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1.1 Background of the Study
Given the role of the financial services industry in the economic development of a nation, the importance of sound risk management practices cannot be over-emphasised. This is because risk management is crucial to every financial institution; encompasses all the activities relating to risk identification, measurement, monitoring and control.
In the last few years, the Nigerian banking industry has undergone series of reforms, part of which is the directive by the Central Bank of Nigeria (CBN) for banks to put in place an effective risk management framework that would ensure soundness in the industry.
Since the end of the banking consolidation in December, 2005, the balance sheet of most banks has more than quadrupled with attendant heightened risk appetites. However, there has not been a corresponding increase in the skills and technical know-how of the risk practitioners. Indeed, most of the banks are yet to institute appropriate risk management framework that would enable them identify, measure, monitor and control the risks inherent in their operations; in spite of the circulars and guidelines issued by the CBN. There was little evidence that the respective boards had shown more than passing interest in the risk management process of their banks.
The major findings of the routine examination of banks by the Nigerian Deposit Insurance Corporation (NDIC) in 2006 and also the Central Bank of Nigeria (CBN) in 2009 revealed that most banks fail to implement some of the recommendations of successive bank examinations and reports. Some of their findings include weak board oversight, inaccurate financial reporting, declining asset quality, and attendant large provision requirement, inadequate debt recovery efforts, partial compliance with the Money Laundering Act and non-compliance with banking laws, rules and regulations and poor corporate governance. The close-out audit of some of the consolidated banks revealed material misrepresentation of the financial conditions of some constituent banks.
Poor risk management practices led to the distress and failure of some banks in the 1990s; it had also led to the revocations of the operating licences of some banks in the past. Furthermore, it led to the dismissal of some Chief Executive Officers/Managing Directors of some banks in 2009 and their consequent prosecution in the law court.
Lending is generally subjected to a wide array of risks in the course of commercial banks operations. These risks have increased especially in recent times as banks diversified their assets in the changing market. In particular, with the globalization of commercial banks in the last decade, the activities and operations of banks have expanded rapidly including their exposure to risk.
Commercial bank lending is characterized by risk taking resulting from default or delay in fulfilment of obligation i.e. borrowing short and lending long and mismatches between interest-sensitive assets and liabilities.
Risk management entails various policies and strategies put in place by banks as to effectively control the risk inherent in bank lending, while at the same time the various constituencies which include the surplus unit, deficit unit, shareholders, regulatory authorities and the community at large. The surplus units are interested in high returns, while the deficit units want to borrow at low cost and at the same time, there must be adequate spread between cost and revenue to meet the demand of the shareholders. All these conflict with the risk minimization obligation owed to the regulatory authority.
1.2 Statement of the Problem
History is repeating itself, in light of the world economy being hit by the repercussion of the financial meltdown that started with the sub-prime mortgage crisis in the United States of America in 2008; which transcend to Nigeria and other parts of the world. This crisis has led to the collapse of many banks and other financial institutions, and even rendered an entire nation bankrupt in the worst hit countries.
In Nigeria, the banking system appears to have weathered the storm due to a number of factors. Among these are the strength of our financial system, as well as the relatively simple nature of financial products and strong capitalization and liquidity of Nigerian banks. However, the capability to absorb and survive the effects of the crisis varies from bank to bank. A few Nigerian banks, mainly due to huge concentrations in their exposure to certain sectors (capital market and oil and gas, being the prominent ones) and general weakness in risk management and corporate governance, have continued to display signs of failure.
As far back as October 2008, few banks showed serious liquidity strain and had to be given financial support by the CBN in the form of an Expanded Discount Window (EDW) where the CBN extended credit facilities to these banks on the basis of collateral in the form of Commercial Paper and Bankers’ Acceptances, sometimes of doubtful value. These banks have been permanently locked in as borrowers in the EDW and were clearly unable to repay their obligations; even when the CBN stopped granting new lines in the EDW, but guaranteed inter-bank lending, these banks continued to be major players (borrowers). Such persistence and frequency of their demands pointed to a deeper problem which is probably financial instability and problems resulting from non-performing loans.
Risk in itself is not bad, what is bad is the risk that is mismanaged, misunderstood or misplaced. Risks are no longer hazards to be avoided but, in many cases, opportunities to be embraced. Risk management is a central part of any organisation’s strategic management. The effective and efficient management of risks is critical to the continued growth and sustainability of financial institutions as well as the growth and development of the economy
The number of high profile bank failures in the last decade points to the fact that risk management should be elevated as an important governance process. This development calls for close monitoring of commercial banks by the regulatory/supervisory authorities in order to ensure the safety and soundness of the banking industry.
Commercial banks have moved from their traditional function of financial intermediaries and now earn income by borrowing from the surplus unit of the society and lending to the deficit unit. Towards the end of the last millennium, banks began to design financial products with varying features in response to the demands of the society. Different types of bank loans have been fashioned to meet the needs of different types of borrowers such as Employee Credit, Asset Acquisition, Credit Cards, LC based LPO Facility, Import Duty Facility, Import Finance Facility, Inventory Finance Facility, Mortgage Finance Facility, Invoice Discounting Facility, Cash Collaterized Facility, Contract Lease Based Facility, Work Order Facility, etc. Each of these facilities has varied levels of risks.
This research effort was initiated by the need to examine the factors that are responsible for the high rate of non-performing loans in Nigerian commercial banks as evident in the banking sector in recent times. Using ten commercial banks as a case study and the need to mitigate or forestall such divergence between performing and non-performing loans through the medium of effective risk management.
1.3 Objective of the Study
The major objective of this study is to appraise risk management strategies of selected banks in Nigeria. The specific objectives are to:
Identify the various risks associated with commercial banks’ lending.
Identify the various constraints facing the bank risk management in managing the risks.
Identify the procedures in place by the bank management for managing these risks.
Determine how effectively the banks have been able to manage these risks so as to mitigate the divergence that may occur in non-performing loans.
Determine how effective risk management has helped banks in reducing loss and achieving high profitability.
1.4 Research Questions
Does effective risk management help in reducing non-performing loans?
Does effective risk management improve the profitability of banks?
Does years of experience have significant effect on credit analysis and risk management?
Does effective risk management help in maximizing shareholders’ value?
1.5 Hypotheses of the Study
The statement of the relationship between the variables in this research is put as follows:
H1 Effective risk management has impact on reducing non-performing loans in commercial bank lending.
H0 Effective risk management has no impact on reducing non-performing loans in commercial bank lending.
H1 Effective risk management has impact on improving the profitability of the commercial banks.
H0 Effective risk management has no impact on improving the profitability of the commercial banks.
