This research work was
undertaken to assess the effect of risk and credit management on bank
performance with reference to Zenith Bank Plc.
This work was intended to
achieve the following objectives: to appraise and determine the lending
procedure of banks, to highlight the extent to which improper project
evaluation influence risk and credit management on bank performance.
Relevant data were collected
from both primary and secondary sources. Questionnaire was the main primary
data collected instrument employed while data from various relevant
publications constituted the sources of secondary data. Upon the analysis of
data, the following conclusions were drawn; that sound lending requires a
clear-well articulated and easy accessible policy document which spells out the
philosophy of lending. On the basis of the above findings, it was recommended
that banks should ensure that loans given out to customers should be backed by
adequate collateral security.
Finally, it is the opinion
of the researcher that the management the Money-Deposit Banks should prevent
the incidence of bad debts in Nigerian Banks.
TITLE PAGE I
TABLE OF CONTENT VI-VII
CHAPTER ONE INTRODUCTION
TO THE STUDY 1
OF THE PROBLEM 3
1.3 OBJECTIVE OF THE STUDY 4
RESEARCH QUESTIONS 4
1.5 RESEARCH HYPOTHESIS 5
1.6 SIGNIFICANCE OF THE STUDY 5
1.7 SCOPE AND LIMITATION OF THE STUDY 6
1.8 DEFINITION OF TERMS 8
CHAPTER TWO: LITERATURE REVIEW
2.1 THEORETICAL FRAME WORK 10
2.2 CHARACTERISTICS OF CREDIT AND RISK
2.3 COMPONENTS OF CREDIT RISK 19
2.4 DETERMINANTS OF CREDIT RISK 20
2.5 CREDIT AND RISK MANAGEMENT AND BANK
2.6 RELATIONSHIP BETWEEN TYPE OF BANK
BANK PERFORMANCE, CREDIT AND RISK MANAGEMENT 23
2.7 BORROWERS OR CUSTOMER 28
(POLITICAL INSTABILITY) 29
2.9 NATURE RELATED
FACTOR: (NATURAL HAZARD) 29
CONTROL OVER CREDIT 38
ALLOCATION OF BANKS LOAN AND ADVANCES 40
ADMINISTRATION IN ZENITH BANK PLC 41
2.14 LENDING AND CREDIT ANALYSIS 42
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 INTRODUCTION 52
3.2 RESEARCH DESIGN 52
3.3 POPULATION OF THE STUDY 53
3.4 SAMPLE SIZE DETERMINATION 53
3.5 INSTRUMENT FOR DATA COLLECTION 54
3.6 METHOD OF DATA ANALYSIS 55
3.7 VALIDIDY OF THE INSTRUMENT 56
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2: ANALYSIS OF RESPONDENT PERSONAL PROFILES 57
ANALYSIS OF QUESTIONS 61
4.4 TEST OF HYPOTHESIS 65
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS, CONCLUSION
5.2 SUMMARY OF FINDINGS 71
5.3 CONCLUSIONS 72
5.4 RECOMMENDATIONS 73
1.1 BACKGROUND TO THE STUDY
industry has achieved great prominence in the Nigerian economic environment and
it influence play predominant role in granting credit facilities. The
probability of incurring losses resulting from non-payment of loans or other
forms of credit by debtors known as credit risks are mostly encountere0d in the
financial sector particularly by institutions such as banks. The biggest credit
risk facing banking and financial intermediaries is the risk of customers or
counter party default. During the 1990s, as the number of players in banking
sector increased substantially in the Nigerian economy and banks witnessed
rising non-performing credit portfolios. This significantly contributed to
financial distress in the banking sector. Also identified was the existence of
predatory debtor in the banking system whose modus operandi involves the
abandonment of their debt obligations in some banks only to contract new debts
in other banks (Sanusi, 2012).
