Credit Risk Management Perception in Nigeria commercial Banks

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.

CHAPTER ONE

1.0       INTRODUCTION

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.

1.3       Objective of the Study

Regards to the problem or point enumerated above in the statement of the problem; the following objectives are to be pursued:

1. To examine the causes of credit risk in Nigeria commercial banks
2. To review the strength of the commercials bank in combating risk credit.

To also ascertain the contribution of the central bank of Nigeria in combating the credit risk management antagonistic factors.

1.4       Research Questions

The above objectives of this study are operationalized into the following investigative research questions to give the study a direction and magnitude.

1. To what extent are credit risks affecting the operational efficiency of commercial banks?
2. What constitute the strength of the commercial banks in mitigating credit risk?
3. Does central bank of Nigeria assist commercial banks in mitigating credit risk?

1.5       Hypotheses of the study

In order to give focus to this study, the following hypotheses were formulated to enhance the efficient study:

1. Ho: Credit risk management does not affect the operational efficiency of commercial banks.
2. Ho2: Central bank of Nigeria does not assist the commercial banks in mitigating credit risk.
3. H03: Commercial banks do not have the required techniques of mitigating credit risks.

1.6       Scope and Limitations of the Study

This study will cover just credit risk management if First Bank of Nigeria Plc and Union Bank Nigeria Plc, Enugu branch between (2007- 2009). Since the researcher will find it difficult, if not impossible to appraise the credit risk management in all the commercial banks in Nigeria, the above named two banks were chosen.

This decision is justified by the fact that commercial banks in Nigeria are homogenous in all respect. The hypotheses test control measures put in place to combat credit risk in Nigeria Commercial banks.

1.6.1    Limitations of the Study

There are constraints which hinders the progress of this work. Such constraints include:

1. Time constraints, financial and other resources
2. Disappointment on the part of our interviewee
3. Poor Communication and withholding of vital information that would have aided or facilitate more efficiency of this work by some of the commercial banks staffs.

1.7       Significance of the Study

For any commercial bank like First Bank of Nigeria Plc and Union Bank of Nigeria Plc with wide range of responsibilities of service delivery to her customers through prudent and efficient credit management undermining credit risk management is doing so to the detriment of its over all effective and efficient and operation in banking business.

In view of the on-going problems in credit risk management of banks; this study through its findings and recommendations will be significant in the following ways.

1. It will provide commercial banks managers with the procedures for ascertaining and curbing banks credit risk.
2. It will help the stakeholders (depositors, investors, banks staff, legislator etc) with information about the liquidity position of the banks under review.
3. It serves as a useful reference material for lectures, financial analyst and other researchers in this field of study.
4. It will also bring to bank stakeholders the practical evaluation statistics model to assessing banks credit risk management in Nigeria commercial banks.
5. It will be of immense importance to bank regulatory and supervisory agencies such as Central Bank of Nigeria
6. (CBN), Nigeria Deposit Insurance Corporation (NDIC) in fulfilling their collective mission of maintaining stability and public confidence in Nigeria banking sectors.
7. Lastly but not the least, it will assist bank management to appropriately focus attention on those areas perpetrating bank’s credit risk in order to boost operational efficiency.

1.8       Profile of the Selected Banks

Among the existing 24-re-capitalized banks in Nigeria commercial banks setting, two are selected for review in this study. The sample selection is judgmental and the selected banks include: the Union Bank of Nigeria Plc. and the First Bank of Nigeria Plc.

1.8.1    Union Bank of Nigeria Plc

Union bank of Nigeria Plc was established in 1917 as a colonial bank with its first branch in Lagos. In 1925, Barclays Bank Dominion colonial and overseas was formed to take over the activities of the bank. In 1965, the bank was legally incorporated in Nigeria as a wholly owned subsidiary of Barclays Bank International Limited and renamed Barclays Bank of Nigeria Limited.

The ownership structure of the bank remains unchanged until 1971 when 8.33% of the Bank’s shares were offered to Nigeria. In the same year, the Bank was listed on the Nigeria stock exchange market. As a result of the Nigeria Enterprise promotion Decree of 1972, the Federal Government of Nigeria acquired 51.67% of the Bank’s shares, which left Barclays Bank Plc, London as a minority with 48.33%. A landmark event in the bank’s history occurred in 1979 when Barclays Bank sold 50% of its shareholding in the Bank to Nigerians. This resulted in the change of the banks name from Barclays Bank of Nigeria to Union Bank of Nigeria Limited to reflect its new image and ownership structure.

The remaining share holding of Barclays Bank was disposed off in 1989. Today, Union Bank is the First Publicly quoted banking institution that is 100% owned and wholly managed by Nigerians (see WWW.union banking.com.)

1.8.2    First Bank of Nigeria Plc

The bank was incorporated as a limited company on March 31, 1948 as Bank of British West Africa Limited with Head Office in Liver Pool UK. In 1969, the bank was incorporated locally as the Standard Bank of Nigeria Limited in line with the company’s decree of 1968. The Bank was converted to public company in 1970 and got listed on the Nigeria Stock Exchange (NSE) in March 1972. Changes in the name of the Bank occurred in 1979 and 1991, to First bank of Nigeria Plc. respectively. The Bank engages in universal banking. That is, it carries on the business of commercial banking, registrar, trusteeship and capital market (First Bank of Nigeria Plc. Annual Report 2004, 2006, 2007).

1.9       Acronyms and Definition of Terms

1. CBN: Central bank of Nigeria Plc Commercial Loan: An unsecured obligation issued by a corporation or banks to finance its short term credit needs, such as accounts receivables and inventory.
2. Loan: A sum of money transferred to another for temporary use to be repaid with or without interest according to terms of the loan agreement.
3. Commercial banks: Banks that deals on retail banking by accepting deposit from customers and granting loan to companies and individuals
4. Liquidity: Ability of banks to meets up its financial obligations using its assets.
5. Risk: This is the potential that event expected may occur or not
6. Risk management: This is a comprehensive process adopted by an organization that seeks to minimize the adverse effect it is exposed due to various factors inherent in the business.

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