CREDIT RISK INCIDENCES AND MANAGEMENT OF FINANCIAL INSTITUTIONS IN NIGERIA
ABSTRACT
The study empirically examines the incidence of credit risk management on financial institutions in Nigeria. In Nigeria, the incidence of credit risk management on financial institutions in any economy across the globe has been widely investigated. The study employed correlation coefficient and the Ordinary Least Square econometric technique (OLS) 1985 to 2013 Nigerian data.
    The results from the empirical analysis indicate that NAQ does not have any significant relationship with bank profitability in Nigeria; total loan has a weak inverse relationship with bank profitability in Nigeria; loan to total deposit (LA/TD) has a weak inverse relationship with bank profitability in Nigeria. Hence, banks are exposing to greater risk of illiquidity and distress; and that the past values of BPR have a significant relationship with incidence of credit risk management in Nigeria than the current values.
    The study recommends among others that bank’s management should be very cautious in setting up a credit policy that will not negatively affect profitability. Also, management should as a matter of importance know how their credit policy affects the operation of their banks so as to ensure judicious utilization of deposits and maximization of profit.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
Background of the Study            
1.2   Statement of Research Problem        
1.3    Objective of the Study                    
1.4   Hypotheses of the Study                
1.5    Relevance of the Study                    
1.6    Scope of the Study                    
1.7    Limitation of the Study                        
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL INSIGHT
Introduction                        
2.2    Risk Management and Bank Performance     
2.3    Strategy, Financial Management and Risk    
2.4    Risk in Financial Services                
2.5    The Firm and Risk Mitigation             
2.6    Relationship between Financial Institutions,
 Services, And Risks                    
2.7    Risks in Providing Financial Services        
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1     Introduction                         
3.2    Model Specification                
3.3    Estimation Technique                    
3.4    Sources of Data                        
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1     Introduction                        
4.2     Correlation Analysis                    
4.3    Regression Analysis                        
CHAPTER FIVE:  SUMMARY, RECOMMENDATIOSNAND CONCLUSION
5.1    Summary of Findings                         
5.2    Recommendations                
5.3    Conclusion                         
    References                      
    Appendix                                     CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    The place of the Banking sector is very crucial to economic growth and development of any nation by way of the financial services provided by them. Their intermediation role could be said to be a strong catalyst for economic growth. The efficient and effective performance of the banking industry over time is an index of financial stability in any nation. The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and development, and hence, it’s long-term sustainability (Kolapo, Ayeni and Oke, 2012). Credit creation is the main income generating activity of banks which provides investors the ability to exploit desired profitable investments opportunities. Nevertheless, in the process of doing so, banks are exposed to credit risk problem (Kargi, 2011). According to Basel Committee on Banking Supervision (2001), credit risk is the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Credit risk is an internal determinant of bank performance. The higher the exposure of a bank to credit risk, the higher the tendency of the banks to experience financial crisis and vice-versa.
    With respect to the Nigerian banking sector, the quality of its credit assets has deteriorated in recent time as a result of the significant dip in equity market indices, global oil prices and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks’ loan assets hindered banks to extend more credit to the domestic economy, thereby adversely affecting economic performance. This according to Kolapo, Ayeni and Oke (2012) prompted the Federal Government of Nigeria through the instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of non-performing loans that bedeviled Nigerian banks. According to Ahmad and Ariff (2007), most banks in economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high non-performing loans and significant increase in credit risk during financial and banking crises, which resulted in the closing down of several banks in Indonesia and Thailand (Kolapo, Ayeni and Oke, 2012).
    In view of the increasing rate of non-performing loans in banking sectors in many developing countries, the Basel II Accord now places serious emphasis on credit risk management practices within the banking industry. The implication of this is that compliance with the Accord means a sound approach to tackling credit risk has been taken and this ultimately improves bank performance. Through the effective management of credit risk exposure, banks not only support the viability and profitability of their own business, they also contribute to systemic stability and to an efficient allocation of capital in the economy (Psillaki, Tsolas, and Margaritis, 2010).
    Since the completion of the Nigerian banking consolidations programme in 2005, rising competition within the entire financial system has accounted for intensive credit disbursement as a means of survival among banks that scaled the „recapitalization bar. This makes perfection of CRM practices crucial tools for ensuring safety of depositors‟ fund and stabilizes the soundness of the system’s financial health. Report of rising toxic asset in the sector also informed the need to undertake an analysis of the basic determinants of credit risks within the system. Thus, it is hope that the analysis will bring about changes in CRM approaches among the Nigeria banks and which will inadvertently affects the financial health of the sector and the economy as a whole.
1.2    STATEMENT OF THE RESEARCH PROBLEM
    Credit risk according to Kargi (2011), is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit risk is found in all activities in which success depends on counterparty, issuers, or borrower performance. It arises any time bank funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet. Thus risk is determined by factor extraneous to the bank such as general unemployment levels, changing socio-economic conditions, debtors’ attitudes and political issues.
