CREDIT RISK MANAGEMENT PERCEPTION IN NIGERIA COMMERCIAL BANKS A CASE STUDY OF FIRST BANK OF NIGERIA PLC AND UNION BANK OF NIGERIA PLC

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CREDIT RISK MANAGEMENT PERCEPTION IN NIGERIA COMMERCIAL BANKS A CASE STUDY OF FIRST BANK OF NIGERIA PLC AND UNION BANK OF NIGERIA PLC

ABSTRACT

The research was undertaken to evaluate credit risk management Perception in Nigeria commercial banks using First bank of Nigeria Plc and Union bank of Nigeria Plc as a case study.The work was intended to achieve the following objectives; to examine the causes of credit risks in Nigeria commercial banks. To review the strength of the Commercial banks in combating this menace.To also ascertain the level of contribution of the central bank of Nigeria in helping the commercial banks mitigate credit risk. Relevant data were collected from both primary and secondary data sources. Questionnaire was the main primary data collection instrument employed while data from various relevant publications and annual reports constituted the secondary data. Based on the study, the following conclusions were drawn: There are several causes of credit risk to commercial banks in Nigeria Credit risks do really affect or reduce the operational efficiency of these banks. Employment of strategies in reducing this credit risk is more sophisticated in first bank of Nigeria plc than in union bank of Nigeria plc. Central bank of Nigeria has over the years been assisting the commercial banks in fighting these credit risks. On the basis of the above findings the following recommendations were made: Commercial banks should employ more strategic means in monitoring credit losses in their banking system.

Commercial banks should assess the workability of each strategy before implementation. Since strategies are costly and may involve heavy capital investment.

More research should be conducted in assessing the lending behaviour of Nigeria commercial banks.

TABLE OF CONTENTS

Cover pager

Title page

Certification

Dedication

Acknowledgements

Abstract

Table of contents

Chapter One: Introduction

1.1 Background of the study

1.2 Statement of problem

1.3 Objectives of the study

1.4 Research questions

1.5 Hypotheses of the study

1.6 Significance of the study

1.7 Profile of the selected commercial banks

1.8 Scope and limitations of the study

1.9 Acronyms/Definition of terms

References

Chapter Two: Review of Related Literature

2.0 Introduction

2.1 The changing bank environment

2.2 Bank exposure to risk

2.3 Corporate Governance of commercial banks in Nigeria

2.4 Risk based analysis of banks

2.5 Analytical tools provided

2.6 Justification for banks regulation

2.7 Political Economy of the based accord

2.8 The based accord of 1988

2.9 The based accord base II

References

Chapter Three: Research Methodology

3.1 Research design

3.2 Nature and sources of data

3.3 Method of data collection

3.4 Population and sample determination

3.5 Method of data analysis and presentation

3.6 Primary data analysis techniques

Chapter Four: Data Presentation and Analysis

Introduction

4.2 Data presentation and analysis

4.3 Testing of Hypothesis

Chapter Five: Summary of findings, Recommendations and

Conclusions.

5.1 Summary of Findings

5.2 Recommendations

5.3 Conclusion

Appendix

Bibliography

CHAPTER ONE

1.1 Background of the Study

The changing environment in which banks finds themselves present major opportunities for banks, but also entails complex, variable risk that challenge traditional approaches to bank management.

Recently, there was increase in non-performing credit portfolios in banks and other financial institutions and these significantly contributed to the financial distress in the banking sector.

Consequently, banks must quickly gain financial risk management capabilities in order to survive in a market oriented environment, withstand competition by foreign banks, and support private sector-led economic growth. An external evaluation of the capacity of a bank to operate safely and productively in its business through effective credit risk management is normally performed once each year. All animal assessment is similar in nature, but has slightly different focuses depending on the purpose of the assessment.

Risks faced by banks are numerous but this study is essentially concerned with credit risk management in Nigeria commercial banks with First Bank Nigeria Plc and Union Bank Nigeria Plc. as case studies.

The credit risk management in commercial banks should be adequately attended to by banks that want to succeed in its over-all business operation.

For most banks, loans are the largest and most obvious source of credit risk, loans and advances constitute almost sixty to seventy percent of the assets side of the balance sheet of any bank. As long as the borrower pays the interest and the principal through proper amortization of loan on the due dates, a loan will be a performing asset.

The problem however arises once the payment are delayed or defaulted and such situations are very common occurrences in any bank. Delay or defaults in payment of bank loan affects the cash forecast made by banks and further result in a changed risk profile, as the bank will now have to face an enhanced interest rate risk, liquidity risk and credit risk.

Bank are increasingly facing credit risk in various financial instruments other than loans, which includes inter bank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees; and the settlement of transactions.

The late 1980s and early 1990s witnessed a great rising non performing credit portfolio in commercial banks especially in First Bank Nigeria Plc. and Union Bank Nigeria Plc. The use of status enquiries on bilateral basis between banks was characterized by some weaknesses. Status enquiries is regarded as business courtesies to which some banks either did not respond to or gave vague replies.

In spite of the systematic weakness, many banks continued to extend fresh facilities to customers who already had hard core and un-serviced debt with other banks and financial institutions. Although, it is difficult to evaluate credit risk, an argument can be made that the loan default disclosures proxy for credit risk may also provide and indication of operational risk related to management decision making.

However, it has been noted that managerial weakness for failed banks includes inadequate supervision of loan portfolio and over-all aggressive strategies for growth in loans and deposits.

Between 1994 and 2003, thirty-seven (37) banks were closed in Nigeria as against twenty-one (21) banks closed between 1930 through 1966. An assessment of the banking distress era of 1993 through 1997 reveals that lending defaults were essentially responsible for over seventy-five (75) percent of the casualties suffered by the Nigerian banking sector through this period.

So the effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. Banks should also consider the relationship between credit risk and other risk.

1.2 Statement of Problem

Various commercial banks in Nigeria are faced with the problem of credit risk management. The First Bank of Nigeria Plc. and Union Bank Nigeria Plc. are faced with the problem of credit risk management just like other commercial banks in Nigeria.

During the recent re-capitalization of the banking industry, many banks even the ones people hold to high esteem closed operation as they could not meet up with the statutory capitalization requirement.

According to Rose and Hudgins (2008) and Kock and Macdonald (2003) bank capital provides a cushion against the risk of failure by absorbing financial and operating losses until management can address the problem.

This problem of credit risk management has crippled most of the commercial banks in Nigeria including First Bank Nigeria Plc. and Union Bank Nigeria Plc.

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