1.6 Significance of the Study
This study will enable us to see the importance and impact of risk management in commercial bank lending portfolio. It will be of a great assistance to the scholar who intends to carry out further research into the activities of commercial banks as regards managing the lending portfolio with special focus on risk management. It will also be of tremendous assistance to the operators of financial institutions in having more knowledge on risk management.
1.7 Scope of the Study
This research work will focus on the risk management activities of ten commercial banks in Nigeria with emphasis on appraising the various risks inherent in commercial bank lending.
1.8 Organization of the Study
The study is divided into five chapters. Chapter one deals with the background of the study, followed by chapter two which is primarily centred on the literature and conceptual framework. Chapter three is focused on the research methodology, while chapter four centres on the analysis of data, findings and strategies adopted by commercial banks in risk management. Chapter five concludes the study with a summary and recommendation.
Adekanye, F. (1980) The Elements of Banking in Nigeria; Graham Burn United Kingdom
Adewunmi, W & Ojo T.A (1980) Banking and Finance in Nigeria; Graham Burn, United Kingdom
Bolten, S.E. (1976) Managerial Finance: Principle and Practice; Houghton Mifflin Company, Boston
Central Bank of Nigeria (2009) Inspection Report; CBN Research Department, Abuja.
Dyner S. (1981) Bank Lending; Water Love
Gerald Leahy (2011) Managing Banking Relationships; Woodhead Publishing Ltd, Cambridge, United Kingdom.
http://www.thisdayhttp://www.thisday Volume 13, 2008
Nwankwo G.O (1991) Bank Management Principle and Practice; Malthouse Press Ltd
Nzotta S.M. (2002) Corporate Financial Decisions; Olliverson Industrial Publishers, Owerri.
The future cannot be predicted. It is uncertain, and no one has ever been successful in forecasting the stock market, interest rates or exchange rates consistently- or credit, operational and systemic events with major financial implications. Yet, the financial risk that arises from uncertainty can be managed. Indeed, much of what distinguishes modern economics from those of the past is the new ability to identify risk, to measure it, to appreciate its consequences and then to take action accordingly such as transferring or mitigating the risk.
2.1 WHAT IS RISK?
Hardy (1924:1) opines that risk may be defined as uncertainty in regard to cost, loss or damage. In his view, Pfeffer (1956: 42) contends that risk is a combination of hazards and is measured by probability.
Lending decisions are generally fraught with risks, but the ability of the bankers to thoroughly assess and analyse such risks will often lead to qualitative and more pragmatic decisions. Even after the decision has been made, it is absolutely necessary to review it in light of changes in the economic environment (R.K.O. Osayameh 1986)
Risk can be defined as the measurable uncertainties inherent in any decision making process.
M. Grouhy et al (2008), under the risk paradigm, stated that risk management becomes not the process of controlling and reducing expected losses (which is especially a budgeting, pricing and business efficiency concern), but the process of understanding, costing, and efficiently managing unexpected levels of variability in the financial outcomes for a business. Under this paradigm, even a conservative business can take on significant amount of risk quite rationally, in light of :
Its confidence in the way it assesses and measures the unexpected loss levels associated with its various activities.
The accumulation of sufficient capital or the deployment of other risk management techniques to protect against potential unexpected loss levels.
Appropriate returns from the risky activities, once the cost of risk capital and risk management is taken into account.
Clear communication with stakeholders about the company’s target risk profile (i.e. its solvency standard once risk taking risk mitigation are accounted for)
This takes us back to our assertion that risk management is not just a defensive activity. The more accurately a business understands and can measure its risk against potential rewards, its business goals and its ability to withstand unexpected but plausible scenarios, the more risk-adjusted reward the business can aggressively capture in the marketplace without driving itself to destruction.
FUNCTIONAL DEFINITION OF RISK
Papas and Brigham (1979:74) contend that risk ‘is a hazard or peril, exposure to harm, and in commerce, a chance of loss’, leading to their conclusion that risk is ‘the possibility that some unfavourable event will occur’. Based on these meanings, risk may be explained in terms of ‘an event or situation that is hazardous, susceptible to harm, or presents a chance of loss, with the possibility that any of these unfavourable events will occur’ (Onyiriuba, op. Cit: 18). These definitions are based on characterisation of risk, but they represent a broader conceptualisation of the meaning of risk in a more practical sense. Yet a more generalising functional definition is needed. This need is served when we define ‘risk’ as any circumstance, event, or occurrence that:
creates doubt because possible outcomes of an action may not fulfil expectation;
threatens the interest of the actor through exposure to harm, because it is a peril, or because it potentially leads to a loss by the actor; and,
can be anticipated, observed, and assessed (for value) objectively.
This definition clarifies the concept or risk for many purposes. It accommodates most of the diverse views of risk commonly found in literature. It sees risk simply in terms of any situation where there is imperfect knowledge (uncertainty) concerning possible outcomes of an event. Such an event (risk) must be a cause of some loss (if it occurs) to someone, but unlike uncertainty, every risk must lend for objective analysis.
A Chicago economist, Frank H Night (1921) stated the important distinction between risk and uncertainty
Risk is a variability that can be quantified in terms of probability while uncertainty is a variability that cannot be quantified at all.
2.2 TYPES OF BANKING RISKS
Banking risks can be classified into two broad categories namely, fraud risk and market risk. Fraud is a deliberate deception, trickery or cheating for unlawful gain or unjust advantage. Through outright thefts, defalcations and embezzlement, frauds result in the largest losses to depositors and other creditors. Fraud is rampant, pervasive and one of the major causes of bank failures. Market risk on the other hand, comprises of all exposures in banking operations in the market place that subject the bank to the prospect of loss and hence to the weakening of capital resources. The inability or failure of the market to effectively control the market risk explains why banks are more heavily regulated from “cradle to grave” than any other commercial or industry undertaking. There are risks resulting from the external environment, they are stated below:
Interest Rate Risk
Interest rate is the danger that changes interest rates will create losses for the banker. Both rising and falling interest rates can cause this damage to any bank that is unprepared, though rising interest rates usually create more problems than falling rates. While the risk due to interest charges has always been a possibility, it was not considered serious as long as rates were stable. Its significance and seriousness increased with high and variable interest rate changes.
Foreign Exchange Risk
Foreign exchange risk is often due to speculation and mismatches in foreign exchange exposures and is probably the most involved of all bank risks.
Country risk is a risk in bank lending that relates to the possibility that political, legal, social or economic event in a country may prevent a debtor from honouring his obligations. It encompasses two sets of related risks – the transfer risk which concerns the ability or willingness of the debtor country to honour its obligations, and local currency risk which arises with regards to the local currency indebtedness to a foreign bank.
