The Impact of Effective Credit Risk Management on Bank Survival
Annals of the University of Petroşani, Economics, 9(2), 2009, 173-184
173
THE IMPACT OF EFFECTIVE CREDIT RISK MANAGEMENT ON BANK SURVIVAL
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KOSMAS NJANIKE
ABSTRACT: A number of financial institutions have collapsed or experienced financial problems due to inefficient credit risk management systems. The study seeks to evaluate the extent to which failure to effectively manage credit risk led to Zimbabwe’s banks’ demise in 2003/2004 bank crisis. It also seeks to establish other factors that led to the banking crisis and to outline the components of an effective credit risk management system. The study found that the failure to effectively manage credit risk contributed to a greater extent to the banking crisis. The research also identified poor corporate governance, inadequate risk management systems, ill planned expansion drives, chronic liquidity challenges, foreign currency shortages and diversion from core business to speculative non-banking activities as other factors that caused the crisis. There is also need for banks to develop and implement credit scoring and assessment methodologies, review and update the insider lending policies and adopt prudential corporate governance practices. KEY WORDS: credit, risk management, bank failure, bank survival
1. BACKGROUND The year period 2003 to 2004 saw a number of banks being forced to close down in what was termed the Zimbabwean Banking Crisis and the main cause being poor credit risk management. In Zimbabwe the number of financial institutions declined from forty as at 31 December 2003 to twenty nine (29) as at 31 December 2004 and the impact of effective credit risk management on bank survival cannot be overemphasized. Some financial institutions were forced to close down and others were placed under curatorship. The main cause of the banking crisis was poor credit risk management practices typified by high levels of insider loans, speculative lending, and high concentration of credit in certain sectors among
173
THE IMPACT OF EFFECTIVE CREDIT RISK MANAGEMENT ON BANK SURVIVAL
*
KOSMAS NJANIKE
ABSTRACT: A number of financial institutions have collapsed or experienced financial problems due to inefficient credit risk management systems. The study seeks to evaluate the extent to which failure to effectively manage credit risk led to Zimbabwe’s banks’ demise in 2003/2004 bank crisis. It also seeks to establish other factors that led to the banking crisis and to outline the components of an effective credit risk management system. The study found that the failure to effectively manage credit risk contributed to a greater extent to the banking crisis. The research also identified poor corporate governance, inadequate risk management systems, ill planned expansion drives, chronic liquidity challenges, foreign currency shortages and diversion from core business to speculative non-banking activities as other factors that caused the crisis. There is also need for banks to develop and implement credit scoring and assessment methodologies, review and update the insider lending policies and adopt prudential corporate governance practices. KEY WORDS: credit, risk management, bank failure, bank survival
1. BACKGROUND The year period 2003 to 2004 saw a number of banks being forced to close down in what was termed the Zimbabwean Banking Crisis and the main cause being poor credit risk management. In Zimbabwe the number of financial institutions declined from forty as at 31 December 2003 to twenty nine (29) as at 31 December 2004 and the impact of effective credit risk management on bank survival cannot be overemphasized. Some financial institutions were forced to close down and others were placed under curatorship. The main cause of the banking crisis was poor credit risk management practices typified by high levels of insider loans, speculative lending, and high concentration of credit in certain sectors among
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