ASSESSMENT OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN UNION BANK PLC,
The study examines risk management and Credit Administration in Union Bank Plc, Kaduna. The research questions that guided this study were: How is risk managed in Union Bank? What are the constraints militating against risk management and credit administration? What are the solutions to the identified problems. The survey method was used as the sample size. A questionnaire designed in five likert scale was used as the instrument of data collection. The mean (x) was used to analyze data. The result of findings indicates that risk is mainly managed in Union Bank through embarking on insurance of customers deposit as well proper evaluation and monitoring of loan proposal.
TABLE OF CONTENTS
Title Page - - - - - - - - - - i
Declaration - - - - - - - - - ii
Approval Page - - - - - - - - - iii
Dedication - - - - - - - - - - iv
Acknowledgement - - - - - - - - v
Abstract - - - - - - - - - - vi
Table of Contents - - - - - - - - vii
1.1 Background of the Study - - - - - - 1
1.2 Statement of the Problem - - - - - - 3
1.4 Significance of the Study - - - - - - 4
1.3 Objectives of the Study - - - - - - 4
1.6 Scope of the Study - - - - - - - 5
1.5 Research Questions - - - - - - - 5
1.7 Definition of Terms - - - - - - - 6
2.1 Introduction - - - - - - - - 7
2.2 Concept of Risk Management in Commercial Banks - 7
2.3 Credit Administration in Commercial Bank - - - 10
2.4 Techniques of Risk Management in Commercial Banks - 19
2.5 Credit Administrative Techniques in Commercial Banks 23
2.6 The Problems Militating against Risk Management and Credit Administration in Commercial Banks - - - - 25
2.7 Summary of the Literature - - - - - - 26
3.1 Introduction - - - - - - - - 27
3.2 Research Design - - - - - - - 27
3.3 Area of the Study - - - - - - - 27
3.4 Population of the Study - - - - - - 27
3.5 Sample Size - - - - - - - - 28
3.6 Instrument of Data Collection - - - - - 28
3.7 Validity of the Instrument - - - - - - 28
3.8 Reliability of the Instrument - - - - - 29
3.9 Method of Data Collection - - - - - - 29
3.10 Method of Data Analysis - - - - - - 29
DATA PRESENTATION AND ANALYSIS
4.1 Introduction - - - - - - - - 31
4.2 Respondent Characteristics - - - - - - 31
4.3 Data Presentation and Analysis - - - - - 32
4.4 Summary of Findings - - - - - - - 38
4.5 Discussion of Findings - - - - - - 39
SUMMARRY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings - - - - - - - 41
5.2 Conclusion - - - - - - - - - 42
5.3 Recommendations - - - - - - - 43
Bibliography - - - - - - - - 49
Appendix - - - - - - - - - 51
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 economic of 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.
Financial organization need 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 financial institution to compete depend on their ability to profitability and manage credit risk. This is the reasons 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, risk rating system in financial institution contains both objective and subjective elements. Objective aspect are based on financial statements and application of certain financial ratio that reflect liquidity, leverage and earnings. Despite the requirement that risk be 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 standard for borrowers and counterparties, poor portfolio risk management, or lack of attention lead to a deterioration in the credit standard 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 to high bad debts in 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 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 at when due.
2. Pure Risk: This refers to reduction in business value as a result of damage to business property by theft, robbery, fire, flood or the prospect of premature death of employee due to work-related illness or accident.
3. Price Risk: This refers to variability in cash flows due to change in input and output prices.
4. Credit Administration: This is the system used in managing the exposure of financial institution 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.
2.1 Introduction The literature covers extract from source documents in line with the objectives of the study. The literature shall be segmented into the following sub-themes. The concept of risk management in commercial banks, concept of credit administration, techniques of risk management in commercial bank, credit management in commercial banks, as well as the constraint of risk management and credit administration. 2.2 Concept of Risk Management in Commercial Banks Risk Management is the identification, assessment and prioritization of risk or the effect of uncertainty on objectives of an organization, by coordinated economical application of resources to minimize, monitor, and control the probability and the impact of unfortunate events or to maximize the realization of opportunities. Risk can come from uncertainty in financial market, project failures at any phase in development, production or sustainment life-cycles, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary or event of uncertain root-cause (Egbe, 2007). Risk management in commercial bank basically focus on credit risk. Credit risk management is the process used to systematically manage the exposure of financial institutions to loan delinquency and default. The process consists of the following four stages: the identification of potential losses from delinquencies and defaults, evaluation of the potential frequency and severity of losses form credit risks; development and selection of methods for managing the risks so as to minimize losses and maximize business value, and implementation and ongoing monitoring review of the selected methods (Okoh, 2009). Thus maximization of business value by preventing or minimizing losses from delinquency and default and promoting prompt loan repayment by borrowers is the principal objective of credit risk management in commercial bank. Bank business value depends on the expected magnitude, timing and variability associated with future net cash flows that will be available to provide shareholders with a return on their investment. Delinquency and default results in losses that reduce business value. Credit risk management seek to mitigate this reduction in business value by designing a system that prevents, reduces or deal with delinquencies and defaults when they occur. Credit risk management is therefore both an ex-ante and ex-post activity (Lawal, 2007). The purpose of risk management in commercial bank is to reduce losses arising from default in payment of loan. As such in order to survive, these institutions must balance risks as well as returns. For a bank to have a large consumer base, it must offer loan products that are reasonable enough. However, if the interest rate in loan products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it lead itself to financial instability. The complexity and derivatives is a factor that gave rise to risk management in financial institution and commercial bank in particular (Kent, 2009). 2.3 Credit Administration in Commercial Bank Credit Administration is the management of loan portfolio. This involves evaluation of loan proposal as well as appraising the capacity of borrowers and the disbursement and monitoring of loan (Egbe, 2011).
Credit administration in commercial bank help to reduce risks of delinquency and default. An efficient loan appraisal system is very important in this respect, loan appraisal is the process of determining in advance the various lending parameters and determining investment opportunities available to farmers that remain unexploited for want of credit, loan appraisal also involves the determination of overall loan limit for each borrower based on his debt capacity; loan duration and phasing of the disbursement to coincide with various implementation stages of the business project.