ABSTRACT
The main objective of this study was to determine the Impact of risk asset management on financial performance of deposit money bank in Nigeria over a period of ten (10) years (2008 - 2009) for the four (4) selected banks. The ex-post facto research design was used for this study. The secondary data were obtained from the financial statements of the selected banks. Descriptive statistics, Panel regressions were employed and used for this study. The results of the analysis showed that There is no significant impact of Loans-to-Deposit ratio, Non-performing loans-to-Total loans ratio on Return on asset of commercial banks in Nigeria; Loans-to-Deposit ratio, Non-performing loans-to-Total loans ratio do not have significant impact on Return on equity of commercial banks in Nigeria and there is no significant impact of Loans-to-Deposit ratio, Non-performing loans-to-Total loans ratio on Return on capital employed of commercial banks in Nigeria. Based on the above findings, the researchers recommends that Banks must comply with relevant provisions of the Banks and Other Financial Institutions Act (1999) as amended and the Prudential Guidelines. Banks should ensure proper credit evaluation of potential borrowers and lending funds should be allocated to prime borrowers; banks should be prudent in managing the loan portfolio ensuring optimal depositors contribution to total loans. Deposits are one of the major sources of loanable funds for a bank, therefore deposits should cover a significant amount of loans to avoid risk and banks should operate in alliance with top quality credit rating firms who will ensure that loan seekers are correctly rated and the potential risk of a loan proposal is brought to light.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgment v
Table of content vi
Abstract x
CHAPTER
ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 2
1.3 Objectives of the Study 3
1.4 Research Questions 3
1.5 Research Hypotheses 4
1.6 Significance of the Study 4
1.7 Scope of the Study 5
CHAPTER TWO: REVIEW OF
RELATED LITERATURE
2.1 Conceptual Framework 6
2.1.1 Profile
of the Selected Banks 6
2.1.1.1 Union
Bank of Nigeria Ltd 6
2.1.1.2 United Bank for Africa
(UBA) Plc 6
2.1.1.3 Access Bank Plc 7
2.1.1.4 First Bank Plc 7
2.1.1.5 Zenith Bank Plc 8
2.1.2 Bank Credit Facilities 8
2.1.3 The Concept of Risk 10
2.1.4 Credit Risk 10
2.1.5 Securities for Bank Loans
and Advances 11
2.1.6 Characteristics
of an Acceptable Collateral 12
2.1.7 Loan Review, Monitoring and Evaluation. 13
2.1.8 Non-performing Loans 14
2.1.9 Effect of Non-Performing
Loans 15
2.1.10 Causes of Non-Performing
Loans (NPLS) 16
2.1.11 Policy on loans
classification (bad and doubtful debt) and recovery procedure. 16
2.1.11.1 Management of Problem
Loans. 17
2.1.11.2 Causes of Problem Loans
17
2.1.11.3 Basis for Classification.
17
2.1.11.4 Recovery of Bad Accounts 18
2.1.12 Risk Management Strategies 19
2.1.13 Concept of liquidity 20
2.1.14 Liquidity risk 21
2.1.15 Financial Performance 22
2.1.16 Measurements of Financial Performance. 22
2.2 Theoretical framework 23
2.2.1 Anticipated Income Theory 23
2.2.2 Shift-Ability Theory 24
2.2.3 Liquidity asset Theory 24
2.2.4 Modern Portfolio Theory 25
2.3 Empirical Review 26
2.4 Gap in Literature 30
CHAPTER
THREE: METHODOLOGY
3.1
Research Design 31
3.2
Area of Study 31
3.3
Population of the Study 31
3.4
Sample Size and Sampling Technique 31
3.4
Method of Data Collection 31
3.5 Method of Data Analysis 31
3.6
Model Specification 32
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Data Presentation 33
4.2 Data Analysis 34
4.2.1 Descriptive Statistics 34
4.2.2 Hausman Specification Test 35
4.2.3
Panel Regression 36
4.3 Test of Hypotheses 41
4.4 Discussion of Findings 43
CHAPTER
FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1
Summary of Findings 45
5.2 Conclusion 45
5.3 Recommendations 46
REFERENCES 47
APPENDIX
I 52
APPENDIX
II 53
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study
Risk is
an inevitable phenomenon which has lived with mankind since time immemorial. In
our domestic and especially in our business life, we find ourselves in
situations where risk taking becomes the solution to our break through. Nevertheless,
one should find a way to minimize or manage this risk in order not to affect
the expected result from a given investment. In the financial sector, risk
management is seen
as one of the most essential internal itineraries upon which decisions are made by financial
institutions. (Aureliju et al,
2014).
