A CORPORATIVE ANALYSIS OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN BANKS (A CASE STUDY OF GUARANTEE TRUST BANK, ACCESS BANK AND FIRST BANK)

ABSTRACT

The study was aimed at analysingrisk management and credit administrations in banks, case study of Guarantee Trust Bank, Access Bank and First Bank, Maitama, Abuja. The survey research was used in this study to sample the opinion of respondents. This method involved random selection of respondent who were administered with questionnaires. The target population of the study comprised of selected employees of Guarantee Trust Bank, Access Bank and First Bank, Maitama, Abuja. The questionnaire administered was one hundred and ten (110) copies and one hundred copies retrieved which constitute the sample size. The descriptive and analytical approach was adopted using Chi-square to test and analyze the hypotheses earlier stated. The findings revealed that there is a significant impact of effective credit administration on falsified customer’s security documentation in Nigerian banks and that there is a significant relationship between risk management and credit administration in Nigerian banks. It was therefore concluded from the findings that risk management in banking has become necessary because the present financial crisis in the Nigeria banking industry has been attributed to a lot of factors and the issue of non-performance of assets and declaration of fictitious projects has become the order of the day in our banking system. This is a result of poor credit management in the sector causing many banks to have become distressed. It was recommended thatbanks should ensure that their credit policies are firmly strengthened, revised and implemented properly; it would lead to reduction in the bank risk assets portfolio and enhance profitability of the bank.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The banking industry is well-known for its role as an intermediary in providing financial assistance (credit) to the economy. This role is typically fulfilled in a variety of ways, the most common of which is the provision of loans and advances to customers, which accounts for the majority of bank lending. Apart from loans and advances, banks also issue banking or bank credits or bonds for and on behalf of their customers.A bank is defined as “a person, institution licensed to receive money as deposit through advertisement or solicitation and limited to a fixed amount that may provide for interest payment or re-payment of deposit amount” by the Banks and Other Financial Institutions Decree (BOFIA) of 1991. Banks play a critical role in the economy of every country as financial intermediaries. The importance of banks to the economy is based on their ability to mobilize credit and grant credit to a variety of economic actors for the production of goods and services while earning a comfortable profit margin. The aforementioned goals will not be met if credit is not properly channelled, controlled, and administered. Rather, it may have serious economic ramifications. The most devastating effect of all the factors contributing to bank distress and failure in Nigeria is poor credit administration.

Credit administration is the process of managing a loan in order to reduce losses. Reporting, record keeping, portfolio monitoring, compliance checks, and coordinating credit functions and staff are all part of credit administration. According to (Egbe, 2011), credit administration entails evaluating loan proposals, assessing borrowers’ capacity, and disbursement and monitoring of loans. According to Anyanwaokoro (2016), one of the most basic functions of banks is credit administration and management, which accounts for a significant portion of their revenue. It is the most dangerous, difficult, and profitable function that banks perform. The ability of a bank to manage credit risk has always been a key strategic value added. Without effective risk assessment, control, and follow-up strategies, this will not be possible. A strong and effective credit management process reinforces and complements the company’s overall goals and objectives. The main issue that banks face in credit administration is that some of the credit facilities they have been granted are not repaid, resulting in the loss of depositor funds and the emergence of bad debts.

According to Odufuye (2017), an effective loan monitoring system will include measures to: Monitor compliance with established covenants, Examine collateral coverage, if available, in light of the creditor’s current situation. Identify contractual payment delinquencies and classify potential credits as soon as possible, and take immediate action to solve problems for remedial management. Credit management, from the perspective of a debtor, is the process of managing one’s finances, particularly debts, in order to avoid having a trail of creditors trailing behind one’s back. As a result, credit administration necessitates the establishment of efficient and effective management policies by banks.

“Risk increases when credit principles are violated,” according to Harle (2013). To ensure that loans granted are repaid, sound banking practices necessitate that bank management establish standards for evaluating and approving individual credit applications. However, due to poor credit administration caused by loopholes and violations in risk assessment and control techniques, bad and doubtful debts continue to take a large toll on bank performance, causing institutionalized distress in many banks and, in some cases, total unexpected collapse.

Risk management is the process of identifying, assessing, and prioritizing risks. It is the impact of uncertainty on objectives, whether positive or negative, followed by a coordinated and cost-effective use of resources to monitor and control the likelihood and/or impact of unfortunate events or maximizes the realization of opportunities (Okeh, 2016).

Every commercial bank’s ability to effectively manage its risks, loans, and advance portfolio is critical to its survival. However, commercial banks in Nigeria have recently seen an increase in non-performing credit portfolios, which has contributed significantly to the banking sector’s financial distress.

The credit risk inherent in the entire portfolio, as well as the risk in individual credit or transaction, must be managed by financial institutions. This is because a financial institution’s ability to profit and manage credit risk is critical to its survival and ability to compete. This is why lending is based on the two most basic banking products: money and information. Banks obtain these products from their customers by providing them with valuable services. They create loan agreements by combining money and information about their borrowers with valuable banking services and then selling the loan agreements back to their customers (Hempel and Simonson, 2017).

As a result, a financial institution’s risk rating system contains both objective and subjective elements. Financial statements and the application of certain financial ratios that reflect liquidity, leverage, and earnings are used to determine objective aspects. Despite the requirement that risk be quantified, risk rating systems will always include a subjective component that attempts to capture intangibles such as the quality of management, the borrower’s industry status, and the quality of financial reporting. Inconsistencies may arise as a result of these subjective items.

