THE EFFECT OF CREDIT RISK MANAGEMENT ON FINANCIAL PERFORMANCE OF SOME SELECTED DEPOSIT MONEY BANKS IN NIGERIA.

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Product Code: 00007427

No of Pages: 75

No of Chapters: 5

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ABSTRACT

The Nigeria banking industry has in recent time suffered from huge non-performing loans which has affected the performance of many deposits money banks in the country. To assess the effect of credit risk management on the financial performance of some selected bank. The study examines the effect of credit risk management and financial performance of deposit money banks in Nigeria. A total of 3 deposit money banks were conveniently selected as sample size of the study, analysis was obtained and hypothesis tested using regression analysis. The result from the data analysis showed that risk management has effect on bank credit management. It was conducted that credit risk management has significant effect on deposit money banks the study. Thus recommend among others that bank should pay more attention to know their customer (KYC) so that up to data profile of the other customer should be maintained.





TABLE OF CONTENT

Approval Page

Certification. iii

Dedication. iv

Declaration

Acknowledgement vi

Table Of Content vii

Abstract


CHAPTER ONE.. 1

1.1 Introduction. 1

1.2  Background To The Study. 1

1.3 Statement Of The Problems. 2

1.4 Objective Of The Study. 3

1.5 Research Hypothesis. 3

1.6 Significance Of The Study. 4

1.7 Scope Of The Study. 5

1.8 Historical Background Of The Selected Banks. 5

1.9 Definition Of Key Terms. 9


CHAPTER TWO.. 11

2.1 Introduction. 11

2.2 The Conceptual Framework Of The Research: 11

2.3 The Theoretical Framework Of The Research:

2.4 Empirical Review……………


CHAPTER THREE.. 48

RESEARCH METHODOLOGY.. 48

3.1 Introduction. 48

3.2 Research Design. 48

3.3 Target Population. 48

3.4 Sampling Size And Sampling Techniques 48

3.5 Method Of Data Collection. 49

3.6 Method Of Data Presentation And Analysis. 49


CHAPTER FOUR.. 51

DATA ANALYSE AND REPRESENTATON.. 51

4.1 Introduction. 51

4.2 Model Specification……………………………………………………………………………52

4.3 Data Analysis………………………………………………………………………………...56

4.4 Test of Hypothesis.............................................57


CHATER FIVE.. 57

SUMMARY, CONCLUSION AND RECOMMENDATION.. 57

5.1 Summary. 57

5.2 Conclusion. 58

5.3 Recommendations. 59

Reference



CHAPTER ONE

INTRODUCTION


1.1 Background to the study

The banking industry in Nigeria is the business of providing financial capital to the business community as well as individual customers. Banks do this with the expectation of achieving targeted rates of retum on the extensions of credit over a period of time and eventually reclaiming their principal with interest. Any extension of credit carriers with it the risk of non-repayment, under the term of the financial relationship between the financier an individual or corporate organization. Based on this fact, bank have a strong rested 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.

Since most banking assets are loans and advances, the process of assessing the quality of bank credit and its effect on the banks financial condition is critical. As rightly observed by Sulaiman (2006), it is unfortunate that one of the serious efficiencies prevalent among Nigeria bank has been the inability of their management to identify problem asset. This, according to Ojo (2015), is bome, perhaps out of ignorance or intense desire to declare huge profits at the end of the financial year. As a result, balance sheet, often do not reflect the banks true financial condition, while profit from which taxes and dividends are paid. Whenever the banks supervisors and regulators discover such deficiencies, the affected banks are often required to make up for the shortfall in provision with adverse consequences for their financial statements. The profit for the emerging period is usually wipe off while the resultant losses would negatively affect the bank’s assets quantity as well as their capital adequacy ratios. Assets quality reflect the state of existing and potential credit risks associated with loan and investment portfolio, real estate owned, and other assets, as well as those relating to off balance sheet transactions. The ability of management to identify, measure, monitor and control credit risk is center to asset quality because loans and advances constitute the largest risk assets carried by banks (Ojo, 2015), consequently, a problem with the loan portfolio passes a guilty verdict on the management, and it is synonymous with a problem with the bank. Credit risk arises when an obligor fails to perform it's obligations under a trading or loan contract or when it's ability to perform such obligation is impaired resulting in an economic loss to the banks (CBN, 2006). It does not only arise when a borrower defaults on re-payment of a loan or settlement of principal and interest, but also when its repayment capability declines. Ojo (2015), defined credit risk as the probability that a payment will not be fully settled because the debtor become insolvent.


1.2 Statement of the Problems

There are many problems associate with credit risk management in deposit money banks today. Bank failures in Nigeria and other emerging economic have been attributed to improper lending practice, lack of experience, organization and information system to adequately assess credit risk in the falling economy (Gil-Diaz, 1994, Aham and Ariff, zoolo, kolap, Ayeni and One, 2015). There is sufficient empirical evidence that poor performance is manifest in banks as indicated by low bank performance indicators including: high levels of credit risk, poor quality loan, limited and or inadequate capitalization, operational inefficiency, higher incidence of non-performing loans, higher level of liquidity risk, and so on. Although these are mentioned as constraints affecting banks performance, they are based on a few studies and non-elaborate method to generate sufficient and valid conclusions. This study therefore becomes an extension of the few studies under taken with a view to generating more and further information based on empirical evidence on deposit money banks.


