Effect of Credit Risk Management on the Performance of Nigerian Banks
Chapter One
Statement of Research Objectives
The general objective of this paper is to examine the effect of credit risk on the performance of Nigerian Banks. Specifically, the study intended to;
- Examine the influence of non-performing loan to loan & advances on bank performance.
- Determine the effect of total loan & advances to total deposit on bank performance.
- Ascertain the influence of loan loss provision to non performing loans on bank performance.
CHAPTER TWO
LITERATURE REVIEW
Origin of Banking
The origin of banking is as old as the history of man, the essentials of banking as is known today began with the origin of money. Money evolved as a result of the many shortcomings of the direct battering of goods and services.
The lack of common unit of measure, the double incidence of wants, the problem of future contracts and lack of means of storing wealth or value led to the evolution of money. As societies grew from small group to large nation, specialization and trade increased and the need for money became clearer and evident. As stated by Chandler (1973:7) “money is productive in the sense that it is an essential part of the modern exchange mechanism and thereby facilitates specialization and production”.
The basic purpose of money is to serve as “the great wheel of circulation, the great instrument of commerce”. Money essentially serves four major functions as a unit of value, a medium of exchange, a standard of deferred payment and a store of value.
To a very large extent, the advent of money eased the problem of the barter system and till date money has become the greatest economic invention of mankind.
Thus as trade and exchange of money, goods and services increased. It became obvious that there were people or sections of the communities who have excess or surplus which are riot immediately put to use while there are sections of people who have ideas and what to use money for but are in short supply. The need to intermediate and ensure optimal utilization of these financial resources led to the evolution of banking.
In Greece, banking rose from the adoption of coinage for trading purposes on the 7 century BC and it was then that wealthy formerly reckoned in lamb and flock was thought of in terms of money. During this period, loans were made, interest rate being about 18% per annum was being charged but as money became plentiful, interest rate was lowered and in Solon’s day (595 BC) the appreciable rate was between 10 to 12%. Also during this period, templates were regarded as banks because most of the intricate objects were kept there for security purposes.
Deposit bearing interest, letters of credit and other means of transferring credits from one place to another were also known in ancient Rome. The Chinese are said to have had a paper currency about 800 AD.
Although the evolution of banking could be traced especially in Italy during the middle ages continuous from early times, the first recognized public ‘bank’ properly so called was the Bano di Rialto established at Venice by Acts of the Senate in 1584 and 1587. In 1619, the Bando Del Giro was founded, this became the only public bank in the state and was long favored as the Bank of Venice, banking in Venice developed out of the money changes and private and private exchange bankers who as early as 1318 seemed to have taken deposits and as far back as 1279 gave security to the state for the proper carrying on their business. It was the failure of these deposit banks that led to the establishment of the Rialto Bank by the state.
The Bank of Venice suspended payments several times owing to its loans to the state and leased after the French invasion in 1797 Adekanye (1986:166). Another early Italian bank was at Genoa, the famous bank of St. George, a private bank of deposit founded in 1407. Other banks that were established and that were famous are Bank of Amsterdam 1619-1873. The bank’s business laid in the assistance of commerce not by loans but by the local manufacturing and international currency, which was bank money.
Services offered by some of these ancient bank include credit by compensation, transfer order, renewal of commercial paper, acting as government agent in tax collection, lending for interest with land as collateral security, discouraging foreign and local bills, receiving deposit and a host of others. Settlement of indebtedness through cheques or drafts was common with these ancient banks.
Evolution and Structure of the Nigeria Banking System
Banks evolution in Nigeria started with trade and economic development. Banking started centuries ago before the arrival of Europeans in Nigeria. During this period, great cities like Kano, Katsina and Sokoto were leading terminals of trans Saharan trade routes where the Hausas. Fulani’s, Turegs and other caravan traders rest themselves and their camels during the transportation of their various commodities like gold, ivory, hides and skins, kolanut and the locally manufactured goods as well as large numbers of slaves to the North of Africa or eastward to Nile Valley. In these cities they would make prices in forms of money, take deposit from the traders or farmers. Interest was often charge at 10% a month or more. The Koran’s ban on usury carried force in these outlying marches of Islam.
