1.1 Background of the study
Banks are important to economic development through the financial services they offer. Their intermediation role can be said to be a catalyst for economic growth. The recent failure of banks has been a concern for Central bank of Nigeria and shareholder of these banks. Loans and advances is a major source of earnings for banks. Banks are exposed to high risk as a result of lending to customers. Banks face the risks of borrowers not being able to repay principal and interest as they fall due. Experience shows that poor credit risk management typified by high level of insider loans, speculative lending and high concentration of credit in certain sector among other issues impede the stability and profitability of banks. Over the years banks in Nigeria have been carrying huge non-performing loans that rose progressively from year to year without being reported through sound credit risk management.
In the past several banks failed as a result of high non performing loans running into several billions of naira. Attractive interest rate on deposits and loans in the 1990’s led to indiscriminate granting of loans without credit risk appraisal and management. This led to bad and irrecoverable loans. Despite measures put in place to check the trend, the rising profile of non-performing loans, continued unabated into 2000’s. The study is motivated by the negative effect of non performing assets on shareholders fund and would be relevant as it addresses how credit risk affects bank profitability.
Greening and Bratanovic (2003) posits, that because of the potentially dire effect of credit risk, it is important to perform comprehensive evaluation of banks capacity to evaluate,monitor and manage loans and advances granted to customers. The study evaluates the extent to which failure in credit risk management impede profitability of banks in Nigeria.
1.2 Statement of the Problem
It is generally accepted that credit risk is the most prominent risk in terms of the level to which it impacts on the quality of risk assets as well as bank profitability and eventually bank failure. Banks grant large portion of their deposits as loans to customers which account for a large portion their income. Provisions made on non performing loans will have negative impact on the profitability of the banks. Inadequate information about borrowers made the Central Bank of Nigeria to set up Credit Risk Management system. This system ensures that loans granted by banks are captured and made available to all the banks in Nigeria. The objectives of CBN Credit Risk Management System is to provide information, monitor the level of borrowings, and facilitating consistent classification of credit. As part of effort to stem the problem of credit risk Asset Management Corporation of Nigeria was established in 2010 to buy off the non-performing loan of banks in Nigeria and take over eight weak banks.
Central Bank of Nigeria periodically issues prudential guidelines that address quality of loan assets, provisions on non-performing loans, capital adequacy and stability of the banking industry. The code of corporate governance for banks was issued after consolidation to check corporate governance and risk management failures. This requires that bank should adequately disclose it risk management in its annual reports. Despite the efforts made by regulatory authorities to stem the tides of credit risks problems, banks still have high level of non-performing loans attributed non compliance to corporate governance and credit risk management practices. Credit quality is considered a primary indicator of financial soundness and health of bank. Credit risk management is very important evaluating and determining bank profitability. Considering the public loss of confidence as a result of banks distress which has be deviled the financial sector in the last decade, it is very important for banks to be profitable. It is against this background that the study seeks to find out the impact of credit risk management on bank profitability in Nigeria.
1.3 Research Questions
This study is intended to answer the following questions:
i. What is the relationship between return on equity and non-performing loans?
ii. Do loan and advances affect bank profitability?
iii. Does total deposits determine profitability bank?
1.4 Objectives of the study
The objectives of the study are to
i. Find out the relationship between return on equity and non performing loans
ii. Find out if loan and advances has impact on return on equity.
iii. Examine the relationship between total deposits and return on equity.
1.5 Research Hypotheses
The following hypotheses was formulated and tested:
1. HO: There is no significant relationship between return on equity and non- performing loan
H1: There is significant relationship between return on equity and non-performing loan
2. HO: There is no significant relationship between loan and advances and return on equity
H1: There is significant relationship between loan and advances and return on equity
3. H0: There is no significant relationship between total deposits and return on equity
H1: There is significant relationship between total deposit and return on equity
1.6 Scope of the study
This study seeks to examine credit risk management and profitability of banks in Nigeria. The study is limited to the top five banks out of the twenty Banks in Nigeria. These banks are First Bank of Nigeria Limited, Guaranty Trust Bank Plc, Zenith Bank Plc, United Bank for Africa Plc and Access Bank Plc. The annual report for 2012 show that these banks ranked as top five banks in Nigeria. The time frame of work is restricted to 5years (2008 to 2012).
1.7 Relevance of the study
One of the objectives of every organization is to make profit. Profit enables organization to invest in assets, and enhance its capital base. Various groups are interested in the profitability of banks. Suppliers and vendors are interested in the profitability of a bank as this will motivate them to transaction business with the bank on credit basis. Employees also have interest in the profitability of the bank. Employees are interested in knowing if the bank will be able to continue to pay salaries and other benefits. Shareholders want to be sure that they will continue to get returns from their investment. Government is interested in profitability because taxes are paid from profit. Managers of banks, researchers, financial analyst and potential investors would also benefit from the result of this study as it will serve as a reference material. The evidence from this study will complement the existing international studies regarding credit risk management and profitability of banks.
OTHER SIMILAR ACCOUNTING PROJECTS AND MATERIALS