AN ASSESSMENT OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN BANKS

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Risk Management is the identification assessment and prioritization of risks. It is the effect of uncertainty on objectives, whether positive or negative followed by coordinated and economical application of resources to monitor and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities (Okeh, 2006). The survival of every commercial bank depends on its ability to manage its risks and loans or advance portfolio effectively. However, in the recent past, commercial banks in Nigeria witnessed rising non-performing credit portfolios and these significantly contributed to the financial distress in the banking sector.  The financial organization needs to manage the credit risk inherent in the entire portfolio as well as the risk in individual credit or transaction. This is so because the survival and ability of the financial institution to compete depend on their ability to profitability and manage credit risk. This is the reason why lending is based on the two fundamental products of banking: money and information. Banks obtain these products from customers themselves by offering customer valuable services. They package money and information about their borrowers together with valuable banking services to create loan agreements and sell the loan agreements back to their customers (Hempel and Simonson, 2007). As such, the risk rating system in financial institutions contains both objective and subjective elements. The objective aspect is based on financial statements and the application of certain financial ratios that reflect liquidity, leverage, and earnings. Despite the requirement that risk is quantified, risk rating systems always have a subjective dimension that attempts to capture intangibles such as the quality of management, the borrower’s status within the industry, and the quality of financial reporting. These subjective items may result in inconsistencies. It is in this regard that many financial institutions have faced difficulties over the years arising from their inability to effectively manage credit risk. As such the major cause of serious banking problems continues to be directly related to tax credit standards for borrowers and counterparties, poor portfolio risk management, or lack of attention lead to a deterioration in the credit standing of a bank’s counterparties. Hence, the need to investigate the subject matter of this research becomes imperative.

 

1.2    STATEMENT OF THE PROBLEM

Commercial banks in the recent past witness rising non-performing credit portfolios sequel to the inability of their management to effectively manage risk and credit administration. That problem resulted in high bad debts in a commercial bank and a number of other commercial banks were classified as distressed banks by the monetary authorities. Consequently, the need to examine the subject matter: An Assessment of risk management and credit administration in Union Bank Plc, Kaduna Main branch becomes worthy of investigation.

 

1.3    OBJECTIVES OF THE STUDY

The central objective of the study is to assess risk management and credit administration in Union Bank Plc, Kaduna. The specific objectives are:

i)    To examine the risk management system in Union Bank Kaduna Main Branch.

ii)   To assess credit administration in Union Bank Kaduna Main Branch.

iii) To identify the constraints militating against risk management and credit administration in Union Bank.

iv)  To proffer workable solutions to the identified problems.

 

1.4    SIGNIFICANCE OF THE STUDY

This study will be beneficial to financial institution especially Union Bank Plc, as they utilize the finding of this study as a basis for policy formulation regarding risk management and credit administration in Banks. The shareholders, stakeholders and the entire society will benefit from this study.

 

1.5    RESEARCH QUESTIONS

i)       How is risk managed in Union Bank Kaduna Main Branch?

ii)      How is credit administered in Union Bank Plc Kaduna Main Branch?

iii)  What are the constraints militating against risk management and credit administration in Union Bank Plc Kaduna Main Branch?

iv)    What are the solutions to the identified problems?

 

1.6    SCOPE OF THE STUDY

The study shall cover an empirical examination of the assessment of risk management and credit administration in Union Bank Plc Kaduna. To this end, the study will examine how risk is managed in Union Bank as well as credit administration. The study shall cover a time from 2006 – 2011.

 

1.7    Definition of Terms

1.  Credit Risk: This refers to delinquency and default by borrowers i.e. failure to make payment as of when due.

2.  Pure Risk: This refers to a reduction in business value as a result of damage to business property by theft, robbery, fire, flood or the prospect of premature death of an employee due to work-related illness or accident.

3.  Price Risk: This refers to variability in cash flows due to the change in input and output prices.

4. Credit Administration: This is the system used in managing the exposure of financial institutions to loan delinquency and default.

5.  Business Risk: This refers to variability in cash flow.

6. Loan Appraisal: This is the process of determining in advance the various lending parameters and determining the overall loan limit for each borrower based on his debt capacity, loan duration.

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