Impact of Credit Risk on Performance of Nigerian Banks
IMPACT OF CREDIT RISK ON PERFORMANCE OF NIGERIAN BANKS
BY
LAWAL AHMED
ABSTRACT
BACKGROUND TO THE STUDY
Financial institutions are germane to the economic development of any nation through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth. The banking industry in Nigeria has achieved great prominence as a result of the intermediation role. The efficient and effective performance of the financial services industry over time is an index of financial stability in any nation. The extent to which financial institutions extend credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability. This is because the credit function of these institutions enhances the ability of investors to exploit desired profitable ventures. Kargi (2011) pointed out that credit creation is the main income generating activity of banks as a financial institution.
However, the past decade has seen dramatic losses in the banking industry in Nigeria. The need to survive and maintain adequate profit level in this highly competitive environment has made banks tended to take excessive risks. But then the increasing tendency for greater risk taking has resulted in insolvency and failure of a large number of the banks. The major cause of serious banking problems continues to be directly related to low credit standards for borrowers and counterparties, poor portfolio management, the absence or non- adherence to credit risk management practices and lack of attention to changes in economic or other circumstances that can lead to deterioration in the credit standing of bank’s counter parties. And it is clear that banks use high leverage to generate an acceptable level of profit. In response to this, financial institution, have almost universally embarked upon an upgrading of their risk management and control systems. Credit risk management is an important component of
BY
LAWAL AHMED
ABSTRACT
BACKGROUND TO THE STUDY
Financial institutions are germane to the economic development of any nation through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth. The banking industry in Nigeria has achieved great prominence as a result of the intermediation role. The efficient and effective performance of the financial services industry over time is an index of financial stability in any nation. The extent to which financial institutions extend credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability. This is because the credit function of these institutions enhances the ability of investors to exploit desired profitable ventures. Kargi (2011) pointed out that credit creation is the main income generating activity of banks as a financial institution.
However, the past decade has seen dramatic losses in the banking industry in Nigeria. The need to survive and maintain adequate profit level in this highly competitive environment has made banks tended to take excessive risks. But then the increasing tendency for greater risk taking has resulted in insolvency and failure of a large number of the banks. The major cause of serious banking problems continues to be directly related to low credit standards for borrowers and counterparties, poor portfolio management, the absence or non- adherence to credit risk management practices and lack of attention to changes in economic or other circumstances that can lead to deterioration in the credit standing of bank’s counter parties. And it is clear that banks use high leverage to generate an acceptable level of profit. In response to this, financial institution, have almost universally embarked upon an upgrading of their risk management and control systems. Credit risk management is an important component of
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