This arises from the enactment of new laws and regulations (or stricter enforcement of existing ones) that may limit the bank’s earning power or the ability to reduce risk exposure by entering new markets or developing new services. A feature of this type of risk is its suddenness since regulation may be passed; giving banks little or no time to adjust to the new situation.
This is the risk that a bank will be unable to purchase or otherwise obtain the necessary funds to meet its obligations as they fall due. This may arise, when, in order to meet sudden or unusually large withdrawals of funds, a bank is forced to rely on less stable purchased funds for a greater than normal proportion of its funding requirements.
TAXONOMY OF BANKING RISKS
S/No Type of Risk Source
Confidence Loss of confidence on the bank by depositors, the general public and the regulatory authorities.
Liquidity Faulty balance sheet, financing mismatches, changes in asset prices.
Fraud Theft, defalcation, forgery and embezzlement.
Credit Default or delay in fulfilment of obligations.
Interest Rate Mismatches between interest sensitive assets and interest sensitive liabilities.
Earnings or Profits Changes in operating expenses and interest rates, excess of expenses over incomes.
Operation Operating errors, inefficiency, faulty control procedures.
Investment Changes in interest rates and changes in asset prices.
Currency or Speculation, mismatches in foreign exchange Foreign Exchange exposure.
Funding Inability to purchase funds or otherwise obtain funds to meet obligations as they fall due – a form of liquidity and investment risks.
Counterparty Default or delay by counterparty i.e. related or affiliated party to honour obligations as they fall due.
Country Failure or delay by a country to honour obligations as they fall due.
Sovereign Inability to take action or obtain redress when a country defaults owing to sovereign immunity
Insured Arising from excess clauses on insured risks, risks not covered by insurance.
Regulatory Arising from violations or sudden imposition of laws and regulations by the regulatory authorities.
Off-Balance Sheet Arising from operations that do not show in the balance sheet.
(Bank Management Principles and Practice by Nwankwo; 1991)
2.3 CREDIT RISKS IN COMMERCIAL BANK LENDING
The major risk inherent in commercial bank lending is the credit risk. This is the risk that the interest or the principal or both on loans and securities will not be paid as agreed. When some loans become uncollectible and are written off, the bank losses both earning assets and some portion of its expected revenues. If loan losses continue to mount and persist for several years, the bank’s cushion for capital eventually becomes eroded and unless additional funds are injected, the bank may be forced to liquidation.
In addition to the risk of non-payment or delayed payment, credit risk also involves the risk that the payments may be rescheduled. It may involve no more than a formalised delay or special provisions and ultimate write-offs. It may also involve changing the nature of the debts outstanding, such as converting some to equity investments in which case payments would depend on returns from the investment.
2.4 FACTORS THAT INDICATE THE DEGREE OF CREDIT RISK
There are varieties of indicators of the degree of credit risk in the banks’ loan and investment portfolios. One is the extent of the range of interest rates on the portfolios while another is the quality of management and the competence of the loan officers. Also the proportion of secured loans in the total portfolio and the quality of the collateral securities. Furthermore, there is the issue of the legal perfection of the collateral securities to register the banks interest and the margin of the security cover on the loans; this is also imperative as it serves as admissible evidence in the court of law to the advantage of the bank.
On the other hand, banks cannot generally influence the external environment since it is exogenous and beyond their control; more so they affect every sector of the economy and not just the banking sector alone. Such external constraints are macroeconomic conditions, the impact of monetary and fiscal policies, the balance of payment and credit needs of the state or zone the banks serve or intend to serve. Even though banks make projections and incorporate them into their strategic plans, external forces cannot be accurately predicted. In view of this, they cannot be ignored in formulating the lending policy.
Perhaps the only factor in the macroeconomic environment that the banks can influence is the credit needs of the area they serve or intend to serve. They can do this by adopting an aggressive marketing policy to identify and anticipate customers’ needs, and formulate an aggressive lending policy to satisfy the resultant credit needs. This carries its dangers; enthusiasm may overrun the prudential reason of earlier success during booms and the banks may burn their fingers during the downturn. This is evidenced by the over involvement of banks in the stock market and energy sector coupled with the effects of the global economic crunch which has resulted in the CBN and federal government stepping in to recapitalise five banks to the tune of over three hundred percent each in August 2009 as they had eroded their funds.
2.5 AN ARTICULATED LENDING POLICY
Lending involves the creation and management of risk assets and it is an important task of bank management. As in liquidity and portfolio management, effective management of the lending portfolio requires an articulated lending policy. The policy should set out the bank’s lending philosophy and objectives including the modalities for implementation, monitoring, appraisal and review. For clarity and ease of communication to all concerned, the policy should be in a written form.
Since lending means taking risks and assessing the risk of defaults and movement in interest rates, a written policy would act as a signpost to guide management and lending officers. Well conceived lending policies and careful lending practices are essential to facilitate the credit creating function and minimize risk in lending. Such policy is also essential in ensuring that the lending and lending portfolio are in line with the objectives and aspirations of the bank, of the government and of the community the bank serves or intends to serve. It is, in other words, essential in ensuring that lending is effective in the sense of the quantum that maximizes the bank’s objectives and obligations of profitability with the economy’s objective of development.
Finally, the bank examiner and the deposit insurance fund require it; in fact, it is one of the first items called for during bank examination. In many cases its quality is taken as an indicator of the quality of management.
2.6 FACTORS IN LOAN POLICY FORMULATION
In formulating loan policy, banks normally take a number of factors into consideration. One is the constraints on lending which are both internal and external. The internal constraints include the bank’s capital, its earnings, its liquidity, the size, structure, maturity and volatility of its deposits, and the quality and competence of its management. Within limits, these internal constraints are within their control, and can be influenced by the bank. Bank capital, for instance, serves as a cushion for the protection of deposits and its relation to deposits influences the amount of risk the bank can afford to take and the amount of loans it can it can commit to a single borrower or to a group of related borrowers. If it wants to take more risks and grant more loans, the bank can increase its capital funds, subject to market sensitivity and receptivity.
Since earnings supplement the capital fund and in fact constitute the principal method of increasing net worth, all banks consider earnings as an important factor in formulating their loan policies. Emphasis, of course, may differ from bank to bank. Banks that emphasize earnings might adopt a more aggressive lending policy, committing more funds to long term lending or consumer loans since these earn higher than short term loans. In the process however, the bank may be increasing its risk exposure and therefore will be subject to prudential guidelines.
Banks also consider the structure of their deposits in formulating their loan policy, in terms of sources, mix, and volatility. Banks provide for loan funds only after providing for primary and secondary reserves. Even after these provisions, banks nevertheless are usually not unmindful of liquidity considerations in allocating the loan funds to different types and categories of the loan portfolio. Again, banks can influence the size of deposits through variations in the costs they charge and pay on such deposits and through purchased funds by liability management subject, as always, to the limit of prudence quality and profitability.
