CHAPTER ONE

INTRODUCTION

1.1    Background to the Study

The financial sector across the globe experienced the changes due to the impact left by the recession and economic trends. Reform was the basic solution in which most countries used to perfect their economy. In Nigeria, it is appreciated that the banking sector produced the well performance through reforms.  It is acknowledged that the sound, and efficient financial sector is the key in the mobilization and improving risk management.  As compares to its neighboring countries, Nigerians financial sector emerged 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, the question is how effective is the credit management being implemented in Nigeria banks especially in reducing the poor performance and increasing the profitability of the Nigeria bank?

The Government of Nigerian bank through its agencies have been working round the clock to ensure has banks performs their obligations through guidelines and polities. The government concerns itself more on the banking sector than other sectors and some of the possible reasons for the higher of government oversights in the sector are:

• Ø Bank asset are usually opaque and lacking in transparency as well as liquidity.
• Ø Bank asset are usually opaque and lacking in transparency as well as liquidity.
• Ø Bank instability will lead to a contagion effect which would affect a class of banks or the entire financial system and the economy.
• Ø Bank depositors (particularly retail depositors) cannot effectively protect themselves because they do not have adequate information, nor are they in a position to coordinate each other.
• Ø Banks have a dominant position in developing economic financial systems, and are important engines of economic growth (King and Levine 1993, Levine 1997).

Credit risk management in banking is not a new activity. Since banking began, mangers of banks have spent at least some of their time worrying  about borrowers not being able to repay their loan or some other disaster would prevent the bank from been able to remain profitable or in extremis, from repaying the banks depositors (illiquidity).  Cynics say, however that worrying is not a solution to satisfactory risk control, since the history of banking in both developed and under-developed countries has record of too many instances of bank losses and failure, usually at a time of economic recession in concerned countries. Banks and other financial institutions are expected to remain fruitful even in the midst of economic uncertainties and financial crunches. The banking institutions’ act as financial link between the surplus and the deficit sectors of the economy. Hence, banks take high risk which is commensurate with returns. Based on the concept, we could say that the credit risk management and banking sector performance can be stated as endogenous construct.

1.2    Statement of problem

Since banks have to remain profitable, solvent and liquid they are exposed ~ hi~ level of risk through their services and transactions. But we must take note that the higher the risk, the higher the returns, whereas returns on other hand is used to measure bank performances.

Therefore, problems associated with credit risk management and bank performances are highlighted below:

(i)      Bad lending decision and credit policies; these could be as a result of negligence by the bank management and deceit by customers

(ii)     Faculty credit risk management by the borrower or bank management as the case may be.

iii)     Nonchalant or unconcerned attitude of the management and the regulatory bodies towards credit risk policies and its management.

 (iv)   Lack or unavailability of credit culture on the part of the bank management:

(v)     Inappropriate or no provisions for loss of credit or default.

1.3    Objectives of the Study

The sole aim of this study is to figure but the intensity of credit risk management as part of banks approach to profitability and sound performance. This study is meant· to investigate the credit risk management and banking sector performance in Nigeria. Hence, the relationship that may exist between credit risk management framework and bank performance.

To achieve this alms and objectives, the study would investigate the following:

• Ø Firstly, we are going to’ investigate the factors underlying credit risk management in banks in Nigeria.
• Ø We are also going to access the effect of credit risk management on banking sector performance in Nigeria.
• Ø We are going to measure the approaches of banks towards profitability which will set an argument towards their performance.
• Ø Lastly, we are going to test the significance, thereby drawing conclusion and giving recommendations.

1.4    Research Question

The research questions to be answered are restated are follows;

(1)     How does credit risk management help detect profitability in the banking-sector?

(2)     To what extent do banks ensure a strict credit risk management?

(3)     Of what relevance is credit risk management to the performance in the banking sector?

(4)     To what extent do banks use credit risk management in measuring its profitability?

1.5    Research Hypothesis

The hypothesis to be stated has;

Ho:      Credit risk management has no significant effect on banking sector performance.

H1:      Credit risk management has significant effect on banking sector performance.

1.6    Significance of the study

This study is designed to show some essential information credit risk management and banking ‘sector performance. Credit risk management and banking sector performance is relevant because if credit risk is not managed properly it could cause poor performance or illiquidity in the banking sector. This study is to pivot, because since risk is inevitable in the banking sector, due to the fact that the higher the bank task risk, the higher the return. Therefore, that simply means that this study is going to enlightening the populace about credit risk, its management and what banks are doing to help curb it, so as to boost their performances.