After the introduction of the British Royal Silver Coins as approved by the treasury minute of 1825, its growth and increase in the volume of trade made the use of cash only for commercial transactions grow greatly such that counting, transporting, storing and keeping of these coins safely began to pose a great problem. This gave birth to the idea of establishing a bank similar to those in Britain in Nigeria for the British businessmen.
For an in-depth understanding of the evolution of banks in Nigeria, there is need for classification into two periods which are:
- i) Non-regulated banking period (1892-1942)
- ii) Regulated banking period (1952-date).
Non Regulated Banking Period
This was a period when people could operate banking institutions subject to the provisions of section 2 (1) of the company’s ordinance without having the skilled manpower and bank capital which serve as a cushion of safety for depositors and other creditors of a bank.
No one can say the specific date banking started in Nigeria but banking activities could be said to have started in Nigeria in 1861. Elder Dempster and Company, a shipping and trading company based in Liverpool contacted African Banking Corporation of South Africa to set up a banking business in Nigeria.
On 28 January, 1892, the crown agents concluded the agreement by which the African Banking Corporation was permitted to import new US silver coins from the Royal mini into Lagos colony. The African Banking Corporation began operations in Lagos in 1891 as the London Board minutes of a meeting of 4 June, 1891 reveal in March 1893, the asset and liabilities of the bank were taken over by the Bank of British West Africa (BBWA) which later became the currency agent of the colonial government in Nigeria, Ghana. Sierra Leone and Gambia. The primary objective of Bank of British Africa was to extend the much needed banking facilities to businessmen.
In 1899, the Anglo African Bank, which later became Bank of Nigeria in 2005 was established as a competitive set up for BBWA. The colonial bank was established on 4 October 1916 with branches in Lagos, Zaira and Accra. Other banks established are Barclays Bank (Dominion, Colonial and Oversea) now Union Bank of Nigeria Plc in 1925.
The failure of these banks to promote the development of indigenous entrepreneurship gave the early impetus to the establishment ofcompeting but ineffective Nigeria owned banks. The foreign banks then came principally to render services in connection with international trade and hence their relations as at that time were mainly with the expatriate trading companies and with the colonial government. Through their discriminating policy, a significant number of application for loans were not approved, giving adequate collateral security and diversion of loans to unproductive sector as reasons. This gave birth to the first indigenous bank named the Industrial and Commercial Bank in Lagos in 1929, which was forced to liquidate due to financial, and management problems.
In 1931, the Mercantile Bank was established but due to the above problems it went into voluntary liquidation in 1936. In 1952, a remarkable step was taken, the National Bank of Nigeria was established, It grew prospered became insolvent and later rejuvenated. In January 1947, the Nigerian Farmers and Commercial Bank was founded in Lagos followed by the African Continental Bank in 1948, Pan African Bank in 1951 and a host of others.
The Barbous committee set up in 1898 by the British Secretary for the colonies stressed the need for separate currency for West Africa. Emmotts Committee set up in 1911 recommended a joint silver coinage for the British West Africa colonies, managed by the West African Currency Board among other functions was established to convert existing currencies on demand into Sterling in London and issue a West African currency. It was located in London but performed its function in West Africa through BBWA.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter focuses on the research design and methods of collection of data through determination of questionnaire administration from the target population.
Research Design
For the purpose of this study, the research design of concern is mainly descriptive in nature employing the field dimension. Research design is mainly defined as the grand plan structure or strategy designed to ensure the collection of data from sample respondents with a given population. We used the survey research method in the work.
Restatement of Hypothesis
H0: There is no significant relationship between loans and advances (credit) and bad loans (non-performing loans)
H1: There is significant relationship between loans and advances (credit) and bad loans (non-performing loans).
Population of Study
Our population of study is limited to banking industry especially the distressed and liquidated banks. The population of study would consist mainly of the commercial and merchant banks on the one hand and the CBN and corporate individual customers on the other hand. The primary focus should remain the distress syndrome and distressed institutions within the financial system and the measures that have been utilized in their management by the CBN and the NDIC.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Introduction
This chapter deals with research questions and treatment.
