Great Britain, Japan and eight other nations in the West Europe to set common
capital requirement for banks under their jurisdiction.
8 Credit Risk
Management: It involves analytical tools including computer programs designed to assess the level of borrow.
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