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THE IMPACT OF RISK MANAGEMENT PRACTICE ON CREDIT QUALITY
(A study of Nigerian Banks)
ALPHONSUS, IDONGESIT UDEME
BEING A RESEARCH PROJECT REPORT PRESENTED TO THE DISTANCE LEARNING INSTITUTE UNIVERSITY OF LAGOS IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF BACHELOR OF SCIENCE (B.Sc.) DEGREE IN BUSINESS ADMINISTRATION
This is to certify that this project work was carried out by ALPHONSUS, IDONGESIT UDEME under the supervision of Dr. M. O ADELOWOTAN, and submitted to the Distance Learning Institute, University of Lagos, for the Award of the Degree in Bachelor of Science (B.Sc.) in Business Administration.
Dr. M. O. ADELOWOTAN Date
PROJECT SUPERVISOR AND HEAD OF
This project is dedicated to God Almighty
It is necessary, at this juncture to acknowledge the contributions of certain individuals towards the success of this project. My first thanks goes to my project supervisor and Head of Department/Coordinator, Dr. M. O. Adelowotan for proof reading of the earlier draft of this project. My thanks also goes to Dr. J.A. Adewara and the entire lecturers in Business Administration in Distance Learning Institute, University of Lagos for skills and knowledge imparting.
I acknowledged the impact of my parents, Chief Engr and Mrs. Alphonsus John Udeme and Late Chief Mrs. Veronica Alphonsus John Udeme. The list of those I am indebted to will be incomplete without including my siblings, friends, and well wishers which are Steve Unwan, Bankole Adesanmi, Mathew Ariyo, Udoh Unyah Family in Nkikara Village, Chinyere Onyedi among others because they stood and encourage me greatly till the completion of this programme.
My special thanks goes to my brothers, Engr. Emmanuel, Ignatus, Otobong and Nduenie Alphonsus, and I owe an unquantifiable gratitude to my fellow graduates in the Faculty of Business Administration for acting as a magma for intellectual re-direction.
The cardinal objective of banks in lending is to ensure repayment as at when due. No doubt, the inability of borrowers to meet their obligations as at when due with most commercial banks in Nigeria has been on the increase in recent times and the negative effect of this on some banks recently is obvious as some have been liquidated, while others are on the brink of collapse. Thus, the effect of this on the economy needs not be over-emphasised. This made two hypotheses to be tested and the conclusions were arrived at that poor credit management arising from poor credit policies leads to the emergence of bad debts and poor credit/loan management. In order to save the bad debts situation of Nigerian commercial banks, it was found out that new approach, other than the current approaches of bad debts recovery exercises leads to an appreciable improvement of the bad debts situation. This study made use of the research survey method. Based on the above findings, some recommendations were being made that bad loans/debts should be effectively managed and the lending policies of commercial banks in Nigeria should be improved upon by strengthening bank regulations and prudential guidelines for a better financial banking industry.
TABLE OF CONTENT
Title page i
Certification / Approval ii
1.1 Background of the Study 1
1.2 Statement of the Problem 3
1.3Aim and Objective of the Study 5
1.4Relevant Research questions 5
1.5Relevant Research hypothesis 5
1.6 Significance of the study 6
1.7 Scope of the study 6
1.8 Definition of terms 6
2.2 Theoretical Framework 9
2.2.1 Institutional Theory 9
2.2.2 Contingency Theory 10
2.2.3 The Economic Theory Of Regulation 10
2.2.4 Management By Objectives 11
2.2.5 The Anticipated Income Theory 13
2.2.6 Positive Accounting Theory 13
2.3 Empirical Review Of Literatures 14
2.3.1 What Is Risk? 14
2.3.2 Functional Definition Of Risk 16
2.3.3 Types Of Banking Risk 17
2.3.4 Taxonomy Of Banking Risks 18
2.3.5 Credit Risks In Commercial Banking Lending 21
2.3.6 Factors That Indicate The Degree Of Credit Risk 21
2.3.7 An Articulated Lending Policy 22
2.3.8 Factors In Loan Policy Formulation 23
2.3.9 Taxonomy Of A Good Loan Policy 25
2.3.10 Loan Officer’s Guide in Credit Analysis 33
2.3.11 Risk Management 34
2.3.12 Risk Management And Control Strategies 36
2.3.13 Risk Avoidance And Minimization 36
3.2 Research Design 41
3.3 Population of the Study 41
3.4Sampling, Procedure And Sample Size 42
3.5Data Collection Instrument And Validation 42
3.6Method Of Data Analysis 43
3.7Limitation Of The Methodology 44
Data Presentation, Analysis And Interpretation
4.2Analysis According To Research Questions 46
4.3Testing Of Hypothesis 50
4.3.1Hypothesis One 50
4.3.2 Hypothesis Two 54
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary 57
5.2 Conclusion 58
5.4 Recommendations 58
Appendix 66dewara and the entire lecturers in Business Administration in Distance Learning Institute, University of Lagos for skills and knowledge imparting.
2.2.6 Positive Accounting