Many financial institutions have struggled in this area over the years as a result of their inability to effectively manage credit risk. As a result, the major cause of serious banking problems remains directly related to tax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention that leads to a deterioration in a bank’s counterparties’ credit standard. As a result, the need to investigate the research topic becomes critical.

1. 1. STATEMENT OF THE PROBLEM

In recent years, banks have seen an increase in non-performing credit portfolios as a result of their management’s inability to effectively manage risk and credit administration. This problem resulted in high bad debts in commercial banks, and the monetary authorities classified a number of other commercial banks as distressed banks.

Credit risk management is a major issue for all banks, as it ensures that each credit application is assessed and rated individually by their credit analysis department. However, their procedures and strategies for carrying out this critical function are being questioned. Ineffective risk assessment and control policies in bad and doubtful debts jeopardize performance, profitability, and, ultimately, the company’s survival. An unviable risk assessment and control strategy has been complemented by poor credit administration. Non-effective risk assessment, bank control policies leading to poor credit administration, the occurrence of doubtful and bad credits, and failure of bank operators to comply with credit administration safety rules and regulations are among the issues identified.

Consequently, the need to examine the subject matter risk management and credit administration in Banks like Guarantee Trust Bank, Access Bank and First Bank becomes worthy of investigation.

1.3       OBJECTIVES OF THE STUDY

The major purpose of this study is to analyse risk management and credit administrations in banks. Other general objectives of the study are:

1. 1. To examine the risk management and credit administration system in Nigerian Banks

1. 1. To examine the importance of effective risk assessment and control policies to the continuous existence of banking industry

1. 1. To examine the impact of effective credit administration on falsified customer’s security documentation in Nigerian banks

1. 1. To examine the relationship between risk management and credit administration in Nigerian banks

1. 1. To identify the constraints militating against risk management and credit administration in Nigerian banks

1. 1. To make recommendations that would improve the effectiveness and efficiency of risk assessment and control policies of Nigeria banks.

1.4 RESEARCH QUESTIONS

1. 1. How is the risk management and credit administration system in Nigerian Banks?

1. 1. What are the importance of effective risk assessment and control policies to the continuous existence of banking industry?

1. 1. What is the impact of effective credit administration on falsified customer’s security documentation in Nigerian banks?

1. 1. What is the relationship between risk management and credit administration in Nigerian banks?

1. 1. What are the constraints militating against risk management and credit administration in Nigerian banks?

1. 1. What are the recommendations that would improve the effectiveness and efficiency of risk assessment and control policies of Nigeria banks?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. 1. There is no impact of effective credit administration on falsified customer’s security documentation in Nigerian banks.

1. 1. There is a significant impact of effective credit administration on falsified customer’s security documentation in Nigerian banks.

Hypothesis 2

H0: There is no significant relationship between risk management and credit administration in Nigerian banks.

1. 1. There is a significant relationship between risk management and credit administration in Nigerian banks.

1.6 SIGNIFICANCE OF THE STUDY

A study of this nature is beneficial not only to the bank’s management, but also to other banks, shareholders, potential investors, and depositors.

The study emphasizes the importance of this asset (loans and advances) to the overall success and growth of the bank and other banks’ management. Furthermore, loans and advances are the most profitable and risky assets, necessitating proper management to maximize profits while minimizing risk.

The banking industry is currently undergoing restructuring due to large non-performing credits in some of our banks, which are the result of lax credit administration practices, a lack of a viable credit risk management system, and a lack of compliance with corporate governance practices.

This study will significantly assist bankers in reducing bad debts to the bare minimum by assessing the capacity of bank risk assessment and credit control procedures to provide for close analysis and monitoring of bad debts in light of the current challenges facing banks in Nigeria in the management of credit risk, to ensure minimal loan loss through the maintenance of a good risk assessment and control. Bring the importance of effective risk assessment and control in credit administration to the attention of credit managers, and make useful contributions to effective and efficient credit management in Nigerian commercial banks’ credit administration.

The research is also important to shareholders, both current and potential. This stems from the fact that proper management of this resource will result in reasonable returns on investment for shareholders. Academicians will also be provided with pertinent information on credit management and its impact on commercial bank financial performance. The study will contribute to the general knowledge and form a basis for further research.

1.7    SCOPE OF THE STUDY 

The study is based on the corporative analysis of risk management and credit administrations in banks, case study of Guarantee Trust Bank, Access Bank and First Bank, Maitama, Abuja.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Risk: Risk of an asset is the potential change of future returns due to its assets. Investors always face the risk that their rates of return asset June be lower than value of expected. So the “risk” is likely to be different the real rate of return with investor’s desired rate. The risk of a financial asset is a function of one or more factors that cause changes securities prices in market.

Management: – This is defined as the process of directing, co-ordination and influencing the operations of an organization so as to obtain desired result and enhance a total performance.

Banks- These are financial institutions, which accept deposit and other loans to the customers.

Credit: – A transaction between two parties in which one (creditor or lender) supplier money, goods, and securities in returns for a promised future, payment by the other of debtor borrower. To sell or lend in the basis of future payment.

Money: – This can be defined as anything which passes freely from hand to hand and is generally acceptable in settlement of debt.

Risk Assessment: The analysis of the probability of loss occurring and the potential impact if the risk does occur.

Credit Administration: The implementing of credit decisions as authorized by the financial regulatory authorities.

Credit Policy: Credit manuals that specify the course of action, procedures and guides to sound lending.

Credit Risk: Is the risk that the principal or the interest or both or part thereof the credit extended to a customer might not be repaid by him in accordance with the loan agreement.

Credit Control: Is the post approval area and monitoring of the credit facility to ensure that the credit remains qualifiedly satisfactory during its tenure.