THE EFFECT OF RISK AND CREDIT MANAGEMENT ON BANK PERFORMANCE (A Case Study of Zenith Bank Plc)
The importance of strong credit risk management for building quality loan portfolio is of paramount importance to performance of deposit money banks in Nigeria as well as overall economy. This study examined the effect of credit risk management on the market performance of listed deposit money banks in Nigeria. Panel data was used from a sample of fourteen listed deposit money banks in Nigeria for a period of nine years (2007-2015). Multiple Regression was used as technique of data analysis collected through secondary source. The findings revealed a positive and significant effect of loan loss provision on market performance of listed deposit money banks in Nigeria while capital adequacy was not positively significant. In addition, non- performing loans, secured and unsecured loans and loans & advances had a negative and insignificant effect on market performance of listed deposit money banks in Nigeria. The study concludes that loan loss provision has a significant effect on the market performance of sampled listed deposit money banks in Nigeria, while other variables were not. Therefore, it is recommended that deposit money banks in Nigeria should enhance their capacity in credit analysis and loan administration with a view to strengthening its management, as loan loss provision is found to affect market performance of sampled listed deposit money banks in Nigeria.
TABLE OF CONTENTS
Title page - - - - - - - - - - -
List of Figures and Tables
Table 3.1 List of Sampled Banks- - - - - - - -71
Table 3.2 Variables Definitions and Measurement - - - - -44
Table 4.1 Descriptive Statistics - - - - - - - -45
Table 4.2 Correlation Matrix - - - - - - - -47
Table 4.3 Regression Result - - - - - - -48
Table 4.4 Heteroscedasticity Test - - - - - - -51
1.1 Background to the Study - - - - - - - -1
1.2 Statement of the Problem - - - - - - - -4
1.3 Research Questions - - - - - - - - -5
1.4 Objectives of the Study - - - - - - - -6
1.5 Statement of Hypotheses - - - - - - - -6
1.6 Scope of the Study - - - - - - - - -7
1.7 Significance of the Study - - - - - - - -7
CHAPTER TWO:LITERATURE REVIEW
2.1 Introduction - - - - - - - - - -9
2.2 The Concept of Firm Performance - - - - - - -9
2.3 Concept of Credit Risk - - - - - - - -12
2.4 Review of Empirical Studies - - - - - - - -29
2.5 Theoretical Framework- - - - - - - - -38
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction - - - - - - - - - -41
3.3 Population of the Study- - - - - - - - -41
3.4 Sample Size and Sampling Technique- - - - - - -42
3.5 Sources and Methods of Data Collection - - - - - -42
3.6 Techniques of Data Analysis-- - - - - - -42
3.7 Model Specification - - - - - - - - -43
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Presentation, Analysis and interpretation of Regression Results48
Robustness test of dependent and independent variables49
Hypotheses Testing and Discussions of Results51
Discussion and Implication of Findings55
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary of Findings58
Limitations of the Study60
Appendix I - -
Appendix II - -
CHAPTER ONE: INTRODUCTION
Background to the study
Banks and banking activities have evolved significantly through time and with the introduction of money. Financial services like deposit taking, lending money, currency exchange and money transfers became important due to the role being played by money, as no good financial system can do without well-structured and efficient financial institutions, specifically the banking industry. Banks had and still have an important role in the economy, by mediating between supply and demand of securities, and transforming short-term deposits into medium-term and long-term credits through credit creation. Through credit creation, deposit money banks are able to create new money through deposit multiplier effect and formed part of the main income generating activity of banks, though exposing them to credit risk (Kargi, 2011).
The Basel Committee on Banking Supervision (2001) defined credit risk as the possibility of losing the outstanding loan partially or totally, due to credit events (default risk) or the likelihood of losses when a borrower fails to repay a debt of any kind. Credit risk is an internal determinant of bank performance and the efficiency of the bank‟s performance is a function of how they are able to satisfy their customers at a minimum risk level and maximum profitability level. The higher the exposure of a bank to credit risk, the higher the tendency of the bank to experience financial crisis and vice-versa, thus necessitate its management.
According to Statement of Accounting Standards, credit risk management is the process of managing capital assets of banks and loss of loan reserves. These necessitate the appropriate management of the risks and serves as a key issue in reducing the earnings risk of banks and
improving its value in the capital market. Nigeria deposit money banks has experienced high non-performing loans, low reserve for loan loss provisions, inadequate secured loans, loans and advances and low capital adequacy.
Credit risk is a serious threat to the performance of banks, as some of the reviewed studies showing a negative effect; therefore necessitate its management. Credit risk management provides a leading indicator of the quality of banks credit portfolio which is because it greatly influences or prevents the failure of a bank, as the failure of a bank is influenced to a large extent by the quality of credit decisions and thus the quality of the risk assets, which can be deterred as a result of poor corporate governance such as CEO duality etc. The importance of strong credit risk management for building quality loan portfolio is of paramount important to firm performance of deposit money banks as well as overall economy (Charles & Kenneth, 2013).
