ABSTRACT
The
aim of this study is to examine the pattern of credit risk management and the
consequential effect of bad, doubtful and uncollectible debts. In most banks,
colossal debt burden has continued to mount pressure on their ability to
balance liquidity in value asset and liabilities. Accordingly, a survey of 40
respondents made up of CBN regulator, NDIC supervisor and UBA operator was
carried out, simple percentage frequency tabulated were used as the statistical
test of analysis. The study revealed that while CBN and NDIC rated the risk
management of asset and mounting debt profile low, UBA Plc rated itself
effectively high. The study recommends periodic review of credit profile and
monitoring the debt portfolio to prevent banks distress.
TABLE
OF CONTENTS
CHAPTER ONE:
INTRODUCTION
1.1 Background of Study
1.2 Statement of Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Scope and Limitation of the Study
1.7 Significance of the Study
1.8 Definition of Terms
1.9 Study Outlines
CHAPTER TWO: LITERATURE
REVIEW
2.1
Origin of Banking
2.2 Evolution
and Structure of the Nigeria Banking System
2.2.1
Non Regulated Banking Period
2.2 Commercial Bank Credits and the Economy
2.3
The Role of Financial Institution
in the Saving Investment Process
2.4 The Role in Capital Formation
2.5 Credits and Credit Risk Management
2.5.1 What is Credit?
2.5.2
What are Credit Risks
2.5.3
Sources of Credit Risk
2.5.4
Handling of Credit Risk
2.5.5
Credit Risk Management
2.6 Application of 1988 Basle Standard by
Nigerian Banks
2.7 Application of Guidelines to Bank
Capital Requirement
2.8 Risk Asset Management Process
2.9 Target Market/Risk Asset Acceptance
Criteria
2.9.1
General
2.9.2
Survey
2.9.3
Industry Studies/Externally Induced
Risks
2.9.4
Business Risk-Internally Induced Risk
2.9.5
Risk Asset Acceptance Criteria (RAAC)
2.9.6
Product Risk Asset Acceptance Criteria
(PRAAC)
2.9.7
Prospect Lines
2.9.8
Reporting
2.9.9 Target Market Update
2.10.10
Housekeeping Controls
2.10
Credit Initiation and Analysis
2.10.1 Credit Initiation
2.10.2
Customer Solicitation
2.10.3
Negotiation
2.11
Credit Committee Review Approval
2.11.1
Control and Reporting Requirements
2.12 Documentation and Disbursement
2.13
Conceptual Issues in Distress Management
2.14 Extent and Implications of Distress
2.14.1
Extent of Distress
2.14.2 Implications of Distress for an Economy
2.1.5
Causes of Bank Distress
2.15.1
Adverse Economic Conditions
2.15.2
Capital Inadequacy
2.15.3
Inept Management
2.16
Ownership Structure Interference in
the Management of Banks
2.17 Distress Management in the Nigerian Banking
Industry
2.18
Moral Suasion
2.19 Imposition of Holding Actions
CHAPTER THREE: RESEARCH
METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Restatement of Hypothesis
3.3 Population of Study
3.4 Sample and Sampling Technique
3.5 Determination of Sample Size
3.6 Research Instrument
3.7 Method of Data Collection
3.8 Validity and Reliability of Instrument
3.9 Method of Data Analysis
CHAPTER FOUR: DATA
PRESENTATION AND ANALYSIS
4.0 Introduction
4.1 Testing of Hypothesis
4.2 Definition of Variables
CHAPTER FIVE: SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3
Recommendations
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 Background of Study
The
recent upsurge of concern by retail and wholesale bankers for the enthronement
of credit risk management into their operational process had been adjudged by
credit analysis as timely and relevant. Financial institutions are exposed to
risk taking of which credit risk is probably the most important. The risk
problem usually emanates from undue delays in. collection or from a signal of a
potential loss which cause a lot of complications in management. Banks in
developing economies like Nigeria face intense challenges in the management of
credit risk management. Government controls frequent instability in the
business environment and most importantly the legal environment undermine the
financial condition of the borrower.
It
thus becomes clear that risk management as a disciple should pursue the goal of
protecting the assets and profit of an organization. This can only be achieved
by arresting the potential for loss before it occurs. In a financial world
where there is dearth of information which interestingly is fragile in nature,
both the allocation of and the use of credit are more vulnerable to disturbances.
The Nigerian financial industry has suffered from the adverse effects of these
disturbances resulting in distress of some institutions. Despite the fact that
borrowers themselves absorb a disproportionate share of risk, the failure of
the financial sector to manage their risk reduces not only the financial
systems ability to allocate capital effectively but also erodes public
confidence in the financial sector.
In
other to bridge the risk profit gap, a macroeconomic framework for meditation
is therefore required for depositors and lenders. Although lending is an
integral and fascinating aspect of banking business, its complexity underlines
its importance as the highest most profitable aspect of a bank’s operation.
Lending is therefore something that must be done with minimum loss. The quality
of bank loan portfolio will ultimately improve profitability and corporate
survival.
Banks
today continually face the problem of how to maintain asset quality in an asset
generating environment. It has therefore become imperative for financial
institution to sustain the discipline attain these past few years and stay
focused on the fundamentals of credit as standard measure to improve the
quality of loan portfolio. Lenders need to assess lending risk and device an
effective way to hedge against risk related to the borrowers’ industry
management and operation.
