Effect of Credit Risk on Bank Performance in Nigeria
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 loans to loans & 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.
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.
This chapter focuses on the research design and methods of collection of data through determination of questionnaire administration from the target population.
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.
DATA PRESENTATION AND ANALYSIS
This chapter deals with research questions and treatment.
Research Question One: To what extent has UBA been managing its credit risk asset?
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).
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.
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.
- Adekanye, F. (2003): The Element of Banking in Nigeria. Lagos: F&A Publishers, Lagos.
- 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.