1.3 Objective of the Study

The main objective of this study is to assess the effect of credit risk management on financial performance of deposit money banks the following are the objective of the study.

  1. To ascertain the effect of loan loss provision on financial performance of deposit money banks.
  2. To determine the effect of liquidity ratio on financial performance of deposit money banks.
  3. To assess the effect of non-performance loan on financial performance of deposit money banks.

1.4 Research Hypothesis 

The purpose of this research is to ascertain whether there is any significant relationship between credit risk management and performance of deposit money banks in Nigeria.

1) H0: loan loss provision ration does not have any significant effect on financial performance on deposit money banks in Nigeria;

H1: loan loss provision ration has a significant effect on financial performance on financial performance on deposit money banks in Nigeria;


2) H0: liquidity ratio does not have any significant deposit money banks in Nigeria;

H1: liquidity ratio has a significant effect on financial performance on deposit money banks in Nigeria;


3)   H0: non-performing loan ratio does not have any significant effect on financial performance on deposit money banks in Nigeria.

H1: non-performing loan ratio has a significant effect on financial performance on deposit money banks in Nigeria.


1.5 Significance of the Study

The work is significant in many ways. First and foremost, is expected to make contribution to knowledge. The research contribution to knowledge. The research will educate student on how deposit money banks are managing their credit portfolio. It will serve as an important references for future research and it is also expected to stimulate further research in these and related areas. The work will identify efficient credit management strategies that Nigeria and deposit money banks could employ to enhance their management of credit and risk assets. This is expected to translate into lower incidence of bad debt. Thus the outcome of the research will be of immense significance to policy makers and banks management on how to prove on the current level of risk management II Nigerian commercial banks.


A bank exist not only to accept deposit but also to grant credit facilities and therefore is inevitably exposed to credit facilities and therefore is inevitably exposed to credit risk. In other worlds, The intermediation function of a bank naturally exposes them to credit risk: credit risk is by far the most significant risk faced by banks and the success of their business depends on accurate measurement and efficient management of credit risk is the degree of value fluctuations in debt instruments and derivatives due to change in the underlying credit quality of borrower and counter parties. Could (2005) defines credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time. Credit risk is the exposure faced by bank when a borrower (customer) default in honoring debit obligation on due date or at maturity. This risk interchangeably called 'counter party risk' is capable of putting the bank in distress if not adequately managed. The credit risk management implications are mean minimize the adverse effect of credit risk. A sound credit risk management framework is crucial for banks so as to enhance profitability and guarantee survival.


1.6 Scope of the Study

The study cover the period of the study is strictly within the frame work of the stated objectives. It is not intended to carry out a complete evaluation of credit management in the economy but focused on selected deposit money banks. Three entire population of commercial banks, which are first, bank fidelity bank, sterling Bank


1.7 Historical Background of the Selected Banks

1.7.3 First Bank PLC

First Bank PLC incorporated 1894 in live pool as the bank for British West African. It acquired African Banking corporation which was established in 1892.in the year 1896 first bank plc opened its first international branch in Accra, Ghana and the incorporated locally as the standard bank of Nigeria Ltd in 1969.first bank was listed on the Nigeria stock exchange in 1971.it established the first offshore financial subsidiary of a Nigeria owned band in the Uk 2002.it also acquired two banks ;MBC international Bank Ltd and FBN(merchant Bankers) Ltd and announced the  business combination discussion with Eco bank in 2005,by the year 2007 first bank Nigeria PLC floated its first ever hybrid capital offering out of Africa and floated Nigeria's biggest offer.

l  From begin the only Bank in Nigeria force cade

l  Weathered the “banking explosion “of the 1930s to 1950s

l  Followed by an era of government owners hip and control

l  To a flurry of consolidation and then gradual growth in number of bank up to the early 1980s

l  The yet another industry growth spurt in the early 1990s when the banking sector was deregulate

l  Leading to an industry shake-up The late 1990s, which reduce the number of bank from 126 to 77

l  And later resuscitation and growth to 89 bank

l  Leading to the recent shake-up to 25 banks


First Bank has solidified itself as a brand of fortitude, strength and innovation in the Nigerian Financial sector since its inception in 1894.the iconic African elephant with navy blue and ivory colors has been a national symbol of one of the biggest international players in the financial services industry to date.


As the First Bank Group moved into its second century of operations, on April 27 2004, the brand unveiled a new corporate identity with a new logo and new colors. Entering into a sophisticated and dynamic era in the life of First Bank, The brand seeks to draw from our history of being one of Nigeria's biggest and most prosperous financial services group and stream living with new age processes, technology and most importantly group mind set.