creation is the main income generating activity for the banks. But this
activity involves huge risks to both the lender and the borrower. The risk of a
trading partner not fulfilling his or her obligation as per the contract on due
date or anytime thereafter can greatly jeopardize the smooth functioning of
bank’s business. On the other hand, a bank with high credit risk has high
bankruptcy risk that puts the depositors in jeopardy. In a bid to survive and
maintain adequate profit level in this highly competitive environment, banks
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 the
banks. (Umoh 2012)
cause of serious banking problems continues to be directly related to low
credit standards for borrowers and counterparties, poor portfolio management,
and lack of attention to changes in economic or other circumstances that can
lead to deterioration in the credit standing of bank’s counter parties. And it
is clear that banks use high leverage to generate an acceptable level of
profit. Credit risk management comes to maximize a bank’s risk adjusted rate of
return by maintaining credit risk exposure within acceptable limit in order to
provide a framework of the understanding the impact of credit risk management
on banks profitability. (Bessis, 2012).
excessively high level of non-performing loans in the banks can also be
attributed to poor corporate governance practices, lax credit administration
processes and the absence or non- adherence to credit risk management
practices. The question is what is the impact of credit risk management on the
profitability of Nigerian banks? How does Loan and advances affect banks
profitability? What is the relationship between non-performing loans and
profitability in Nigerian banks?
considers the extent of relationship that exists between the core variables
constituting Nigerian Bank default risk and the profitability. It therefore
seek to examine the impact of credit risk on the profitability of Nigerian
banking system and identifies the relationships between the non-performing
loans and banks profitability and evaluate the effect of loan and advance on
banks profitability on Nigerian banks. To achieve the study’s objectives it is
postulated that there is no significant relationship between non-performing loan
and banks profitability while loan and advances does not have a significant
influence on banks profitability.
(Robert & Gary 2004)
1.2 STATEMENT OF THE PROBLEM
problem for this study is to appraise the risk and credit management policies
of a typical Money-deposit bank (the Zenith Bank Plc) with a view of
finding the causes, consequences of bad debts in banks. Year after year,
banks suffer much from the part of full loan extended which has for one reason
or the other proved unrecoverable. Banks lose millions of Naira in various bad
debts yearly and despite efforts by bank management, committee of chief
inspectors and the bankers committee on the other hand, the wave of bad debts
in banks is still on alarming proportion. This is gathered from a combination
of literature reviews on the topic.
the other hand, many banks experienced a lot of bad debts when the new
government abandoned the project awarded to the contractors by civilian
government. These contractors borrowed to execute the project awarded to them
but could not repay the loan, due to government action on revamping the economy
thereby abandoning the project. Other experiences were during the time of
draught or poor rainfall and pest. These however led to low harvest which
did not give the farmers enough time to repay their debt. Again, experience may
arise in respect of lapses on the part of the banks credit officers. For
instance, there may be excesses over approved facility, unformatted
facilities and expired facilities not renewed on time. In each of these cases
the customer may easily deny even owing the bank all or part of the
amount. Banks have always borne the burden alone, but this may not continue in
future as the banks may be unable to take the risk of lending more but when
eventually they do, they would seek the best way they come out of the
risk with a realistic reward which they are clearly failing to achieve at
present, the study therefore will examine the effect of credit management and
the incidence of bad debt in Nigeria commercial bank.
OF THE STUDY
To determine and appraise the risk and
credit procedure of banks using Zenith Bank Plc.
To highlight the effectiveness and
adequacy or otherwise the risk and credit management policy of Nigerian banks
in reducing the occurrence and consequences of bad debts.
To highlight the rate at which
inadequate collateral security provision by borrowers increases the incidences
of bad debt in Nigerian.
To determine whether fund diversion has
any effect on risk and credit management in Nigeria banks.
To ascertain the extent to which
government intervention in risk and credit policies of banks has influenced
Nigerian money deposit banks.
1.4 RESEARCH QUESTIONS
Has inadequate collateral security
provision by borrowers caused bad debt in Zenith Bank Plc?
Does fund diversion have any effect on
bad debt of Zenith Bank Plc?
To what extent has government
intervention in lending policies of money deposit bank influenced bad debt in Zenith Bank Plc?
To what extent does improper project
evaluation influenced bad debt of Zenith Bank Plc?
Does risk and credit procedure of banks
using Zenith Bank Plc properly assess?
To what extent has risk and credit
management policy of Nigerian banks reduce rate and costs of bad debts
What are the effectiveness and adequacy of
risk and credit management policy of Nigerian banks?
Does risk and credit management affect
the performance of Nigeria banks
following hypotheses were drawn as follows;
Inadequate collateral provisions by borrowers do not increase the
incidence of bad debt in Zenith Bank Plc.