The
Nigerian Banking sector in recent years has undergone series of financial
distress and operational failures. Banks previously performing well suddenly
disclosed huge financial issues as a result of unfavourable credit exposures ,
interest rate position taken or derivate exposures that was supposed to reduce
balance sheet risk (Okere, 2018). Cooker (1989), observes opines the main
function of a bank is the collection of deposits from those with surplus cash
resources and the lending of these cash resources to those with an immediate
need for them. These features are required to provide guidance to member
countries, including Nigeria, in having required accessibility to financial
instruments to source for capital.
The Basel
Committee paved way for the creation of the “New Capital Accord” which was
implemented in 2007. The New Capital Accord required capital charges to be
accrued for credit, market and operational risks. This is in line with the
objective of protecting depositors, consumers, and the citizens against losses
emerging from bank failures (Umoh, 2005). With reference since 1988, directors
of the Nigerian Banking industry have displayed interest in refining the risk
analysis, measurement and management capacity of firms in the banking sector.
According to Soludo (2005), business operations in the financial sector was to
make Nigeria money deposit banks compete positively in the global stock market
and to spawn a large capital base that will make available resources for banks
to settle compliance cost in the region of credit and market risk management.
Risk is
an essential part of a business, because the profitability of any business is
dependent largely on the level of risk taken. Hence, risk is related with
opportunities and threat, which may harmfully affect an action or expected
outcome (Audu, 2014). Many Nigerian banks had failed in the past due to
inadequate risk asset management exposure. Banks are greatly opened to vast
number of systematic and unsystematic risks during their business operations.
Therefore, Risk asset management in financial institutions has undoubtedly
attracted more attention from the regulators, financial experts and
academics.
Nwankwo
(1990), observes that the subject of risks today occupies a central position in
the business decisions of bank management and it is not surprising that every
institution is assessed an approached by customers, investors and the general
public to a large extent by the way or manner it presents itself with respect
to volume and allocation of risks as well as decision against them.
Financial
institutions such as Deposit Money Banks are exposed to a variety of risks
among which are; interest rate risk, foreign exchange risk, political risk, market
risk, liquidity risk, operational risk and credit risk (Yimka, Taofeek,
Abimbola & Olusegun, 2015). Others are Solvency risk, legal/regulatory
risk, counterpart risk, reputational risk, strategy risk (Audu, 2014). However,
the focus of this is on liquidity, operational and credit risks which is based
on the fact that the Treasury Single Account (TSA) policy of the Federal
Government exposed financial institutions to wider risks.
Deposit
money banks play a vital function in the economic resource distribution of
countries. For survival and growth, deposit money banks need to be profitable.
Beyond their middle man function, the profitability of banks has serious
effects on economic growth. Good financial performance promotes high
shareholders returns. As a result of this, there exists further investment
thereby promoting economic growth. Also, poor financial performance of deposit
money banks can lead to failure and financial crunch which have undesirable
impacts on the economic growth, Ongore & Kusa (2013). Credit and liquidity
problems may adversely affect the financial performance of a bank as well as
its solvency if not properly managed. Credit risk management has been an
essential part of the loan process in the banking sector. Deposit money banks continue
to spend huge resources in credit risk management modelling with the objective
of maximizing profits.
1.2 Statement
of the Problem
The core
operation of financial institutions especially the banks is to attract deposit
and give credit to customers in form of loans. Recent financial crises in the
banks have proven that risk management practices are essential for survival of
banking industry. The exposure of banks in Nigeria to unidentified risk has led
to major bank failures. This is because the banks generally operates in
volatile environments where risk change often. Many of these risks are highly
improbable events such as the turmoil in global commodity markets, witnessed in
the second half of 2014 brought their full weight to bear on the Nigerian
economy in 2015. This reflected on high inflation rate, exchange rate, and fall
in oil price by 66.8% in international market which brought about economy
depression in Nigeria (NBS, 2016).