Another internal constraint is the technical competence of management with respect to lending. This refers to the ability, technical knowledge and experience of the bank’s personnel in lending. A bank may have competence in one area, e.g. real estate lending and little or none in energy sector lending; and this may be the emerging horizons in lending. A bank wishing to capitalize on the emerging opportunities can decide to upgrade or retool the lending personnel or buy the necessary expertise in the market, subject, of course to the cost/return considerations. Lastly, the amount of provisions for losses on bad and doubtful debts that has been made will also determine the impact of degree of credit risk.
Unlike the internal constraints, banks cannot generally influence the external environment since it is exogenous and beyond their control; more so they affect every sector of the economy and not just the banking sector alone. Such exogenous factors include the macroeconomic conditions, the impact of monetary and fiscal policies, the balance of payment and credit needs of the state or zone the banks serve or intend to serve. These forces influence deposit inflows and outflows in the loan portfolio. While the macroeconomic factors may have been forecasted and incorporated in the bank’s overall corporate plan, the fact that they cannot be predicted with exactitude means they cannot be ignored in formulating the loan policy.
Perhaps the only factor in the macroeconomic environment that the banks can influence is the credit needs of the area they serve or intend to serve. They can do this by adopting an aggressive marketing policy to identify and anticipate customers’ needs, and formulate an aggressive lending policy to satisfy the resultant credit needs. This carries its dangers; enthusiasm may overrun the prudential reason of earlier success during booms and the banks may burn their fingers during the downturn.
2.7 TAXONOMY OF A GOOD LOAN POLICY
The loan policy is a set of co-ordinate systems and strategies that outlines the basic criteria and guidelines on types of acceptable loans, requirements for documentation, collaterals and returns; and the system to be followed in documenting, structuring, monitoring and collecting the loans.
While the policies naturally would differ from bank to bank depending on size, market area, philosophy and technical competence, a well articulated lending policy should, in general, have three sections:
General objectives and modalities
Machinery for loan administration and routine administration
General Objectives and Modalities
The objective of the loan policy is to contribute maximally to the reconciliation of the bank’s liquidity profitability syndrome by keeping bank funds fully profitably employed, making sound and collectable loans and effectively addressing the legitimate credit needs of the community. Accordingly, this general objective section of the loan policy sets out its external and internal missions. Included are the bank’s perceived business role and trade area, its perceived market niche, desired profitability, maintenance of public confidence and the degree of competitiveness and aggressiveness the bank intends to employ. Some banks go beyond the general statements to quantify these intentions. These may include loan growth and earnings and the desired loan to deposits or to assets ratios.
The type of territory to be served is also indicated either in terms of local government area, state or zone, the determining factors being the resources, competition, and the demand for loans and capacity for effective supervision. The types of loan to be made are also specified. Factors to consider in so doing include the risks associated with various types of loans, the need for diversification to spread the risks, liquidity considerations, types of customers, the capabilities of the personnel and the relative profitability of the various types of loans. As far as possible, banks aim to diversify their loan portfolios among the various broad categories such as industry, manufacturing, real estate, personal and professional, commerce, etc. Quantities are also specified for each category in terms of percentage of the total loan portfolio to be allocated to each category.
To facilitate lending, reduce risks and maintain standard, the loan policy should specify the quality of loans to be made, which loans should be secured and which should not, the type and quality of acceptable securities, and loans and securities that are inadmissible, i.e. should not be made or accepted. Proportions might be specified between secured and unsecured loans; so also are margins to lend on acceptable securities and limits specified for each type of loan. The loan policy should also specify where authority and responsibility for the loan portfolio resides. Finally, the policy should specify the modality for loan appraisal and review.
Machinery for Loan Administration
This section sets down the machinery for the day-to-day or routine administration of the loan. This involves the definition and functions of the loan administration department, its structure and authority; the assignment of responsibilities and reporting, approving channels within the department and from the department to general management. The types of information and documentation required should also be specified as well as the modality or criteria for interpreting the information. The machinery for routine administration should also be indicated. Guidelines here include those for insurance, draw downs, excess lines, margin requirements, supervision, observance of covenants and management of problem loans.
Credit analysis is a loan function that is basic to minimizing loan losses. Through credit analysis, the bank attempts to determine the ability of the borrower to repay legitimate loans extended to him. By refusing credit to a potential borrower whose analysis reveals insufficient financial strength, the bank hopes to improve its chances to avoid unnecessary losses in its loan portfolio.
Credit analysis involves balancing the potential risks with returns. The borrower’s ability to repay the loan has to be determined; it involves familiarity with the type of lending and the economic activity involved, whether it is real estate, stock, energy (oil and gas), importation of goods, etc.
The borrower’s capacity and capital have to be assessed. This requires financial statement and security analysis to project the income and cash flow, assessment of the source of repayment and the economic and technical feasibility of the project. Assessment and forecast of the economic and political environment will also be required to ascertain whether, even if the proposition is profitable now it is likely to continue being profitable at least until the loan is fully repaid.
There are two methods involved in this kind of assessment namely, qualitative method and quantitative method. In qualitative method, the loan officer has to gather and appraise information on the borrower’s record of financial responsibility, determine his true or correct need for borrowing; identify the risks facing the borrower’s business under current and prospective economic and political situations and estimate the degree of his commitment regarding repayment. Quantitative analysis on the other hand, involves the analysis of historical financial data using various management ratios (Table 2.7) in order to project future financial results that will be used to evaluate the borrower’s capacity for timely repayment of the loan. It also enables the analyst to know if the business of the borrower can financially survive possible economic and industry reverses.
Apart from using management ratios, the loan officer also has to study and understand the economic and political environment. The key issues here include the resources profile in the economy, the development plans, fiscal and monetary policies for harnessing the resources, the economic vital indicators, the political structure, and the critical issues dominating economic and political thinking at any point or period in time. He also has to assess the peaceful resolution of the issues.
