THE EFFECT OF RISK AND CREDIT MANAGEMENT ON BANK PERFORMANCE (A Case Study of Zenith Bank Plc)


Content

ABSTRACT

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENT

                                                                                                                 PAGE

TITLE PAGE                                                                                                 I

CERTIFICATE                                                                                              II

DEDICATION                                                                                                 III

ACKNOWLEDGEMENT                                                                             IV
ABSTRACT                                                                                                       V

TABLE OF CONTENT                                                                                  VI-VII

 

CHAPTER ONE INTRODUCTION

1.1       BACKGROUND TO THE STUDY                                                 1

1.2       STATEMENT OF THE PROBLEM                                                 3

1.3       OBJECTIVE OF THE STUDY                                                         4

1.4              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

REFERENCES                                                                                  9

 

CHAPTER TWO: LITERATURE REVIEW

2.1       THEORETICAL FRAME WORK                                                                10

2.2     CHARACTERISTICS OF CREDIT AND RISK MANAGEMENT   18

2.3     COMPONENTS OF CREDIT RISK                                            19

2.4     DETERMINANTS OF CREDIT RISK                                         20

2.5       CREDIT AND RISK MANAGEMENT AND BANK

PERFORMANCE                                                                                          21

2.6       RELATIONSHIP BETWEEN TYPE OF BANK OWNERSHIP,

BANK PERFORMANCE, CREDIT AND RISK MANAGEMENT          23

2.7       BORROWERS OR CUSTOMER                                                                 28

2.8       GOVERNMENT (POLITICAL INSTABILITY)                                        29

2.9       NATURE RELATED FACTOR: (NATURAL HAZARD)                         29

2.10   GOVERNMENT CONTROL OVER CREDIT                                             38

2.11     SECTORAL ALLOCATION OF BANKS LOAN

AND ADVANCES                                                                            40

2.13   CREDIT ADMINISTRATION IN ZENITH BANK PLC                41

2.14   LENDING AND CREDIT ANALYSIS                                            42

            REFERENCES                                                                                  48

 

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

            REFERENCE                                                                                    

 

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1              INTRODUCTION                                                                             57

4.2:      ANALYSIS OF RESPONDENT PERSONAL PROFILES                        57

4.3   ANALYSIS OF QUESTIONS                                                              61

4.4       TEST OF HYPOTHESIS                                                                   65

            REFERENCE                                                                                    

 

CHAPTER FIVE: SUMMARY, RECOMMENDATIONS, CONCLUSION

5.1    INTRODUCTION                                                                                71

5.2       SUMMARY OF FINDINGS                                                                        71

5.3    CONCLUSIONS                                                                                  72

5.4    RECOMMENDATIONS                                                                      73

BIBLIOGRAPHY                                                                             75

APPENDIX

 

 

 

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The banking 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).

 

Credit 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)

The major 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).

 

The 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?

 

The study 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

The 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.

 

On 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.

 

1.3   OBJECTIVE OF THE STUDY

(i)           To determine and appraise the risk and credit procedure of banks using Zenith Bank Plc.

(ii)          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.

(iii)        To highlight the rate at which inadequate collateral security provision by borrowers increases the incidences of bad debt in Nigerian.

(iv)        To determine whether fund diversion has any effect on risk and credit management in Nigeria banks.

(v)          To ascertain the extent to which government intervention in risk and credit policies of banks has influenced Nigerian money deposit banks.

 

1.5       RESEARCH QUESTIONS

1.   Has inadequate collateral security provision by borrowers caused bad debt in Zenith Bank Plc?

2.   Does fund diversion have any effect on bad debt of Zenith Bank Plc?

3.   To what extent has government intervention in lending policies of money deposit bank influenced bad debt in Zenith Bank Plc?

4.   To what extent does improper project evaluation influenced bad debt of Zenith Bank Plc?

5.   Does risk and credit procedure of banks using Zenith Bank Plc properly assess?

6.   To what extent has risk and credit management policy of Nigerian banks reduce rate and costs of bad debts

7.   What are the effectiveness and adequacy of risk and credit management policy of Nigerian banks?

8.   Does risk and credit management affect the performance of Nigeria banks

 

1.5   RESEARCH HYPOTHESIS

The following hypotheses were drawn as follows;

1.           HO: Inadequate collateral provisions by borrowers do not increase the incidence of bad debt in Zenith Bank Plc.

HI: Inadequate collateral provisions by borrowers increases the incidence of bad debt in Zenith Bank Plc.

2.           HO: Fund diversion does not affect bad debt in Zenith Bank Plc.

Hi: Fund diversion affects bad debts in Zenith Bank Plc.

3.           HO: Government intervention in lending policies of money-deposit banks has no influence on risk and credit management in Zenith Bank Plc.

HI:  Government interventions in lending policies of money-deposit banks have direct influence on risk and credit management in Zenith Bank Plc.

4.           HO: improper project evaluation has no significant relationship with bad debt in Zenith Bank Plc.

HI:  improper project evaluation has direct relationship with bad debt in Zenith Bank Plc.

 

1.6   SIGNIFICANCE OF THE STUDY

It 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.

A study of this subject will therefore be a welcome addition to the existing volume of banking literature.

 

Effective 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).

 

Hence 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.

 

1.7   SCOPE AND LIMITATION OF THE STUDY

In 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.

The limitations of this study include some of unavoidable constraints and problems encountered in the process. They are as follows:

i)             Finance: 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 administrative short-comings.

iv)      Ignorance of Respondent / Borrowers: Most bank customers were semi-illiterates and most often it was very difficult to collect adequate data required from them.

v)    Time: 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.

 

1.8   DEFINITION OF TERMS

1. 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.

3. Debt:        This is what one owes to another person.

4. Loan:       A Loan is a credit arrangement, a security is pledged and must be repaid with interest over a stipulated period of time.

5. Overdraft: This is a credit arrangement by banks to their customer to withdraw money over and above that what he has in the account.

6. Default:  This means failure to pay one´s debt for credit extended which has fallen due.

7. 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.

8. Capital:    The general position of the customer.

9. Collateral:     Assets 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 hold.

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.

 

 

 

 

 

REFERENCES

Bessis, J. (2012). Risk management in banking, Second edition, John Wiley & Sons Ltd.

Okogbo, P.N.C. (2001). Nigerian’s Financial System: Essex. Longman Group Ltd. 

Robert D. and Gary W. (2004): “Banking Industry Consolidation Efficiency Issues”, working paper No. 110 presented at the financial system in the decade ahead: A Conference of the Jerome Levy Economics Institute April 14-16, 1994.

Sanusi, J. (2012): “Central Bank and the Macroeconomic Environment in Nigeria”, Quarterly Review, Vol. 03, No. 3 December.

Umoh P.N. (2010): “Bank Loans’ Recovery: The Roles of the Regulatory/Supervisory Authorities”. Judiciary Law Enforcement Agencies and the Press, NDIC

 

 

 

 

 

 

 

 

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