This study is based on "The Effect of Credit
Risk Management on profitability of Banks in Nigeria". The main
objective of the study was to investigate both the positive and negative
effects credit risk management on banks profitability growth and development.
The researcher in the course of study, made use of questionnaires as a
method of data gathering, and the data was statistically analyzed, using simple
percentage and chi-square method of analysis. The data were analysed using a
Hence, the study shows that there is a relationship between bank's
effective credit risk management and profitability; there IS correlation
between credit risk management on bank performance and Eco bank's; that
effective evaluation and measurement of credit risk by bank's management
enhanced bank lending ability.
The study however recommends that Eco Bank Nigeria Plc should encourage
training and development for staff in Credit risk management
department to enhance consistent service delivery.
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Significance of the Study
1.5 Relevant Research Questions
1.6 Statement of Hypotheses
1.7 Scope and Limitation of the
1.8 Operational Definition of Terms
2.2 Conceptual Framework
2.3 Introduction of Basel
2.4 Credit Risk Analysis Techniques in Eco Bank Pic
2.5 Risk and Uncertainty in Project Appraisal
2.6 Factors Responsible For Uncertainty
2.7 Analysis of Risk and
Uncertainty in Decision- Making Process of Project Selection in Eco Bank Plc
2.8 Risk and Sensitivity Analyses
2.9 Risk Control Analysis
2.10 Types of Credit Risk
2.11 Credit Risk Process
2.12 Changing Business Model of
Credit Risk in the Banking Industry
2.13 New Risks and Credit Risk
2.14 Practical Areas of Focus for Risk Managers and Supervisors
2.15 Sources of Risk
2.16 Key Concepts in Risk Management
and Return Analysis
2.18Factors Causing Credit Risk
2.19 Credit Risk Management: Policies and Procedures
2.20 Risk Management and the
3.2 Restatement of the Research Questions
3.3 Restatement of Hypotheses
3.4 Sources of Data
3.5 Population of Study
3.6 Sample and Sampling Techniques
3.7 Research Instrument
3.8 Questionnaires Administration
DATA PRESENTATION AND ANALYSIS OF RESULTS
4.2 Characteristics of the Study
4.3 Testing Statement of
SUMMARY OF FINDINGS, CONCLUSIONS RECOMMENDATIONS AND
SUGGESTIONS FOR FURTHER STUDIES
5.1 Summary of Findings
5.4 Suggested Areas for Further Studies
1.1 BACKGROUND TO THE STUDY
This project is set investigate "the effect of Credit Risk
Management on profitability of Banks in Nigeria' with special reference to Eco
Bank Nigeria Plc. Risk management has become a hot issue in the financial
sector. Almost without exception, institutions have rushed headlong into major
effects upgrade their risk management systems and focus management attention on
appropriate process for due consideration of the tradeoff between risk and
return. For a long while, these systems were a patchwork of firm specific
solution to risk measurement and management but recently this has all changed.
The financial institution worldwide, has begun to settle on stand and
approaches to risk management well as a consistent view of what is and is not
possible in this domain ( Madufor, 2006).
Banking by its nature entails taking a wide variety of risk. It IS therefore
important to examine credit risk within the context of overall risk frame work
for a better understanding and appropriation.
In general, banking risks fall into four major risk categories:
financial, operational, business and event risks (Soluda 2006). The following
paragraph however elaborated on historical background of the case study (i.e. Eco
1.1.1 HISTORICAL BACKGROUND OF ECO
Eco Bank was incorporated on March 26, 1990 as a private limited
liability company with 100% equity ownership by Nigerian citizen,
and licensed April 10, 1990 to carry on commercial banking.
The Bank commenced business on June 12, 1990 at the Waterfront plaza,
Plot 270, Ozumba Mbadiwe Avenue, Victoria Island, Lagos. It was listed on the
Nigerian Stock Exchange on June 25, 2004. At present, it authorized capital is
Eco Bank International therefore is sixteen year old commercial banks
with business offices located in several parts of Nigeria.
The Bank is one of the largest in Nigeria. Her financial year runs from
October 1 to September 30 of the subsequent year. Eco bank's impressive
performance over the years accounts for the quality of its customer portfolio
which includes corporate Organizations, High Net worth Individuals, The Federal
Government and some state Government. To enhance response time, relationship
management units have been structured as follows:
Corporate Banking Group (CBG), Treasury and Financial Institution Group
(TFIG,) Retail Banking Group (RBG), Public Sector Group (P8U).
