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)

Effective Management of Micro Credit Delivery in a Rural Bank

Introduction

The major approaches in the micro financing continuously changing and described as triggered by credit of rural banks. In addition, the growing masses of Small and Medium Enterprises (SMEs) create an impact in the country’s national economy. The design and process of the micro credit in most of the country resulted in improving the living status of the poor by fighting the poverty. Furthermore, the education of the people within the community is another criterion towards the effectiveness of the micro-financing. The features included in the micro credit policy of the rural banks are however, affected by the effective management scheme in meeting the objectives of the country and can be used for the future.

Background and Problem Statement

The formal financial sector in Ghana mostly comprises of commercial banks that operates in number of branches in the country. Recently, the banks and other financial institutions sought to broaden the management in micro-credit or loan to strengthen the SME sector. This behavior attracted the financial users but the threats also increased. Rural banks and other financial institutions are advised to be cautious because of the identified risks associated in the micro-credit sector (Mensah, 2004). Because of this fact, what are the effective management strategies or scheme that can be applied in the micro-credit delivery, particularly among the rural banks?

Research Aim and Objectives

The main aim of the study is to build the capacity in rural banks by unveiling the effective management approach that can be used in micro-credit delivery. In order to fulfill this aim, the study should consider the three objectives. First is to identify the similarities and differences of the informal and formal financial sector in the country. Second, is to recognize the developments in rural banks from the past five years. And third is to describe the influence of growing sector such as the SMEs in the effective management and growth of micro-financing.

Literature Review

The essential approach of Ghana is discovering the potential of rural banks in outreaching the poor while sustaining the savings and credit offers. Micro-finance is defined as the provision of financial services, that includes credit, loans, savings and insurance, to poor, disadvantaged and otherwise under-privileged members of society (particularly in developing countries) who would otherwise not have access to such facilities (Parikh, Ghosh, & Chavan, 2003). In Ghana, the micro-finance has emerged as one of the most effective methods of financial development and poverty alleviation. The micro-financing attempts to unleash the forces by transforming the lives of the individual. The growth of the rural economics is due to effective facilitation of the micro-finance. This action is simply explained from inducing the development to the initiated development that tends to create changes in the role of bank credit, particularly in rural banks (Raghayan, 2006). However, it is identified that the institutions have weak management and internal controls which demonstrated in the experience of Ghana is balancing the various areas in banking. Although the Bank of Ghana has exercised the considerable regulatory which allows the institutions in regulating their system, there’s still system among the micro-financing that failed to achieve the impressive outreach (Steel & Andah, 2003). There are barriers to the rapid development of the financing, for example in SME, are schemes, initiatives, and funding mechanisms of the rural banks to facilitate the effectiveness of micro-credit support. The SME in Ghana is affected of the lack of financial support or the low level of the financial intermediation. Because of the inconsistency caused by the schemes, there is an increase in the financing gap that entirely affects the industry. Furthermore, there is lack of institutional and legal structure that facilitates the management of micro-credit risks (Mensah, 2004). Because of the ineffective management of the micro-finances, the country can move forward to the utilization of the free economic principles such as the idea of information technology (IT) to provide the necessary attention in the rapid growth of the micro-finance (Raghayan, 2006).

Methodology

The suggested method in the study is the use of the secondary information. The important information can be obtained from the case studies, rural bank financial reports, World Bank Association, and other reports that can give details to the effective management approach of various countries. By comparing the micro-financing management schemes of the countries, the study can generate the analysis regarding the applicable solution in micro-credit delivery. In the end, the study can organize the conclusion on the preferred management approach in micro-credit delivery.

References:

Mensah, S., (2004)” A Review of Financing Schemes in Ghana”, Presented at the UNIDO Regional Workshop of Financing Small and Medium Scale Enterprises, Accessed 28 July 2010, from http://www.semfinancial.com/publications/SME%20Financing%20Schemes%20in%20Ghana.pdf

Parikh, T., Ghosh, K., & Chavan, A., (2003) “Design Studies for a Financial Management System for Microcredit Groups in Rural India”, Accessed 28 July 2010, from http://people.ischool.berkeley.edu/~parikh/papers/p0314-parikh.pdf

Raghayan, R.S., (2006) “Micro-Finance – Uplifting Rural Economy”, The Chartered Accountant, Accessed 28 July 2010, from http://www.icai.org/resource_file/102921143-1148.pdf

Steel, W.F., & Andah, D.O., (2003) “Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry”, Accessed 28 July 2010, from http://www.worldbank.org/afr/wps/wp49.pdf

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].