Table 2.7 Commonly Used Management Ratios in Credit Analysis
Type of Ratio Name Function Measurement
Liquidity a) Current Ratio Indicates the extent to Current Assets
which claims of short- Current Liabilities
term creditors are covered
by assets that can be readily
converted into cash
without loss. High values
suggest high safety margins for
short-term creditors but does
not consider quality of
receivables and inventories.
b) Quick Ratio A more reliable measure of Current Assets - liquidity than the current Inventories
ratio. Purges the current Current Liabilities
ratio of lack of concern for
the quality or liquidity of
Profitability a) Net Profit Margin Measures profitability of Net Income
OR the firm relative to sales. Sales
Return on Sales
b) Return on Equity Measures profitability of the Net Income
(ROE) firm relative to net worth or Total Equity or
owner’s equity in the firm. Net worth
c) Return on Assets Measures profitability of the Net Income
(ROA) firm in relation to assets Total Assets
Leverage a) Debt to Assets Measures the amount of Total Debt
debt employed by the firm Total Assets
in relation to the total assets
of the firm. The bigger the
debt the more volatile the
earnings because of the
b) Debt to Equity Measures the amount of Long Term Debt
debt employed by the firm Total Equity in relation to total equity or (Net Worth)
c) Times Interest Measures the coverage of Earnings before
Earned interest payments in Interest + Taxes
OR the debt. Annual Interest
Financial Charges Financial leverage ratios in Expenses
Coverage general indicate the degree
to which creditors, rather
than owners, are financing
the firm, and the firm’s ability
to meet long-term interest
and principal payments on debt.
d) Account Payable Measures accounts payable Average Accounts
Turnover in relation to Purchases. Payable
Activity or a) Collection Period Measures the degree of Average Accounts
Management efficiency with which Receivables
Efficiency management collects Sales Per Day
b) Total assets Measures the degree of Sales
Turnover efficiency with which Total Assets
management utilises assets
in relation to sales.
c) Inventory Measures management Sales
Turnover efficiency in turning over Average Inventory
inventories to generate
profit i.e. inventory control.
d) Fixed Asset Measures net sales over Sales
Turnover fixed assets. Net Fixed Assets
e) Receivables Measures sales over Credit Sales
Turnover receivable. Accounts Receivable
(Financial Management by Pandey 1992)
2.8 LOAN OFFICER’S GUIDE IN CREDIT ANALYSIS
Importance of credit analysis – determining creditworthiness, capacity and willingness of borrower to honour obligations, minimize risks and maximize returns.
Loan officers should:-
Study the environment – Environmental Scanning
The banking environment, the financial system
Bank’s corporate plan and loan policy and objectives
External environment – political, economic and legal forces, policies and objectives of government, issues of public interest and conflict resolution process.
Conduct credit investigation
Six factors in credit investigation:- Character, Capital, Capacity, Collateral, Conditions, Management.
Conduct financial statement and security analysis
Examine conditions: of borrower and that of project – determine the economic and technical feasibility or viability.
Ascertain Management Capability
6Ms of management – Men, Materials, Machines, Methods, Money, Management
Have judgemental ability
Technical competence, Training, Experience, Calmness, Composure, Good interpersonal relation with head office and customer.
The Loan Package
Packaging and structuring
The loan agreement
Covenants, cash flow, trigger clauses, balance sheet clauses, etc
Availment, monitoring, follow-ups, reviews, etc
(Bank Management Principles and Practice by Nwankwo)
2.9 RISK MANAGEMENT
Risk management is a continuous process of corporate risk reduction that is done not only as a defensive mechanism but proactive one. Risk management is really about how firms actively select the type and level of risk that is appropriate for them to assume. Most business decisions are about sacrificing current resources for future uncertain returns. In this sense “risk management” and “risk taking” are not opposites, but two sides of the same coin. Together they drive all our modern economies. The capacity to make forward-looking choices about risk in relation to reward lies in the heart of the management process of all enduring successful corporations.
THE RISK MANAGEMENT PROCESS
EVALUATE PERFORMANCEIDENTIFY RISK EXPOSURESMEASURE AND ESTIMATERISK EXPOSURESASSESS EFFECTS OFEXPOSURESFIND INSTRUMENTS AND FACILITIES TO SHIFTOR TRADE RISKSASSESS COSTS AND BENEFITS OF INSTRUMENTSFORM A RISK MITIGATION STRATEGY:AVOIDTRANSFERMITIGATEKEEP
(The Essentials of Risk Management by M. Grouhy, D. Galai, R. Mark)
RISK MANAGEMENT AND CONTROL STRATEGIES
There are three strategies by which banks can manage and control risks and the bank must specify the strategy that best meet its risk management objectives. One is to prevent the risk from occurring, and having occurred to minimize the loss. Another is to adopt measures to transfer the risk to some external agency and the third is to assume and retain the risk. The strategies are outlined as follows:
Risk Avoidance and Minimization
RISK AVOIDANCE AND MINIMIZATION
In order to avoid risks, especially credit risk, banks have strong preference for self-liquidating short term lending strategy; they are prepared to match increased credit risks with higher returns only within narrow limits. They would, in fact, prefer not to touch medium and long term lending at all. In many cases this risk avoidance and minimization strategy is reinforced by regulatory provisions through moral suasion and other stipulations that limit the scale of balance sheet activities such as currency and interest rate swaps and options and other hedging devices. Other ways of executing this strategy include adequate control measures, staff competence and efficiency in credit analysis and in assessing credit worthiness, exposure limits and diversification of operations to avoid undue concentration on particular activity or sector.
No amount of avoidance and minimization measures, no matter how comprehensive and effective, can completely eradicate risks. Whatever bank management does, some risks must remain. Therefore, this strategy addresses the remaining risks by transferring them to an external agency such as an insurance institution. This requires that the costs and benefits of the transfer should be carefully weighed in terms of feasibility, practicability and the insurance premium. However, while some risks are insurable, such as theft, fraud, fire, etc, some are not insurable, such as risks arising from changes in interest and exchange rates. Besides ‘excess clauses’ imply that there are limits to the insurance coverage even for the insurable risks. These margins and the insurance premium have to be taken into consideration in the decision to transfer risks to an insurance agency. Other forms of transfer include collective guarantees and guarantees of government and their agencies.
If risk avoidance measures cannot prevent or avoid all risks, and if not all risks are transferable, it follows that some risks must remain and bank management must devise a strategy to address the remaining risks. Such strategy is risk retention whereby the bank assumes those risks that can neither be avoided nor transferred. Risk retention is a form of self-insurance. The insurance fund is the net worth, and incomes earned on current operations serve as the insurance premium required to keep the net worth an adequate level. It can be done through interest margins charged on operations and designed to cover operating expenses and some losses.
On the whole, credit risk is a core area in banking which commercial banks cannot do without, however they can deal with it and manage it with these three key principles: selection, limitation and diversification. Selection implies who to lend to while limitation refers to the amount to lend in the light of the assessed creditworthiness of the borrower. Macroeconomic developments may result in unforeseen changes in the fortunes of companies and industries, of geographical areas or even of whole countries. This therefore requires the necessity for limits and diversification in different types of lending or different types of economic activity of borrowers, economic sectors and different geographical regions. The more the limit and the more diversified, the less the credit risk. The more concentration, the greater the risk.