BANK PLC: RISK MANAGEMENT; PHILOSOPHY AND CORPORATE VALUE
Eco Bank's corporate values derive from the overall corporate vision of
Nigeria's bank of first choice" and the bank's goals business objectives. The
core values, that provide the premise for decision making approvals and
behaviour in Eco Bank include:
Value- drive Customer Focus: Emphasis on value creating products and
services that are responsive to customers' requirements. Customer intimacy and
adequate knowledge of the customer and business is important in order to ensure
that credit products and offerings adequately address our customer's needs
A Culture of Excellence: Differentiated service delivery and
responsiveness to customers are emphasized as a core competitive advantage in Eco
Bank provide industry leadership in defining service quality standards in line
with global best standards and best practices. This implies excellence in the
Bank's credit translating into efficient and timely credit processing
Courtesy: Polite, articulate and sterling service delivery and Customer
interaction aimed at delighting all customers and the bank's public.
Integrity: Emphasis on fidelity and confidentiality geared towards
winning the customer's implicit trust. Virtue and transparent honesty are
emphasized in all transaction and relationships including delivering on promise
made to customers.
Accountability Each Eco Bank person is personally responsible and
accountable for result and outcomes of his/her work and deliverables. To create
an environment of individual accountability, individual roles and
responsibilities are clearly articulated and communicated.
Teamwork: Corporate objectives are bigger than any individual or
group in the bank. It is therefore imperative that teamwork is emphasized and
actively cultivated to create a cohesive environment for the achievement of set
Innovativeness: Innovation and creativity is deliberately.
Creativity: Encouraged by
Creating and Maintaining an environment that ensures freedom to express and
apply one ideas and is tolerant of 'genuine' mistakes.
Entrepreneurialism: Proactive identification, development and follow up
on market and business opportunities and challenges are emphasized.
Meritocracy: Merit is emphasized as the basis for decision making and
approvals in the bank appraisal including peer, sub-ordinate and as may be
appropriate customer feedback is incorporated into the performance appraisal
process. Performance evaluations are transparent and reward decision.
Respect for the individual: An environment of respect of the dignity
of each Eco Bank employee is maintained. It is imperative that each Eco Bank
person treats everyone the way they would expect to be treated.
Loyalty: The quality of unwavering devotion/and sense of duty,
which bind or connects the staff to the Bank.
BANK PLC: PRIMARY RISK MANAGEMENT PRINCIPLES
These fundamental principles that underlie Eco Bank's risk management
policies are derived from Eco Bank's corporate valve as outlined above as well
as current best thinking and global best practices for the management of risk
in financial services institutions
The Board of Directors of the bank are responsible for articulating and
reviewing on an ongoing basis the overall risk strategy and risk policies of
the bank that outline clearly the risk. Appetite and return preferences that
will govern the creation and management in assets in the bank.
Relationship managers In asset creating business units are responsible
and accountable for prospecting and marketing customers that meet the criteria
defined in the bank's target market in the line with the provision of the risk
management credit exposures to reduce incidence of delinquency and maintains
Establish an appropriate risk environment in the bank.
Operate under a sound credit-originating process.
Maintain an appropriate credit risk asset creation,
administration and monitoring process.
Ensure adequate control over risk assets.
At Eco Bank; responsibility is matched by appropriate authority to
perform job duties and achieve desired result and outcomes. Hence individuals
and group with responsibility for credit creation and approval are accordingly
empowered with the appropriate level of authority to carry out their tasks.
BANK PLC AND ITS PORTFOLIO MANAGEMENT
In line with defined risk and return preferences, the risk assets
portfolio of the bank is deliberately managed to avoid excessive concentration
of risk to any industry, market sector or individual customer as well as to
ensure portfolio flexibility and liquidity.
The Eco Bank portfolio management process provides for upfront definition
of target risk assets stratification in the bank and on an ongoing basis tracks
the actual composition of the risk assets portfolio against the desired
structure. The bank's management information system provides
up to date, accurate and complete information on the risk assets provide
informed basis for management action decision making in respect of the risk
The authority to approve credit is jointly exercised by the bank's risk
management function as well as business managers online with the provisions of
the bank policies in respect of credit approval.
1.1.5 RISK ADMINISTRATION
The Risk and Management Control function establishes and maintains
appropriate structure and frameworks for administration of the bank's risk
asset portfolio and individual risk exposures. The risk Management Framework
enables on-going administration of credit risk- bearing portfolios, monitor the
condition and performance of individual exposures.