Research Question One: To what extent has UBA been managing its credit risk asset?
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
From the analysis in chapter four, a number of findings emerge:
1) Responses from department of loans and advances, credit risk and asset department of UBA rated UBA high in managing its credit risk with 10 or 25% respectively. CBN rated it low with 6 or 15% while NDIC rated it lowest with 4 or 10%.
This signifies that the public seems to have confidence in the bank, this may be as a result of the reputation and image and goodwill the bank has built for itself over many years of banking operations. The increase in the deposits over the years has helped to increase the loan-able funds available to the bank. As a result, the loans and advances which the bank wants to customers have also been on the increase over the years. However, this is being mismatched with the resultant bad loans and advances.
2) As evidence from the earlier analysis, the liquidity position, cash ratio and loan to deposit ratio show that UBA Plc complied with the prescription of the supervisory/regulatory authorities for the period of study, where a minimum given to the bank did not go below the minimum and where also maximum given it has not been exceeded. Table 4.2 attest to this.
3) Lack of enthronement of efficient credit risk management to insider abuses, reckless appraisal of loans, faulty conceptualization of feasibility reports and inability to factor in the un-predictable has been attributed to problems and challenges militating against the enthronement of efficient credit risk management in UBA Plc. Table 4.3 attest to this
4) The study revealed that UBA Plc places more emphasis on short-term loans and the bank has been operating in such a way as to comply with relevant guidelines of the CBN and NDIC.
This is evidence from the comparison of ratios earlier computed for the bank with the prescribed standard.
Finally, the study reveals that there is a significant relationship between loans and advances (credit) and bad loans (non- performing loans).
Conclusion
In reaching conclusion, it is good at this junction to note that the essence of prescribing the prudential ratios and credit policy guidelines are to reduce the risk attached to credit, to ensure proper credit management is practiced by banks and most importantly to meet cash withdrawals of depositors.
In giving credit, a bank benefits by way of profit from interest received. As it is in other professions, a banker also has his type of professional hazards among them is bad debts/loans i.e. the failure of borrowers to pay interest or the principal. There is need for banks therefore to manage their credit well so as to reduce the risk of non payment of interest and. principal.
The distress in the banking sector has been widely acknowledged as arising primarily from non performing loans (bad loans) which have been traced to the poor macroeconomic environment, poor loan processing, inept management, undue interference in the loan granting process, inadequate or absence of loan collaterals, self serving interest of managers and directors etc. As a result of the deterioration of banks credit portfolio especially of 1990, the monetary authority were directed by government to act and put a halt to the side and reverse the trends. This brought about the introduction of the prudential guidelines in November 1990. The guidelines were issued to ease the identification of problem loans and ensure prudence in recognizing income from such loans.
Recommendations
In view of the urgent need to sanitize the banking industry and bring the incessant occurrence of loans turning bad to a halt, the following recommendations are made with consideration given to the present economic climate and the growing number of banks in the system.
– It had been observed that some banks would rather pay the prescribed penalties than meet some of the guidelines strictly. Therefore, penalties for default should be more drastic.
– In order to be able to make loans that can be repaid while minimizing the bank’s exposure to high credit risk, profitability and cash flow of the company using trend analysis and industry comparison should be encouraged.
BIBLIOGRAPHY
Books
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- Batty J. (1982): “Management Accountancy” McDonald and Evans Publisher, London.
- Effiot, J. W. (1984): Money, Banking and Financial Markets. New York West Publishing Company.
- Nicholas, R. (1999): “Bankers Lending Techniques” The Chartered Institute of Bankers, London.
- Nwachukwu, C.C. (1998): “Management Theory and Practice” Longmans Lagos.
- Nwankwo, G.O. (1989): Nigeria Financial System. London Macmillan Press.
- Ojo, A. and Adewumi, W. (1999): Banking and Finance in Nigeria. Gralon Bum, Leight Bizzard, U.M.