Since the objective of credit limits and diversification strategy is to restrict losses to what bank can withstand without jeopardising its solvency, the limits should be set primarily in relation to net worth of the bank. In addition, an appropriate matching for monitoring and control of concentrations must be established in terms of effective credit analysis system, guidelines and reporting modalities to contain the potential
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This chapter is primarily concerned with the methods and procedures adopted by the researcher to generate relevant information for the study vis-a-vis the techniques used for analysis. This chapter is presented under the following headings:
Area of study
Method of Investigation
Measurement of Variables
Validation of Research Instrument and Testing
Data Analysis Technique
3.1 AREA OF STUDY
Basically, this research work will be pivoted on the management of credit risk in commercial banks lending. Due to the time constraints, the study limits its scope to ten banks in the country; which include First Bank, Guarantee Trust Bank, Ecobank, United Bank for Africa, Zenith bank, Intercontinental Bank, Oceanic Bank, Afri Bank, Union Bank and Diamond Bank.
Since the head offices of these banks are located in Lagos, the study therefore focuses on their branches located Lagos. The questionnaires were distributed to their various branches in the Lagos metropolis.
3.2 METHOD OF INVESTIGATION
Fundamentally, the method of investigation to be employed in any research endeavour is determined by the very nature of the research assignment.
Hence, in the research work both primary and secondary methods of investigation will be effectively employed to find out the impact of effective credit risk management on the variables- non-performing loan as well as the profitability of the banks.
3.3 SAMPLING PROCEDURE
3.3.1 The Population
Considering the many banks in the country (24 at present) and the realization of the time constraints, the target population is reduced to cover 10 commercial banks in the country.
Ten banks were selected in view of the fact that the researcher was unable to sample all the commercial banks in the country.
3.3.2 The Sample Size
The researcher is unable to carry out research on all the commercial bank because of the time constraint. These ten banks were selected on the basis that they are systemic to the Nigerian economy. Below is the list of the ten banks in question.
List of Participating Banks
First Bank Nigeria Plc
Guarantee Trust Bank Plc
Ecobank Nigeria Plc
United Bank for Africa Plc
Zenith Bank Plc
Intercontinental Bank Plc
Oceanic Bank Plc
Union Bank Plc
Afri Bank Plc
Diamond Bank Plc
3.4 MEASUREMENT OF VARIABLES
To have an appropriate basis for stipulating how quantitative values would be assigned to each variables of a study, which is termed as operational measure of a variable, a clear definition of how the variables would be used in a study is required.
EFFECTIVE RISK MANAGEMENT
This is an independent variable in the study and is measured by responses of respondents to items 14, 15,16 and 17 of the questionnaire.
NON-PERFORMING LOANS AND PROFITABILITYs
The non- performing loans and the profitability represent dependent variables in the research study.
In view of the large population involved the researcher considered the adoption of cross-sectional survey as suitable and more appropriate for the research work. The cross sectional survey according to Baridam (2001) is widely used in administrative or social science research because of the complex relationship that exists between variables that are not subject to manipulation. He further maintained that cross-sectional survey can be thought of as analogous to the taking of a snapshot of situation and analysing them; and the survey relies on a sample of elements from the population of interests which are measured at a single point in time. The researcher made use of the personal interviews, questionnaires, and observations to gain insights into research work.
VALIDATION OF RESEARCH INSTRUMENT
Reliability of an instrument measures its accuracy, precision and the extent to which it is free from errors; in this study, it is determined by conformity of responses to established facts. Validity of an instrument measures what it is intended to measure, which determines its relevance. The researcher intends to use a close ended questionnaire in line with Likert Scale. This instrument will be used to gather responses which are relevant to the variables being measured.
3.7 DATA ANALYSIS TECHNIQUES
In analysing the data collected, descriptive statistics was used and the results were expressed in percentages. The following hypotheses were formulated and tested:
Effective risk management has no impact on reducing non-performing loans in commercial banks lending.
Effective risk management has no impact on improving the profitability of commercial banks.
The first hypothesis was tested using Chi-Square while the second was tested using Spearman Rank Correlation Coefficient. The justification for this tool lies in its suitability to test for independence among nominally grouped data. The formula is as follows:
X2 = (Fo – Fe) 2
Fo = Observed frequencies
Fe = Expected frequencies
The degree of freedom (df) = (R-1)(C-1) Where:
R = The number of rows
C = The number of columns
The researcher used the responses to questions 15 and 16 of the questionnaire to test and analyse the hypotheses.
Baridam, D.M (2001) Research Methods in Administrative Sciences Third Edition; Sherbrooke Associates, Port-Harcourt.
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Fisher, R.A. & Yates, F. Statistical Tables for Biological, Agricultural and Medical Research Sixth edition; Oliver Boyd Ltd, Edinburgh.
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Contained in the chapter are the attempts to analyse the findings of the research through the questionnaires administered to the selected commercial banks in Nigeria. Data were presented with the use of tables, frequencies and percentages. In analysing the data, the researcher considered all questions to be relevant and of research interest. Inferences were drawn from the respondents and facts from the interviews conducted. Hence, the researcher has considered it ideal to present the chapter with due consideration to the analysis of data, hypotheses testing and summary.
4.1 DESCRIPTIVE ANALYSIS
This research focused on ten commercial banks in Nigeria. Questionnaires were distributed among the selected banks for the study. A total of 105 questionnaires were prepared and distributed randomly, out of which 87 were completed and returned indicating a response of 82.9%. The effort of the researcher to personally distribute and collect the questionnaires was responsible for the success recorded on the response. Table one below shows the order of questionnaires distributed and the rate of return.
Questionnaire Distribution and Return
First Bank of Nigeria Plc
Union Bank of Nigeria Plc
Afribank Nigeria Plc
SOURCE: SURVEY DATA
4.2 ANALYSIS OF DATA
The responses were analysed and presented in tabular form
Length of Service:
YEARS OF SERVICE
1 – 3 years
4 – 6 years
7 – 9 years
10 years and above
The above table revealed that majority of the staff of the banks have spent at least four years in their various banks indicating 79.3%
Department of Respondents:
From the table above, it is very clear that risk management and marketing departments have the largest response rate, totalling 63.2%. The implication of this is that majority of the staff interviewed have the practical knowledge of risk management in the banks. This will indeed add value to the precision and validity of the outcome obtained from this research work.
Level of Management:
LEVEL OF MANAGEMENT
The table above shows clearly that the larger number of the banks’ staff interviewed fall within the lower and middle management cadres. This implies that most of the banks rely on the middle management cadre to implement their policy on credit risk management.