Inadequate collateral provisions by borrowers increases the incidence of bad
debt in Zenith Bank Plc.
Fund diversion does not affect bad debt in Zenith Bank Plc.
Fund diversion affects bad debts in Zenith Bank Plc.
Government intervention in lending policies of money-deposit banks has no
influence on risk and credit management in Zenith Bank Plc.
Government interventions in lending policies of money-deposit banks have direct
influence on risk and credit management in Zenith Bank Plc.
project evaluation has no significant relationship with bad debt in Zenith Bank
improper project evaluation has direct relationship with bad debt in Zenith
OF THE STUDY
is hardly an exaggeration that the difference between the success and the
failure in the banking industry is in the effective management of the banks
loans and advance. Efficient loan management is vital to the protection of
assets and the achievements of adequate returns to investment. Though much work
abound in the literature of the technique of lending, the methods of
securing such lending and the pitfalls that await the unwary banker. By
comparison it appears to be very little in point on the subject of loan
management and recovery.
study of this subject will therefore be a welcome addition to the existing
volume of banking literature.
loan management recognized that beyond the application of sound banking
principles whenever a loan is made, there is need for urgency in appreciating
the point when a loan begins to look doubtful, in arriving at a decision as to
the appropriate action and in taking that action. This will enable the
bank to at least obtain full payment including accrued interest or at
worst to mitigate the capital loss in the face of increased competition among
banks, future profits are likely to be harder to come by and since bad debts
are a charge against profits, it is appropriate that we review the methods,
proportions and margins of lending to bad and doubtful debts Okogbo (1981).
the significance of this study to bankers will enable them to appreciate an
appraisal of their lending and control mechanism now that they are
expected to lend under tight monetary conditions. The economy as a whole will
benefit from the study because if the level of bad debts is reduced, banks
will be left with more profits to enable them make the expected contributions
to the development of the economy.
AND LIMITATION OF THE STUDY
the study of risk and credit management in Nigeria, Zenith Bank Plc was used
for my analysis. All references therefore relate to Zenith Bank Plc. A Six-year
period covering 1988-1993 will be studied.
limitations of this study include some of unavoidable constraints and problems
encountered in the process. They are as follows:
The problem of finance was not left out in the course of research to this
study. Insufficient fund hindered an in-depth study of this research since it
was financed from meager pocket money of the researcher.
ii) Non-Availability of Records: This includes
the problems of easily getting the appropriate data due to bureaucracy which
hinders the information flow in the country.
iii) Non-challant Attitude Of Bank Officials:
The reluctance of bank officials to reveal information on the need for this
study, for fear of breach of duty of secrecy to customers’ exposure of banks
of Respondent / Borrowers: Most bank customers were
semi-illiterates and most often it was very difficult to
collect adequate data required from them.
Since this study is one of the many courses offered by the researcher, the researcher
was constrained by time to carry out an indent research on the study.
Risk: This is the potential that a chosen action
or activity will lead to a loss. The notion implies that a choice having an
influence on the outcome exists (or existed). Potential losses themselves may
also be called "risks". Almost any human endeavor carries some risk,
but some are much more risky than others.
2. Credit: The resources provided may be financial (e.g.
granting a loan),
or they may consist of goods or services
(e.g. consumer credit). Credit encompasses any form of deferred payment.
Debt: This is
what one owes to another person.
Loan: A Loan
is a credit arrangement, a security is pledged and must be repaid with interest
over a stipulated period of time.
Overdraft: This is a credit arrangement by banks to their
customer to withdraw money over and above that what he has in the account.
means failure to pay one´s debt for credit extended which has fallen due.
Capital Risk: Capital refers to the amount of equity
owners have put up. Almost every aspect of banking is either directly or
indirectly influenced by the availability of capital.
Capital: The general
position of the customer.
that customers may offer as security to obtain credit in case of bad debt.
10. Character: The likelihood
that a customer will try to honour his obligation.
11. Credit Risk:
Credit risk is defined as the probability that some of a bank’s assets, especially
its loans, will decline in value and possibly become worthless. Because banks
12. Debt holders:
Debt purchasers and depositors provide finance in return for a promised stream
of payments and a variety of other covenants pertaining to corporate behavior.