Analytical techniques based on information systems are established to
enable management measure and manage risk inherent in all on and off balance sheet activities.
1. 1.6 ECO BANK RISK MANAGEMENT
Across organizations, many business leaders are recognizing that risk are
no longer merely hazards to be avoided especially banks but in many cases
opportunities to be embraced. "Risk is itself is not bad. What is bad is
risk that is mismanaged, misunderstood, mispriced, or unintended". Risk
Management is moving well beyond the tradition of risk mitigation (using
controls to limit exposure to problem) toward risk portfolio optimization
(determining the organization's risk appetite and capacity among a group of
the enterprise, seizing opportunities within those defined parameters, and
capitalizing on the rewards that results). As a consequence, risk management is
beginning to be perceived as a means of strategic business management linking
business strategy to day risks (Diacon, 1984)
The intervention of July 6, 2004 was therefore an attempt to address the
problem of distressed and technically insolvent banks without an initial resort
to liquidation with all its adverse consequences for depositors.
Empirical evidence and studies have confirmed that distress In financial
systems in many cases are caused by the absence of inadequate effective credit
risk management process and risk management process and risk management in
banks and thereby address the problem of distress in the banking system. Some
of these initiatives are as follows (Obinna,2005).
Injection of fresh Capital into the Industry
In the process of complying with the minimum capital requirement, over
N350 billion was raised by banks from the capital market '" As at now the
total capitalization of the less than N300 billion.
The capital injection addresses the cases of weak capitalization. It
equally provides investment capital for service delivery systems and risk
management capabilities. It improves ability to access up market opportunities that are currently significant not locally banked e.g
upstream oil, gas and telecommunication.
The liquidity engendered by the new investment into the banking industry
induced interest rate to fall, improve overall liquidity in the system and
increase in lending to the real sector.
1.2 STATEMENT OF THE PROBLEM
This research work intends to investigate the effect of credit risk
management on profitability of bank in Nigeria. Empirical evidence and studies
have confirmed that distress in financial system in many cases IS caused by the
absence or inadequate effective credit risk management process. The saving and
Loans (S&L) crisis in Nigeria took two decades plus serious regulatory
ineptness and legislative cupidity, to develop into the debacle it became. This
project will investigate the problem of credit risk management in Bank and
similar financial institutions. The problem of risk measures to direct capital
to activities with the best risk/reward ration, problem of prudent risk taking
by division and individuals. Also, problem of risk reductions in firms' value due
to changes in the business environment. Investigation has been extended to the
problem of adverse effect of credit risk on banks profitability, growth,
stability and development in post consolidation and recapitalization era.
1.3 OBJECTIVES OF THE STUDY
Any research study without clearly defined objective is baseless and
irrelevant. Considering the above fact, the objective of this research is as
To investigate both the positive and negative effects
credit risk management on banks profitability growth and development.
To investigate Bank's credit policy frame work install for
To examine bank credit policies ("Lending
Guidelines") that clearly outline the banks' loan portfolio and favourable
To investigate the type of risk banks are exposed to in their
To examine the various techniques banks adopted to manage
1.4 SIGNIFICANCE OF THE STUDY
This research work is important because it discusses sensitive issues in
credit risk management in the Banking operation. Besides, other key benefits
This research work will assist banks to identify, measure, manage and
investigate various risk elements banks are exposed to or that could have
adverse effect(s) on bank operations and threaten its survival. Since
bank business is a growing concern involving various risk types, it is
imperative to have an effective mechanism. From this research work as risk
management frame work and control systems in place to check these risk.
The research study will assess the key factors and proffers solution.
Also, issues regarding the borrower's position in the industry, overall
industry concerns or competitive forces will be addressed and the strength and
weaknesses of the borrower relative to its competition will be identified. This
study will solve the incidence of bank distress that is there will be banks with no virus: the
healthier will be the banking industry, which will, obviously, translate
into healthier and better economy. It will serve as a source of reference to
other banks for their credit risk management in the financial institution.
1.5 RELEVANT RESEARCH QUESTIONS
The research questions that guide this study are as
Is there any relationship between bank effective risk
management and its relative profitability?
Can credit risk management influence bank's performance?
Would effective evaluation and measurement of credit risk
by bank' management enhance bank's lending ability.
