The Impact of Credit Risk Management on Banks’ Profitability in Nigeria

Introduction

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. Therefore, the anticipation of risk and assessment in credits are being managed to avoid the failure.

Credit Risk Management’s Importance

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).

Nigerian Banking

In the start of the global financial or credit crisis, the banking industry received increased attention by the regulators, agents, and management. 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).

Theoretical Framework

The banks’ reviews 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. Basically, the banking process includes the preventive regulations which are designed to limit the risk incurred, while the regulations imposed offers the protection in the event of failure. All of the actions or framework is based on the relationship of the financial and economic indicators. The intervention of the economic theory in the regulation of financial intermediaries results to the arising desire to correct the market failures.

The economic theory in banking affects the other users of financial sources such as businesses, consumers, workers, and government. Therefore, it only emphasizes that regulation is important to maintain the safe and sound banking system that can meet the obligation without any difficulty and there is a least chance or level of solvency and liquidity. Tailing the economic theory in banking, there is also another theoretical framework which encompasses the interest and income theory, which is the basis of the cash flow approach in bank lending (Akperan, 2005).

Concept of Credit Risk

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 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).

Conclusion

Banking institution in Nigeria recognized the importance of credit risk management. The existing process of risk management such as stress testing and credit rating are the implications of the Nigerian banking that the financial group anticipates any types of risk and in return, establish a strong action against the failure.

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 20 Jan 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 20 Jan 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 20 Jan 2010].

Focus Group, 2007. Credit Risk Management Industry Best Practices. [Online] Available at: http://www.bangladesh-bank.org/mediaroom/corerisks/creditrisks.pdf. [Accessed 20 Jan 2010].

Gonzalez, F., Determinants of Bank-Market Structure: Efficiency and Political Economy Variables. Journal of Money, Credit &Banking, Vol. 41, No. 4.

Unchendu, O., 2009. Monetary Policy Management in Nigeria in the Context of Uncertainty. [Online] Available at: http://www.naijalowa.com/wp-content/uploads/2009/08/Monetary-Policy-Management-in-Nigeria-in-the-context-of-uncertainty.pdf. [Accessed 20 Jan 2010].