The Effects of Credit Risk Management on Profitability of Nigeria

Introduction

The Nigerian economy is composed of various sectors. The main source of living of the Nigerian nationals came from agriculture where it is indicated for about 70% of people are engaged in farming. Aside from farming, the animal raising is also emphasized to be part in the agriculture. On the other hand, petroleum is the leading mineral produced in Nigeria that provides about 95% of foreign exchange earnings and the majority of government revenues. There is a recognizable oil industry in the country which expected to help the country to boost is competence and manage its own sustainable economic development.

In terms of Nigerian banking, the industry is affected by the 2008’s global financial crisis or recession which ultimately delivers various effects in the discovered economic source of foreign earnings. This increased the attention of the regulators, agents, and management. In order to measure the effects that the recession and financial crunches brought by the serious events, the stress testing and credit rating is applied in the Nigerian banks to counter-act in the uncertainties and anticipate such risks (Blaauw, 2009a). Credit risk management is the most complex framework and has the crucial elements of banking system. The banks should be strengthened to ensure the sustainability of economic growth and to prevent a repeat of the crisis. Learning from the global crisis and its challenges concludes an in-depth understanding of development in credit economy that speeds up the overall development of the country’s financial industry, which is also true in most of the developing countries (Blaauw, 2009b).

Credit Risk Management’s Importance

The banking institution or any financial sectors has one main common goal, to provide financial support to the people or firms. The banking institution is the main financial provider that most of the large companies preferred. However, there are process that although strictly monitored creates a great possibility for failure. In this event, the banks and financial institutions gave importance to the credit risk and considered as an essential factor in the financial sector that is needed to be managed. When banks recognized the credit risk, it means that there is a possibility that a borrower or counter party tends to fail in meeting the obligations in accordance with the agreed terms. Credit risk in banks or any financial institution deals with lending to corporate, individuals, and other banks or financial institutions.

Credit risk management needs to be a robust process that enables the banks to proactively manage the loan portfolios to minimize the losses and earn an acceptable level of return to its shareholders. The importance of the credit risk management is recognized by banks for it can establish the standards of process, segregation of duties and responsibilities such in policies and procedures endorsed by the banks (Focus Group, 2007).

Credit risks appear in banking institution because of the uncertainties plagued the financial system. The uncertainties remain a major challenge for monetary policy not only in Nigeria but every country. The Nigerian central banks generally continue to seek better ways of dealing with the uncertainties. The major approaches applied by the banks are the continuing efforts on research and close monitoring. Banks believe that the research and monitoring are the key sources of uncertainties like data generating institutions and the treasury (Uchendu, 2009).

The Bank’s Efficiency

The market structure is important in banking for it influences the competitiveness of the banking system and companies to access to funding or credit investment. The economic growth affects the structure and development of the banking system. In addition, the vast knowledge in risk assessment and managerial approach is recognized as part of the development. Moreover, because the banks and the processes are highly regulated, it became very useful in assessing the effects or impact of the credit risk management in the banks and even in other financial sources (Gonzalez, 2009). The bank review the credit portfolio classification system continuously and recognizing any deterioration in credit quality. The reviews are done systematically and realistically which enable the banks to perceived risk and facilitate the comparability of credit portfolios and assessing the risks (Akperan, 2005).

Conclusion

Through the use of credit risk management, the banking industry of Nigeria can process the financial group anticipate any types of risk and in return, establish a strong action against the failure. In this way, the profitability of the country can be answered. If the credit management is implemented within the central bank of Nigeria, there is an assurance that the loans are collected and will not accumulate to the unpaid debts.

References:

Akperan, J., (2005) Bank Regulation, Risk Assets and Income of Banks in Nigeria [Online] Available at: http://www.ndic-ng.com/pdf/adam.pdf [Accessed 06 September 2010].

Blaauw, A., (2009a) The Case for Stress Testing in Nigerian Banks [Online] Available at: http://www.ubagroup.com/userfiles/file/exec_insights/Stress%20testing%20in%20Nigerian%20banks.pdf [Accessed 06 September 2010].

Blaauw, A., (2009b) Basel II and Credit Ratings [Online] Available at: http://www.ubagroup.com/userfiles/file/exec_insights/Basel%20II%20and%20Credit%20Ratings.pdf [Accessed 06 September 2010].

Focus Group, (2007) Credit Risk Management Industry Best Practices [Online] Available at: http://www.bangladesh-bank.org/mediaroom/corerisks/creditrisks.pdf [Accessed 06 September 2010].

Gonzalez, F., (2009) Determinants of Bank-Market Structure: Efficiency and Political Economy Variables, Journal of Money, Credit &Banking, 41(4)