Response on whether years of experience enhance effective risk management or not:
The result in the table reveals that 69% of the staff interviewed agreed that years of experience is a key determinant in effective risk management of the banks. Only 31% of the staff disagreed that years of experience is relevant in effective risk management.
Response on whether Credit Risk Management is manned by highly experienced professionals or not
From the table above, it is clear that majority of the people interviewed posited that the Credit Risk Department is manned by highly experienced professionals while few of the staff opposed it.
4.3 TESTING OF HYPOTHESES
Sequence to the presentation of the data generated in the course of this research work, the hypotheses postulated by the researcher in chapter one were tested using the appropriate statistical tools to confirm or reject such postulations.
4.3.1 Hypothesis One
The first hypothesis “Effective risk management has no impact on reducing non-performing loans in commercial banks lending” was tested with question 15 of the questionnaire using the Chi-Square Test. The justification for this tool lies in its suitability to test for independence among nominally grouped data.
Chi-Square (X2) = (Fo - Fe)2
X2 = Chi-Square
The degree of freedom (df) = (R-1)(C-1)
R is the number of rows
C is the number of columns
Effective Risk Management and Non-Performing Loans
EFFECTIVE RISK MANAGEMENT
To determine the level of significance of the computed Chi-Square, the distribution of Chi-Square values is referred.
CALCULATIONS FOR HYPOTHESIS ONE
(Fo - Fe)
(Fo - Fe)2
(Fo - Fe)2/Fe
X2 calculated = 15.86
Tabulated X2 at 0.05 level of significance
Degree of freedom (df) = (R-1)(C-1) = (3-1)(3-1) = 4
X2 Critical = 9.49
Since X2 calculated is greater than X2 Critical, we reject the Ho thereby concluding that effective risk management has impact in reducing non-performing loans in commercial banks’ lending in Nigeria.
4.3.2 Hypothesis Two
The second hypothesis “Effective risk management has no impact on improving the profitability of the banks” was tested using Spearman Rank Correlation Coefficient with the formula:
Rs = 1 – 6Ed2
Question 16 of the questionnaire was used. In order to apply the Spearman Rank Correlation Coefficient formula, the researcher transformed nominal to ordinal and ranked as follows:
Very High = 5
High = 4
Moderate = 3
Low = 2
Very Low = 1
N = Number of Respondents
Rx = Rank of Effective Risk Management
Ry = Rank of the Banks’ Profitability
D = Difference between ranks
D2 = Square of difference
SUMMARY OF CALCULATION
N = 87
Ed2 = 56
Rs = 1 - 6Ed2/N(N2-1)
= 1 – 6(56)/87(872-1)
= 1 – 336/658416
= 1 – 0.00051
Using Z test to analyse the null hypothesis:
Z = Rs ( N-1 )
= (0.999) 86
= (0.999) (9.27)
For a two tailed test with an X of 0.05 the critical Z values are + or -1.96. Since Z = 9.26 falls outside the critical Z values, the null hypothesis is rejected and therefore we maintain that effective risk management has impact on improving the profitability of the banks.
SUMMARY, CONCLUSION AND RECOMMENDATION
Today, the subject of risk occupies a very central position in the business policy consideration of bank management and it is not surprising that customers assess financial institutions on this basis. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, lack of attention changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties.
Risk management has a far reaching effect on the survival of the banks; therefore the researcher tried to find out how effective risk management can ensure the continued survival and sustained profitability of commercial banks in Nigeria.
The recent global financial crisis and the shake-up of the Nigerian banking sub-sector has made it abundantly clear that a more advanced, integrated and scalable infrastructure is needed to protect the financial industry, investors and other stakeholders. It is aptly stated as ERM (Enterprise Risk Management). ERM calls for corporations to identify all the risks they face, decide which risks to manage actively and then make that plan of action available to all stakeholders (not simply shareholders) as part of their annual reports. It ensures that all risks to which the firm is exposed to are managed holistically across two dimensions (I) type of risk and (II) scope of activities. ERM enables companies to manage risks that defy easy measurement or a framework for management.
Risk management is a central part of any organisation’s strategic management. As earlier noted, it is the process whereby organisations methodically address the risk attached to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities. The effective and efficient management of risk is critical to the continued growth and sustainability of financial institutions as well as the development of the economy.
Banks as we know are subject to a wide array of risks in their operations. These risks have increased, especially in recent times as banks diversify their assets in dynamic markets. It is therefore necessary to ensure that effective risk management strategies are put in place to mitigate these risks.
It is also important to emphasise that the regulatory authorities alone cannot prevent business failures. In the banking industry the role of regulators and supervisors is to act as facilitators in the process of risk management, and to strengthen the framework in which risk management is undertaken. Therefore, the quality of bank management and especially, the risk management process are crucial in ensuring the safety and soundness of the banking system.
Risk management does not mean risk free and in today’s world, managing risk has become a necessity not an option. While many banks are still dealing with fall out from the economic crisis, it is noteworthy to state that there has been a positive outcome because it has heightened focus on risk governance and has also forced senior management to fundamentally rethink their strategic approach to risk. Banks may adopt the following strategies:
REASSESSING AND INTEGRATING RISK APPETITE
The board and senior management should clearly define risk tolerance and limits. The level of acceptable risk musk be assessed and determined for each risk type and line of business. Disparate business goals, weak communication and lax enforcement can cause a disconnection between the risk parameters set at the board and senior management level and the day -to-day management of the bank. So therefore it must be supported by effective communication such that the risk parameters cascade down to the business unit and desk level in order to ensure awareness throughout the bank.
STRENGTHENING RISK IDENTIFICATION PROCESSES
Risk should be looked at holistically and a more vigilant stance should be assumed on risk identification policies and procedures. This can be in form of daily real-time monitoring of risks, stricter portfolio risk-grading systems and tighter screening of on-boarding procedures for new clients. Banks can also form a cross-functional risk identification committee composed of compliance, treasury and business units.
SHIFTING FOCUS ON RISK CLASSES
As new risks are surfacing, there should be enhanced management of key risks as well as risks that defy measurement.
A) Credit Risk:
1. Conduction of stringent independent credit analysis both for borrowers and credit providers and guarantors.
2. Deployment of special workout teams that will manage loan portfolios more rigorously to resolve remnant structural credit positions and monitor deterioration in credit quality, charge-offs and related delinquencies.
3. Risk Officers should be empowered to perform their duties professionally and independently without undue interference.
4. Relationship managers should be duly accountable for delinquent loans in their custody.
B) Operational Risk: Assessing the transaction dynamics
1. Standardizing documentation of process and controls
2. Improving data gathering, quality and timeliness.
3. Developing methodologies and metrics to quantify risks.
4. Conducting scenario analysis by risk types in order to keep abreast of situations in the business environment.
C) Liquidity Risk: Liquidity risk must be factored more fully into risk management.