1.2 Statement of Problem
The
changes that have taken place in the Nigerian financial system over the past
two decades have been traumatic and revolutionary with disturbing news of
shrinking spread on loans, erosion of demand deposits, disintermediation of
banks or in most cases by the capital market and the concentration of
oligopolistic practices in few core banks with series of threats to the
Nigerian money market.
Credit
risk management system incorporates the processing of credit transactions from
the receipt of credit facility request from customers, through credit risk
analysis and approval, monitoring of credit exposures to credit payoff or
delinquency management in event of decline in credit quality. The management of
loans and advances does not require any special skill, although, technical
knowledge is essential. Previous experiences can also assist but the ability to
think objectively to deal and communicate with a broad range of accounts and
customers of different back experience, approach and ability is more important.
As the challenges posed by the difficult economic environment increases,
financial institutions are subsequently exposed to increasing risk. The most
important of these is credit risk, that is the possibility that a borrower will
not repay the loan when if falls due or that he may even fail outright to
repay. This credit risk has the effect of exposing banks to problem loans when
they crystallize. Advance problems arise immediately customer makes his request
for the manager to take a decision. This is further compounded when repayment
by customer is not met and debt irrecoverable, except through realization of
security (where possible). Where a large chunk of banking system credit is
unpaid, the process of intermediation is impeded, fresh funds are unavailable
to deserving new projects and the consequences of this for national
productivity and employment can be serious. Because of these problems, loans
which are increasingly becoming a threat to the financial stability of the
banking industry, the Regulatory/Supervisory Authority (CBN and NDIC)
introduced the prudential guidelines in November 1990 and always release credit
policy guidelines annually for financial institutions comply with so as to
minimize this credit risk. But the question is, are these banks really
complying with the guidelines so as to safeguard customers’ deposit and owners’
funds? This question is what the research seeks to answer using UBA Plc as a
case study.
1.3 Objectives of the Study
The objectives of the
study are:
- To show the extent of compliance of UBA
Plc with the prudential and credit guidelines so as to minimize credit risk
- To establish the pattern of relationship
between loans and advances in UBA Plc and bad loans (i.e. non performing loans)
- To make appropriate recommendations for
control of advances and minimizing bad debt arising from bad lending.
1.4 Research Questions
- To what extend has UBA Plc been managing
its credit?
- Has UBA Plc been complying with the CBN
prescribed guidelines?
- What are some of the problems and
challenges militating against the enthronement of efficient credit risk
management in UBA Plc?
- What are your recommendations for the
removal?
1.5 Research Hypothesis
For
this study, one research hypothesis is considered. This is:
H0: There is no significant relationship between
loans and advances (credit) and bad loans (non-performing loans)
H1: There is significant relationship between
loans and advances (credit) and bad loans (non-performing loans).
1.6 Scope and Limitation of the Study
The
scope of the study shall be limited to credit risk management in commercial
banks. it shall be within the frame of population size which comprises of all
commercial banks in Nigeria.
However,
the sample size of the study is restricted to. UBA Plc. Focus will be on the
risk management department of UBA Plc coupled with information from CBN and
NDIC.
A
research work of this nature is fraught with many limitations. An obvious
limitation of this study is non-availability of textbooks on credit. Most of
the materials available are in form of seminar papers, workshop papers and
credit review extracts etc. Time constraint is
another limitation since the researcher is a part time student who has
to combine this project with regular office work. In spite of all these
limitations, justice is done with the available information and materials
collected.
1.7 Significance of the Study
This
study becomes important because of the volume of bad debts, which has mounted
in banks over the years. The magnitude of non performing credits in the banking
system is a cause for concern to different stakeholders including bank management
which granted the credit, bank director some of whom took the credit,
depositors whose funds have been misappropriated, bank supervisors, government
responsible for protecting the banking system and the society at large. These
concerns arise not only because of the potential losses to depositors but
because of the likely loss of confidence in the banking system arising from a
systematic distress. When credit is not paid, the banking system would be
unable to play its intermediating role. It thus becomes obvious that this is a
problem that everyone has a role to pay in finding solution.
1.8 Definition of Terms
Risk: Is
a state in which losses are possible.
Loss: Consists
of disappearance or reduction in value.
Risk Management:
Is an organized method for dealing with the pure risks (and sometimes
speculative risks) to which an individual, family, firm or other organization
is exposed.
Employees: Are
those who work in an organization.
Loss Prevention: An
effort that reduces the probability of a loss.
Loss Reduction: An
effort that reduces the severity of loss.
Risk Transfer: A technique such as insurance or a
hold-harmless agreement whereby financial aspects of a potential loss are
shifted to another party.
1.9 Study Outlines
This
study shall be divided into five chapters. Chapter one shall contain the study
background, statement of problem, objectives of the study, research questions
and hypothesis, scope and limitation of study, significance of study,
definition of terms and study outlines.
Chapter Two
shall contain literature review. My emphasis is to review relevant literature
on the study using UBA Plc as my case study.
Chapter Three
discusses the various techniques and procedures used in collecting data and the
analytical treatment of the data collected in the study. It, among other
things, discussed the research design; population; sample and sampling
procedure; research instrument; method of data collection and data analysis.
Chapter four
is devoted to explain how the data collected and arranged in tables to
facilitate clear and proper analysis.
Chapter five
presents a summary of this study and the conclusions that could be drawn from
it. Following this conclusion, some recommendations are made.
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