How is a Credit Union Beneficial as Against a Commercial Bank in our Times?

Introduction

Banking and financial transactions change every time there is a challenge and a spotted room for improvement. Currently, from the ordinary transactions, filing of records, gathering of essential documents, and other handling of financial problems banks turned into a transparent subject for change and development. The commercial banks, nowadays, are highly competitive as one of the largest stream in terms of financial institutions. With the aid of continuous global change, the environment eventually changes into electronic based system. The existence of credit union in most of the developing countries is attested to be more advantageous in the society that the commercial banking system, even if there are many changes and progress.

Research Background and Problem Statement

Credit unions along with the other cooperative activities evolved from the traditional practice, same as the commercial banking did. The idea and concept of the credit unions is to aid the poor people most especially the people who reside in developing countries. By simply providing them money and making loan transactions, the relationship between the people and the financial institutions are understandably beneficial (Scott, 2009). However, what are the other evidences proving that the credit unions can deliver more advantage to the people than of the commercial banking, particularly in these times?

Research Aim and Objectives

The main aim of the study is to look for the pieces of ideas that can provide explanation regarding the beneficial use of credit unions than of the commercial banking system and transactions. In order to guide the study to deliver the essential ideas about the credit unions, there are three important objectives. First is to compare the policies, regulations, systems, or financial situation of credit unions and commercial banks, like in Ghana and other developing countries. Second is to identify the most appealing characteristics of credit unions to their clients which may serve as a strong foundation regarding the trust and loyalty of the customers. And third, is to determine the level of challenges that commonly manifested in the activities involved in credit unions.

Literature Review

Credit unions, like the other financial institutions are also regulated and commonly administered by the government. This is done through ensuring that all of the support given by various credit unions leads to the common good of the society (Scott, 2009). One example of developing countries is Ghana, in which identified that the microfinance system is being regulated by the commercial banks laws. On the other hand, there are a separate laws for the cooperative and non-bank financial institutions. The credit unions in Ghana is performed under the rural microfinance (RMF) and found to be more beneficial to the customers because of the recorded improvement that reflects in the new era of financial institutions. Through the wise combination of a more commercial approach, reconstruction on the sector and recapitalization and building capacity, and lastly strengthening the regulation, the credit unions seems more admirable. The weak performance that mostly identified under the welfare focus and policies of low interest is reportedly became the center of the idea in focusing for a better management and satisfying the services of the credit unions. Albeit there are many limitations in the credit unions, still it is viewed to resist the impacts of changes in financial stream. In addition, there are no stipulated specific provisions regarding the capital requirement on the users but as long as the members can manage and be responsible on their roles, the credit unions will continue to be strong (Basu, Blavy, and Yulek, 2004). In commercial banking, it is still a debate for some developed countries unto how to compensate the arising problems in banking as well as the insurance of the members whenever the financial crises hit them hard. The only answer that they found is through providing stability which may seem impossible because of the financial conditions and uncertainties (Starr and Yilmaz, 2007).

Methodology

The suggested method that the study can use is through the utilization of the comparative case study in which the most reliable sources regarding to the main subject can be found. The use of the case studies is a proof provided by the past researchers about the emerging markets and developments in credit unions. From there, the researcher/s can measure the impact as well as the appeal of the credit unions in most of the developing countries. Also, the case studies include the use real situations that might unlock the ability of the credit unions to serve a lot of clients.

References:

Basu, A., Blavy, R., & Yulek, M., (2004) “Microfinance in Africa: Experience and Lessons from Selected African Countries”, (IMF) International Monetary Fund, Accessed 01 June 2010, from http://www.imf.org/external/pubs/ft/wp/2004/wp04174.pdf

Scott, J.A., (2009) “Commander and Installation Bank and Credit Unions Liaison Officer Desk Guide”, (DFAS) Defense Finance and Accounting Services, Accessed 01 June 2010, from http://www.dfas.mil/more/referencelibrary/MDA_210-02-D-0003.pdf

Starr, M.A., & Yilmaz, R., (2007) “Bank Runs in Emerging-Market Economies: Evidence from Turkey's Special Finance Houses”, Southern Economic Journal, Vol. 73, No. 4, p. 1112.