    Basel Committee of Banking Supervision BCBS (2001) credit risk represents the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Credit events usually include events such as bankruptcy, failure to pay a due obligation, repudiation/moratorium or credit rating change and restructure. Basel Committee on Banking Supervision- BCBS (1999) sees it as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Heffernan (1996) observe that credit risk as the risk that an asset or a loan becomes irrecoverable in the case of outright default, or the risk of delay in the servicing of the loan. In either case, the present value of the asset declines, thereby undermining the solvency of a bank. Credit risk is critical since the default of a small number of important customers can generate large losses, which can lead to insolvency (Bessis, 2002; Gastineau, 1992).
BCBS (1999) observed that banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transaction. Anthony (1997) asserts that credit risk arises from non-performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-committed contracted manner. Brownbridge (1998) claimed that the single biggest contributor to the bad loans of many of the failed local banks was insider lending. He further observed that the second major factor contributing to bank failure were the high interest rates charged to borrowers operating in the high-risk. The most profound impact of high non-performing loans in banks portfolio is reduction in the bank profitability especially when it comes to disposals.
    The current business of banking is now beyond the traditional definition of accepting deposit and granting credit facilities to credit worthy customers. Indeed, it is now being redefined purely as the business of risk management, especially as it relates to accepting deposits, granting loans and trading portfolios. This was also articulated in the study of Jaiye (2009) that the business of banking is to manage risks associated with accepting deposits, granting loans and trading portfolios.  It has been observed that the inability of many banks in Nigeria to effectively managed risk in this direction has plunged them into severe financial crisis such as excessive high level of non-performing loans occasioned by poor corporate governance practices, lax credit administration processes and the absence or non- adherence to credit risk management practices. These of course led to the sacking of some banks’ CEOs by the governor of central bank of Nigeria. It also injected fresh capital into the Banks up to the tune of N400b to ensure that the Banking system is safe but also to protect all depositors and creditors. On Wednesday, 19 August 2009, the CBN made the list of debtors known to the public. On the list are the names of prominent businessmen, Bankers and politicians. It was discovered that these people own the first five banks discovered to be shaking after auditing by the CBN to the tune of N747b (Oluchukwu, 2012).
    In view of the foregoing therefore, this study is an attempt to empirically examine the incidence of credit risk management on financial institutions (commercial banks) in Nigeria, as well as analyzes the efficiency of credit risk management practices adopted by the sampled banks within the Nigerian banking industry. The study therefore seeks to provide answers to the following research questions:
What is the impact of credit risk management on bank profitability in
    Nigeria?
(ii)    What is the relationship between total loans and    advances and bank profitability in Nigerian?
(iii)    What is the relationship between loan and advances to total deposits and
    bank profitability in Nigerian?
(iv)    What is the relationship between net asset quality and     bank profitability     in Nigerian?
1.3    OBJECTIVE OF THE STUDY
    The main objective of the study is to determine the relationship between credit risk management and bank profitability in  Nigeria. However, other sub-objectives are to:
(i)    determine the relationship between total loans and    advances and bank profitability in Nigerian
(ii)    determine the relationship between loan and advances to total deposits and bank profitability in Nigerian
(iii)    determine the relationship between net asset quality and     bank profitability     in Nigerian
1.4    HYPOTHESES OF THE STUDY
    The following hypotheses will be tested during the course of the study:
There is no positive relationship between credit risk management and bank profitability in Nigeria.
There is no relationship between total loans and advances and bank profitability in Nigerian.
There is no relationship between loan and advances to total deposits and bank profitability in Nigerian.
There is no relationship between net asset quality and bank profitability in Nigerian.
1.5    RELEVANCE OF THE STUDY
    The study is significant in the following respect:
Firstly, the results from the study will provide relevant data to the government and policy makers with respect to the effective and efficient management and regulation of the industry visa-vic the overall economic growth and development of the Nigerian economy.
    Secondly, investors, potential investors, lenders and borrowers and all stakeholders in the Nigerian banking sector are all interested in the risk management and profitability of banks, as well as their direction in the country and hence, enable them to make some inform decisions with respect to investment and financing decisions.
     Furthermore, the study will also be relevant to researchers, academia, students of finance and allied disciplines, as it will provide them relevant data to carry out further studies in this area or similar areas if they so wish.
1.6    SCOPE OF THE STUDY
    The study is a Nigerian specific study and a time series data. It covers a period of twenty nine years (1985 to 2013), and relevant data shall be sourced from the Nigerian stock exchange publications and the central bank of Nigeria statistical bulletin of various years.
1.7    LIMITATION OF THE STUDY
    The two limitations envisage in this study has to do with the accuracy of the data used as well as the sources of data. However, effort will be made to minimize errors and thus assure the reliability of results obtained.