1.6 STATEMENT OF HYPOTHESES
Ho: There is no relationship between bank effective credit risk management
Ha: There is relationship between bank effective credit risk management and
Ho: There is no correlation between Credit risk management on bank
performance and Eco bank profitability
Ha: There is correlation between Credit risk management on bank
performance and Eco bank profitability
Ho: Effective evaluation and management of credit risk by Bank's management
does not enhanced Bank's lending ability
Ha: Effective evaluation and management of credit risk by Bank's management
has enhanced Bank's lending ability.
1.7 SCOPE AND LIMITATION OF THE
The research work, intended to investigate credit risk management on
profitability of Bank in Nigeria with special reference to Eco Bank Nigeria Plc.
Emphasis would be on impact of credit risk on banks and profitability in the
banking industry. The study covered types of credit risk in the bank,
measurement and solving problems and risk management strategy.
Most of the facts used in this study were limited to Eco Bank PIc,
journals, magazines, articles on credit and risk management in banking industry
as well as through the questionnaires. Based on risk management, CBN and Stock
Exchange Bulletin; unpublished thesis, literature and various text books on the
subject matter were also reviewed.
Limitations of this project work included financial constraint, time
constraint as well as lack of access to secondary data and attitude of the
respondents to the questionnaire administered to them.
1.8 OPERATIONAL DEFINITION OF
The following words are defined to enable the user to comprehend.
Credit or Loan: Used interchangeably. It refers to the cash or goods
or services granted by the financial institution with a pledge to payback at a
Collateral Security: Is an asset pleaded against the performance of a
Shareholders/Investors: These are the stakeholders of the bank who
invested their money for the operation of the business.
Recapitalization: Is the minimum capital base (shareholders fund)
required to float a bank in the banking industry.
Merger and Acquisition: CAMA 1990 however defines merger and
acquisition to mean "any amalgamation of the undertakings of any part of the
undertakings or interest of two or more companies or the
undertakings or part of the undertakings of one or more companies and one or
more bodies corporate.
CBN: Central Bank of
Nigeria the Apex Bank and Bankers' Bank also they have the authority to issue
The various types of risk include business risk, investment risk,
financial risk, portfolio risk and cataclysmic risk.
Business Risk is due to variability in operating earnings, which in turn
may be a function of firm's normal operations. It is determined by charges in economic environment In
general and by management's decision on capital intensification within the
firm. Specifically, a firm is influenced by the ratio of its fixed costs to
Investment of project risk is due to the variability in expected
earnings arising from variations in both cash outflows and inflows from an
investment. It is usually associated with errors in forecasting of consumer
tastes and other demand related influences, changes in relevant factors costs
in the investment as well as in technology.
Financial risk is the variability in operating earnings arising from the
commitment of the firm to meet its fixed payment obligations due to .he use of
debt capital. In other words, the use of more debt or reference share which
increases the firm’s financial leverage, results 1 greater fixed obligatory payments
for it and in turn increases the variability of earnings after taxes (EAT) and
earnings per share (EPS).
Portfolio risk deals with the variability in operating earnings due to
the level of efficient diversification in a firm's portfolio of assets. A
firm's portfolio risk is reduced by choosing investments with low ore negative
correlation with its existing portfolio or investments.
Cataclysmic risk relates to the variability in earnings due to events
beyond managements control and anticipation. Usually included in this category
are expropriation by governments, outright exhaustion of a natural resources on
which a firms future operation depends serious energy and acts of God
(earthquake, flooding, etc.)
Risk assessment: Those activities that enable the risk manometer to
identify, evaluate, and measure risk and uncertainty and their potential impact
on the organization.
Risk identification: The process of identifying the exposures to potential
property, liability, and human resources losses, as well as the hazards and
perils that lead to those losses."
Risk Measurements: The process of determining the likelihood of a loss from
an exposure and its probable severity.
Organizational Risk Management (ORM): A general management function that
seeks to identify, assess and address the causes and effects of uncertainty and
risk on an organization.
Strategic, operations, and risk management model: A model of
management functions that emphasizes the relationship between strategic
management, operations management, risk management.
Risk and Uncertainty Assessment: All activities associated with identifying,
analyzing, and measuring risk and uncertainty.
Risk Control: All activities associated with avoiding, preventing,
reducing or otherwise controlling risks and uncertainties.
Risk Financing: Those activities that provide the means of
reimbursing losses that occur and that fund other programmes to reduce risk and
Programme Administration: All those activities and strategies
associated with the long-term and day-today operation of the risk management