First Bank was rated a super brand in 2007,from a pool of 2000 highly graded brand in Nigeria, by the super brand Nigeria council and the 2012 brand financial Banking League table rated us in the top 500 most valuable banking brand worldwide and the most valuable Nigerian banking brand in 2011.


Those rating show that as the bank revolutionizes it's operations and dynamics with new product and services, at the heart of the organization in the understanding that customer services delivery and trust are the ultimate way to stay 'truly The First, All through the seasons, First Bank has remained. Resilient dependably dynamic (corporate web site "http;//www. First bank Nigeria. Com/about us/our history /")


1.8.2 Fidelity Bank Plc

Fidelity Bank Plc began operations in 1988, as a commercial banking and then become a universal bank, in February 2001. The current enlarged Fidelity Bank is result of the merger with the former FSB international Bank Plc and Manny Bank Plc (under the Fidelity brand name) in December 2005.


Fidelity Bank is today ranked amongst the top 10 in Nigeria banking industry, with presence in the major cities and commercial centers of Nigeria over the years, the bank has been reputed for integrity and professionalism. It is also respected for the quality and stability of its management.


Fidelity staffs are also respected in the Nigerian banking industry for the quality of training they receive on the job, as well as in good businesses school both in Nigeria and overseas. The management is particular about the quality of people that join the system. To quality as a member of team Fidelity, a candidate is expected to possess three vital statistics, with the acronym TAC;

l  Talent (an innate mental aptitude)

l  Ambition (a desire to succeed) and

l  Character (a total quality of integrity which will guide the talent and ambition to productive ends).

The management is focused on building and maintaining a virile and well-respected brand that caters to the needs, to it's growing corporate, commercial and consumer banking clientele. For this purpose, the bank is leveraging it's pedigree in investment banking (Fidelity was a merchant bank for 11years) and its structures and services offerings for a retail populace.

Fidelity Bank also enjoy the respect and partnership of a network of off shore institutions with it has Correspondent banking, confirmation lines, credit and other relationship those include, ANZ Landon, Afr-eximbank,  Bank, Frankfurt, Citibank, N. A. London and HSBC, US, Ex-im Bank, etc


1.8.2 Sterling Bank Plc

Sterling Bank Plc is one of the leading commercial bank established in Nigeria. It commended operation as NAL bank, the nation’s per-eminent investment banking institution in 1960, following the indigenization degree of 1972, it became a government owned international finance company Illinois and American Express Bank Limited between 1974 and 1992. in 1992, the bank was partly privatized and listed as a public company on the Nigerian stock Exchange (NSE); and in 200 the government sold its residuals interest in the bank, effectively making it a fully privatized institution the consolidation of Nigerians banking industry saw NAL bank completing a merger with four other Nigerian banks namely magnum trust bank NBM Bank, Trust Bank Of Africa and Indo Nigeria Merchant Bank (INMB) in January 2006.

The merger entities were successfully integrated and have operated as a consolidated group with the name sterling Bank ever since.


The bank recently assimilated the entire business interest of the defunct equatorial Trust Bank (ETB) towards the end of 2011. This effectively enhanced its position in the hierarchy of respectable players in the Nigerian banking industry on all key parameters. Today, with a capital base of N44 billion, over N508 billion in assets and about 170 branches nationwide complemented by 200 Automated teller machine points nationwide sterling bank has grown into a major financial solution provider and justifiably pride itself as "the one customer Bank "that celebrates every customer as a unique individuals (corporate web site "http ://www. Sterling banking. com/about -corporate info. aspx")


1.8 Definition of Key Terms

The credit risk management is measures employed by bank to avoid or minimize the adverse effect of credit risk.

Deposit Money Bank: is a type of bank that provides service, such as accepting deposit, giving business loans, credit and basic investment products.

Borrower: a person that has applied, meet monetary loan from a lender.

Leander: is a private public or institution entity which makes funds available to others to borrow or lends money,

Central Bank of Nigeria (CBN); is a national bank that provides financial and banking services for its country's government and commercial banking system.

Credit Risk Management (CRM): credit management is the risk of loss that may risk from the failure of a business partner (also known as counter party) to reimburse a loan when it is due.

Probability of Default (PD): is a parameter used in the calculation of economic capital or regulatory capital.

Asset Management Company (AMCON): a company that invests its client pooled fund into securities that match its.

Return On Equity (ROE): measure the rate of return on the ownership interest (shareholders 'equity) of the common stock owners.

Return on Assets (ROA): percentage shows how profitable a company asset are in generating revenue.

Return on Shareholders Funds (ROSF): ratio is a measure of the profit for the period which is available to the ordinary shareholders with the ordinary shareholders stake in a businesses.

Special Purpose Vehicle (SPV): is a subsidiary of a company which is bankruptcy remote from the main organization. The action of a SPV are usually very tightly controlled and they are only allowed to finance buy and sell assets.

Fair Issac Corporation (FICO) is a public company that provides analysis and decision making solution including credit scoring. 


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