Many
Nigerian banks had failed in the past due to inadequate management of their
risk exposure. The problem has continued to affect the industry with serious
adverse consequences as banks are generally subject to wide array of risks in
their business operations. Banks are now working so hard to attract the
massive number of people who are not working with them. This has led to an
increase in banks‟ surplus units and deficit units. With the aim of increasing
revenue and gaining a large portion of the market share, many banks have given
out loans and advances which could not be recovered leading a massive growth in
Non-Performing Loans (NPLs) in their accounts (Opoku, 2015). This has become a
worrisome situation for banks and other stakeholders.
Conclusion
from the review of extant literature clearly suggests a relationship between
risk asset management and banks performance, however, researchers do not always
split this risk factors into categories while embarking on finding a solution.
It therefore creates a lacuna for a more recent empirical investigation to be
tested in Nigeria, a country faced with so many recurring issues and recently
faced recession which impacted virtually all the key sectors of the economy.
This study seeks to establish the degree to which banks’ risk asset management
(Loans and
Advances, Non-performing loans) have impacted performance of
Nigerian commercial banks.
1.3 Objectives of the Study
The
broad objective of the study is to examine the impact of risk asset management
on financial performance of commercial banks in Nigeria. Specifically, the
study intends to:
i.
Determine the impact of Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio on Return on asset of commercial
banks in Nigeria
ii.
Ascertain the impact of Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio on Return on equity of commercial
banks in Nigeria
iii.
Evaluate the impact of Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio on Return on capital employed of commercial
banks in Nigeria.
1.4 Research Questions
The
following questions will guide the study based on the objectives:
i.
To what extent do Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio impact on Return on asset of commercial
banks in Nigeria
ii.
What is the impact of Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio on Return on equity of commercial
banks in Nigeria
iii.
How far do Loans-to-Deposit ratio, Non-performing
loans-to-Total loans ratio impact on Return on capital employed of commercial banks
in Nigeria.
1.5 Research Hypotheses
The following hypotheses are therefore formulated to guide
this study.
H01: There is no significant impact of
Loans-to-Deposit ratio, Non-performing loans-to-Total loans ratio on Return on
asset of commercial banks in Nigeria.
H02: Loans-to-Deposit ratio,
Non-performing loans-to-Total loans ratio do not have significant impact on
Return on equity of commercial banks in Nigeria
H03: There is no significant impact of
Loans-to-Deposit ratio, Non-performing loans-to-Total loans ratio on Return on
capital employed of commercial banks in Nigeria.
1.6 Significance of the Study
In the
theoretical contribution, the study will fill the knowledge gap on the problem
of impact of risk asset management and financial performance in commercial
banks. In addition to the above, the study can add more comprehensive knowledge
to the readers in the financial sector. Basically, the study would be useful to
the following:
Financial Institutions: Institutions
such as the Capital market Authority, central Banks and financial institutions
can adopt our findings for smooth operations and boost investors’ confidence.
The study shall be used for reference purposes by the financial institutions
for implementation of policies in line with risk management.
Policy makers: This
research will add to the ever growing number of policies, measures and
regulations to be implemented by policy holders.
Bank Managers and Employees: From a practical
area, the information in this
research will offer
a comprehensive guideline to
bank managers, investors
and other commercial banks
employees, depending on the
conclusions and results of this research paper.
Commercial bank managers could use the information and concentrate to
improve banks’ performance by working on the risks in banks. Commercial banks
can now better and allocate their resources in line with the position of risks.
Researchers: Another
addition and contribution is that, the study will make the basis for other
researchers who would wish to dig into further studies of the area.
1.7 Scope of the Study
This
study would empirically analyse the relationship between Loans and Advances and
Non-performing loans as proxies for the explanatory variable, risk asset
management and financial performance indicators, return on asset, return on
equity and profit margin. Five banks will be chosen for the conduct of this
study, Union Bank Plc, GTB, UBA, Access and Zenith Banks from the period of
2007-2018. This time frame was chosen due to paucity of data.
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