Credit Risk and Bank Performance in Nigeria

Introduction

Banks and other financial institutions are expected to remain fruitful even in the midst of economic uncertainties and financial crunches. In most of the third world countries, the banking institutions are delivering the financial for the poor. This kind of activity is another type of financial cycle and profit gaining. Parties enjoyed the benefits – for the livelihood, there is a chance to increase their living through setting a small business and for the banks there is an awaiting interest that can increase their earnings.

Background and Problem Statement

The financial sectors across the globe experience the changes due to the impact left by the global recession and economic trends. Reforms are the most basic answer in which every country attempts to perfect. In Nigeria, it is appreciated that the banking sector produced the well performance through the reforms. It is acknowledge that the sound and efficient financial sector is the key in the mobilization the saving, fosters the productive investments, and improving the risk management. As compared to it neighboring countries, Nigeria’s financial sector emerges through the performance. The successful commercial bank consolidation which started in 2005 resulted in both regional and international expansion of well-capitalized banks (USAID, 2008). However, how effective is the credit risk management being implemented in Nigerian banks, especially in reducing the poor performance and increasing the profitability of the Nigerian banks.

Research Aim and Objectives

The main aim of the study is to figure the intensity of credit risk as part of the bank’s approach towards the profitability. In order to achieve this aim, the study should address the following objectives. First is to look at pre-consolidation era in 2005-2007, and post consolidation (reform period) 2008-2010. Second is to describe the ability of credit risk and its management that will set an argument contributing to the issues of banks’ poor performances. And lastly, is to measures the approaches of the banks towards profitability.

Literature Review

The Nigerian banks almost lost their key in playing strategically and it is in the pre-consolidation era. Most of the bank needs the strategic repositioning and restructuring to accelerate the growth of their revenues and profitability during the post-consolidation era. In this event, there is a great competition and struggle towards the banking supremacy. To surpass all the adversity in financial/banking sector, there should be an inclusion of the sharp deviation to robust the operation.

In the analysis of the behavior of the banks, Nigeria’s financial sector already employed varieties of the methods in which the banks will achieve their performances. In the post-consolidation, it appeared that most of the banks employed the Discounted Cash Flow Model in the measuring the nature of the dividend policy in the banking industry. The changes in the industry because of the consolidation reached in discussing the valuation metrics which include the Economic Profit Model, PBV Model, PE Model, and PGE Model (Meristem, 2008).

The poor performance traced in the operations of the Nigerian Banks probably came from the structure of the markets and the assets. The values of the assets suddenly changes and the rates of prices, as well as the interests, are affected. Uncertainties ruled the climate in the financial sector that tends to lose the banking sectors’ capability in operations and profitability. However, through delivering the sound and appropriate management of the banks, the chances to get their potentials are extremely high. The measurements in profitability are settled through the introduction of the guideline that will be useful in assessing the methods and procedures for monitoring the risks that might involve. Paying special attention on the credit risks and its policy is the expected to be associated with the controlling market risks, and the exchange and interest rates risks. In the identification of the risks, the banks new products and activities should be ensured that they were all into an adequate controls. And this can be done through the aid of the accounting and information system that can expose the related risks (CenBank, 2000).

Methodology

The suggested method in the study is the utilization of the secondary information. Through the sorted data in Nigerian financial sector, the essential information can be gathered. In addition, there is an opportunity to compare the report of the banks placed in different regions of Nigeria and assess them to give the details in credit risk and their approach to its management. The participating banks will be three of the following Nigerian banks: Afribank, Tier Banks, Diamond Bank, FCMB, and Skye Bank. The examination of the performance is possible through reviewing the investment rationale and risk/loan analysis of the respective banks.

References:

CenBank, (2000) Central Bank of Nigeria Banking Supervision Annual Report [Online] Available at: http://www.cenbank.org/out/Publications/reports/BSD/2001/bsdar00.pdf [Accessed 02 July 2010].

Meristem, (2008) Nigeria Equity Research [Online] Available at: http://www.websoft.com.ng/meristem/app/mail/MEIRSTEM%20RESEARCH_%20NIGERIA%20EQUITY%20REPORT-%20MIDDLE%20TIER%20BANKS.pdf [Accessed 02 July 2010].

USAID, (2008) Nigeria Economic Performance Assessment [Online] Available at: http://pdf.usaid.gov/pdf_docs/PNADL990.pdf [Accessed 02 July 2010].