Also it is to believe that this study carried out will be of benefit to the banking and financial institutions, government and also to the present and future researchers, because, the study is going to help analyze the effect which proper credit risk management would have on banking sector performance and also the internal and external factors that can help limit the credit risk since researchers believe it can be averted.

1.7    Historical background of First Bank Plc:

First bank can be traced back to 1894 was founded by Sir Alfred Jones, a shipping magnate from Liverpool, the bank started out as a small  operation in the office of Elder Dempster & Company in Lagos.  The bank incorporated as a limited Liability Company on 31st march 1894, with the head in Liverpool. It began trading under the corporate name of the Bank of British West Africa (BBWA) started as with a paid-up capital of £12,000, after absorbing its predecessors, the African banking Corporation, which had being established earlier, in 1892. BBWA went on to establish a leading position in the banking industry in West African, recording impressive growth and working closely with the Colonial Government in its role as a Central Bank.  Marking the creation of the Bank’s international banking operations, a branch was opened in Accra, Gold Coast (now Ghana) in 1896, and another in Freetown, Sierra Leone in 1898. A second Nigeria branch was opened in the old Calabar in 1900, and two years later services were extended to Northern Nigeria.

In 1957, it changed its name from Bank of British West Africa (BBWA) to Bank of West Africa (BWA) after Nigeria’s independence in 1960; the bank to extend more credit to indigenous Nigerians.  At the same time, citizens began to trust British banks since there was an independence financial control mechanism and more citizens began to patronize the new bank of West Africa. In 1965, Standard Bank acquired Bank of West African and changed its acquisition name to Standard Bank of West African.  In 1969, it was incorporated locally as the Standard Bank of Nigeria Limited, in line with the Companies’ Decree of 1968. In March 1971, the bank obtained a listing on the Nigeria Stock Exchange.

Furthermore names changes took place in 1979 and 1991 to First Bank of Nigeria Limited, then First Bank plc. In 1985, the bank introduced a decentralized structure with five regional administrations, and this was reconfigured in 1992 to enhance operational efficiency. The Bank has continued to be a leader in financing the long-term development of the Nigeria economy. Ever since 1947, when it advanced the first long-term loan to Government, it has kept broadening its loan and credit portfolio to various sectors of the economy. In satisfying the needs of its customers, First Bank has diversified into range of banking activities and services.

The current Chairman is Dr. Ayoola Oba Otudeko, OFR. The bank is the largest retail lender in the nation, while most banks gather funds from customers and loan it out to corporations and multinationals, First Bank has created a small market for some of its retail clients. At the end of September 2011, the bank had assets totaling approximately US$18.6 billion (NGN: 2.9 trillion). The bank’s profit after tax, for nine months ending 30 September 2011 was approximately US$270.2 million {NGN 42.2 billion}.

First Bank of Nigeria maintains a subsidiary in the United Kingdom FBN Bank (UK), which has a branch in Paris. The bank also has representative office in South Africa and China. In October 2011, the bank acquired Banque International de Credit (BIC), a lending in the Democratic Republic Of Congo (DRC) the company was named the best in September· 2006. The firm’s auditors are PricewaterhouseCoopers (Chartered Accountants). The bank has a long solid and long term ratings from Fitch and the Global Credit Rating Company partly due to its low exposure to non-performing loans. The firm’s compliance with financial laws has also strengthened with the economic Financial Crimes Commission giving it a strong rating.

1.8    Definition of Terms

There many terms used in this study, but we are going to define the most important terms used in this research work.

1        Credit:  It is a contractual agreement in a borrower receives something of value now and agrees to repay the lender at some later day. From the Oxford learners Dictionary credit is defined as money that one borrows from a bank, a loan or advance.

2        Risk: It is the probability that the actual return on an investment or security will deviate from the expected return. Risk in this study as related to credit simply means the probability of a default from customers when credit facilities are granted to such customer.

3        Credit Risk Management: Credit risk management is a tool or measurement used by the bank in order to regain the confidence of the public through optimization of risk.

4        Non-Performing Credit Facilities: This represent credit facilities whose interest or principal is due for payment and is yet unpaid for 90 days or more. Non-performing credit facilities can be categorized under sub-standard, doubtful, and lost credit facilities.

5        Non-Performing Loan (NPL): This is a loan that is in default or close to be in default. A high non-performing loan indicates that the bank s taking more risk in their operation and investment.

6        Non-PerformingLoan Ratio: It is a ratio of managerial risk­-taking behavior relative to all organization resources.

7        Basel Agreement/Account: A negotiated agreement between regulatory authorities in the United States, Canada, Great Britain, Japan and eight other nations in the West Europe to set common capital requirement for banks under their jurisdiction.

8        Credit Risk Management: It involves analytical tools including computer programs designed to assess the level of borrow.