1. Committee that had been set up should meet regularly at short intervals to track and monitor liquidity positions.
2. Review of basic risk governance policies and procedures in order to strengthen the bank.
3. Upgrade data quality and collection
4. Improvement of reports in a timely manner so as to support real-time decision making.
5. Effective liquidity stress testing so as to enhance valuable forecasts into the capital and strategic planning process.
Market Risk: The extreme volatility in the market is calming down and institutions are breathing a collective sigh of relief, but the contagion impact will remain on people’s mind for a long time to come. The extent of the crisis and speed with which it swept through the banking industry is very much on every one’s mind.
One tool that helps the financial markets run smoothly is a set of international banking agreements called the
http://www.investopedia.com/terms/b/basel_accord.aspBasel Accords. Basel I Accord was issued in 1988 but as a result of its shortcomings, Basel II Accord was issued in 2004 to address the shortcomings. These accords coordinate the regulation of global banks, and are "an international framework for internationally active banks". The accords are obscure to people outside banking, but they are the backbone of the financial system; the Basel Accords were created to guard against financial shocks, which is when a faltering capital market hurts the real economy, as opposed to a mere disturbance. The Basel Accords determine how much equity capital - known as regulatory capital - a bank must hold to buffer unexpected losses. So, in simple terms, the Basel Accord requires banks to have an equity cushion in the event that assets decline, providing depositors with protection.
The regulatory justification for this is about the system: If big banks fail, it spells systematic trouble. If not for this, banks would have been left alone to set their own levels of equity -known as economic capital - and let the market do the disciplining. So, Basel attempts to protect the system in much the same way that the
http://www.investopedia.com/terms/f/fdic.aspNigerian Deposit Insurance Corporation (NDIC) protects individual investors.
ERM AND COPORATE GOVERNANCE
Many firms have run into trouble due to risk management failures accompanied by corporate governance failures. This lethal combination brought about the swift demise of Enron, an AAA rated institution regarded as a leader in risk management with superb management capabilities in its industry. Weak corporate governance was also a dominant factor in the cases of banks bailed out by the CBN. Banks can have the best risk management framework but if these are not underpinned by strong corporate governance, risk management will not protect the rights of stakeholders.
The global financial crisis and, in particular, the Nigerian version of the crisis has demonstrated that ERM needs to be anchored by a comprehensive corporate governance framework and compliance process for Nigerian banks to move forward. The full adoption of these principles will enhance complete, timely, relevant, accurate and accessible risk disclosure to all stakeholders.
UPGRADING REPORT ANALYSIS AND DELIVERY
Risk reporting is becoming more comprehensive, actionable and timely. Management reports should deliver real actionable value unlike the former “data dump system” that characterized risk reporting in the pas. Furthermore, teams should turn their attention to delivering information more quickly in a timely efficient manner that will support real-time decision-making. It is not enough to write reports, the reports should be acted upon before there can be translation of organizational goals.
UPGRADING AND REINFORCING FORECASTING
The systems and methods of forecasting should be improved. There is need for more sophisticated predictive tools that will enable management to assess the implications of market events on and across categories of risk. The bank should rely less on historical data and assumptions and embrace proactive tools and futuristic models.
STREAMLINING TECHNOLOGY TO SUPPORT EFFICIENCIES
The bank should leverage technology to support risk management more effectively.
Instruction: Please fill in or tick the box provided where necessary
1. What is the name of your bank? ................................................................
2. How long has your bank been in business?
5yrs 5-6yrs 7-9yrs 10yrs and above
3. What is the length of your service in the bank?
1-3yrs 4-6yrs 7-9yrs 10yrs and above
4. Which department do you work?
Operation Administration Human Resources
Risk Management Marketing Others
5. Indicate the level you belong in the official hierarchy of your bank.
Officer Middle Management Top Management
6. Do you think years of experience enhances effective credit risk management?
7. As a corollary to the above, do you think highly experienced professionals man the Credit Risk Department of your bank?
8. If yes, is it written down as a policy?
9. How many times have you witnessed the policy on credit risk being changed in your bank?
1 Time 2 Times 3 Times 4 Times and above
10. Which of these factors are responsible for the change?
Increasing rate of non –performing loans
Downward trend in the profitability of the bank
11. Do you think all conditions for granting credit are often fulfilled before availment?
12. How would you rate the relevance of credit risk management in your bank?
Very High High Moderate Low Very Low
13. Considering all variables, how effective is credit risk management on the performance of your bank in the last five years?
14. To what extent has effective risk management influenced your bank’s profitability in the last five years?
15. To what extent has effective risk management helped to reduce non-performing loans in your bank?
16. To what extent has effective credit risk management helped to improve your bank’s total asset quality, deposit liabilities and its capital base?
17. Does your bank organize on-the-job training for the staff especially those ones in the special area of credit risk management?
18. If yes, to what extent has such training helped the performance of the staff in the area of effective credit analysis?
PROBABILITY DISTRIBUTION TABLE
0.95 0.90 0.80 0.70 0.50 0.30 0.20 0.10 0.05 0.01 0.001
1 0.004 0.02 0.06 0.15 0.46 1.07 1.64 2.71 3.84 6.64 10.83
2 0.10 0.21 0.45 0.71 1.39 2.41 3.22 4.60 5.99 9.21 13.82
3 0.35 0.58 1.01 1.42 2.37 3.66 4.64 6.25 7.82 11.34 16.27
4 0.71 1.06 1.65 2.20 3.36 4.88 5.99 7.78 9.49 13.28 18.47
5 1.14 1.61 2.34 3.00 4.35 6.06 7.29 9.24 11.07 15.09 20.52
6 1.63 2.20 3.07 3.83 5.35 7.23 8.56 10.64 12.59 16.81 22.46
7 2.17 2.83 3.82 4.67 6.35 8.38 9.80 12.02 14.07 18.48 24.32
8 2.73 3.49 4.59 5.53 7.34 9.52 11.03 13.36 15.51 20.09 26.12
9 3.32 4.17 5.38 6.39 8.34 10.66 12.24 14.68 16.92 21.67 27.88
10 3.94 4.86 6.18 7.27 9.34 11.78 13.44 15.99 18.31 23.21 29.59
Source: R.A. Fisher and F. Yates, Statistical Tables for Biological Agricultural and Medical Research, 6th ed., Table IV, Oliver & Boyd, Ltd., Edinburgh.
29 Theory and Practice; Intercontinental Educational Publishers, Owerri.
16. To what extent has effective credit risk management