Effect Of Credit Risk On Performance Of Nigerian Banks

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Effect Of Credit Risk On Performance Of Nigerian Banks

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PROJECT TOPIC AND MATERIAL ON EFFECT OF CREDIT RISK ON PERFORMANCE OF NIGERIAN BANKS

The Project File Details

  • Name: Effect Of Credit Risk On Performance Of Nigerian Banks
  • Type: PDF and MS Word (DOC)
  • Size: [70 KB]
  • Length: [56] Pages

 

 

 

INTRODUCTION

Commercial banks play a significant role in the economic development of nations through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth (Kolapo, Ayeni and Oke, 2012). Lending is no doubt a significant part of the financial services rendered by these banks. This is why Kargi (2011) pointed out that credit creation is the main income generating activity of banks. However, commercial bank lending is guided by credit policies which are guidelines and procedures put in place to ensure smooth lending operations. Bank lending if not properly assessed, involves the risk that the borrower will not be able or willing to honour their obligations (Omara, 2007).

However, beyond the urge to extend credit and generate revenue, banks have to recover the principal amount in order to ensure safety of depositors’ fund and avoid capital erosion. Bank lending therefore has to consider interest income, cost of funds, statutory requirements, depositor’s needs and risks associated with loan proposals (Dongo, 2004). For these reasons banks have overtime developed credit policies and procedures which stipulate the lending process. This process includes among others the credit appraisals, documentations, disbursement, monitoring and recovery processes lending. Bank lending is also based on established international standards (Omara, 2007).

However, despite the credit processes and procedures put in place, the Nigerian banking industry, in the past decade, has been strained by the deteriorating quality of its credit assets 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 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. Similarly, the Prudential Guidelines was amended in 2010. This was with a view to provide a lasting solution to the recurring problems of non-performing loans that bedevilled Nigerian banks.

Similarly, the commercial banks on their part and in response to deteriorating quality of credit assets have almost universally embarked upon an upgrading of their risk management and control systems. This is because poor asset quality no doubt creates the problem of non-profitability and illiquidity.

Thus, there is no doubt that the success of banks largely depends on the effectiveness of their credit management systems because these institutions generate most of their income from interest earned on loans extended to their customers. The Central Bank Annual Supervision Report, 2010 indicated high incidence of credit risk reflected in the rising levels of non- performing loans by commercial banks in the last 10 years, a situation that has adversely impacted on their profitability. This trend not only threatens the viability and sustainability of banks but also adversely affects the economic performance of the country as a whole. Poor credit appraisal techniques that have seen credit exposures turn bad, no doubt, largely accounts for the rising level of non-performing loans. Hence, the report of the rising “toxic asset‟ of banks informed the need to undertake an investigation into the effect of credit risk on banks’ performance. In doing this, the ratio of non-performing loan to loan & advances, ratio of total loan & advances to total deposit and the ratio of loan loss provision to non performing loans were used as indicators of credit risk while the ratio of Profit after Tax to total asset known as return on asset (ROA) indicates performance.

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