The growing stock of studies in accounting, finance and economics, underscores the failure in credit risk management as one of the main source of banking sector crises which possibly led to economic failure experienced in the past, including 2001 global financial crises (Fofack, 2005). Due to increasing spate of non-performing loans and its attendant consequences, the Central Bank authorities through its accords (Basel I and II) emphasized on the importance of capital adequacy for mitigating credit risk. Capital adequacy in banking business provides protection against sudden financial losses and serves as a distress prevention strategy (Greuning, 2003). The level of capital, a cushion to absorb credit and other losses, is matched to the portfolio risk depending on the risk characteristics of individual transactions, their concentration and correlation. All organizations, including banks, need to optimally allocate capital in relation to
the selective investments made. Hence, efficient tools and techniques for risk measurement are a key cornerstone of a good credit risk management.
Other measures put in place in managing the risk associated with lending include making provisions to loans in case of loss or default in repayment, which could turn out to improve the firm performance of deposit money banks, most especially when specific assets are set aside for claims in terms of secured loans. In addition, when banks have adequate capital, it not only solves insolvency but also avoid the failure of the financial system.
The Nigerian banking industry has been strained by the deteriorating quality of its credit assets as a result of the fall in global oil prices and sudden depreciation and devaluation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks‟ loan assets hindered banks to extend more credit to the domestic economy, thereby adversely affecting the performance of financial institutions. This prompted the Federal Government of Nigeria through the instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of credit risk mismanagement that bedeviled Nigerian banks. In 2017, it is said that about 1.5 per cent of the Nigeria population are said to owe banks the sum of N5trilion and that it had been difficult to recover the debts as a result of legal technicalities deployed by debtors‟ layers (AMCON, 2017). This has motivated for this study to be carried out in order to assess the effect of credit risk management on the market performance of deposit money banks in Nigeria.
Statement of the Problem
Empirical studies that examine the effect of credit risk management on bank‟s performance in Nigeria centered on traditional measures of performance such as return on equity, return on asset, earnings per share etc. with none to the best of the researchers knowledge on market (value- based) measures of performance, as the traditional measures of performance do not take into consideration the cost of capital and moreover, they are influenced by accrual based accounting conventions, in addition to overemphasis to achieve and maintain short-term financial results. While market measures of performance are promoted as the measures of a company‟s real profitability, in terms of performance. Since value creation has become of primary concern to investors and proponents of value based measures claim that those measures are the only performance measures tied directly to stock‟s intrinsic value (Stewart, 1991; 1999; Grant, 2003).
In addition, to examined how credit risk affects the performance of the banks under study as it has caused the liquidation and takeover of many banks that include Intercontinental bank, Oceanic bank, Bank PhB and Afri-Bank just to mention but a few. When loan are not repaid as at when due (Non-performing) could affect the performance of banks, as loan interest (profit) payment are delayed. Inadequate provisions for loans or collateral (secured loan) can also affect the performance of banks but generally, banks are expected to absorb the losses from the normal earnings. But there may be some unanticipated losses which cannot be absorbed by normal earnings. Capital comes in handy on such abnormal loss situations to cushion off the losses.
Above all, combining the above variables in this study differentiated it from previous studies, as they account for few of the variables used. In addition, sample size and period of study are not
wide which could possibly be one of the reason of having different findings and as such, this study covered nine (9) years, five (5) credit risk variables and sample size of sixteen (16) firms. However, in Nigeria, literature on this subject is very limited or the issues have not been localized or well treated, like the inclusion of capital adequacy. Little or no attention is paid to this area by academics, financial economist or corporate directors and regulators as evidenced by little of literature and contribution to this discourse.
The following research questions are raised to guide the study;
i. What is the influence of non-performing loans on the market performance of listed deposit money banks in Nigeria?
ii. What is the effect of loan loss provisions on the market performance of listed deposit money banks in Nigeria?
iii. What is the effect of secured loans on the market performance of listed deposit money banks in Nigeria?
iv. To what extent do loans and advances influence the market performance of listed deposit money banks in Nigeria?
v. What effect does capital adequacy have on the market performance of listed deposit money banks in Nigeria?
Objectives of the Study
The main objective of this study is to examine the effect of credit risk management on the market performance of listed deposit money banks in Nigeria. While the specific objectives are to assess the:
i. Influence of non-performing loans on the market performance of listed deposit money banks in Nigeria.
ii. Effect of loan loss provisions on the market performance of listed deposit money banks in Nigeria.
iii. Effect of secured and unsecured loans on the market performance of listed deposit money banks in Nigeria.
iv. Effect of loans and advances on the market performance of listed deposit money banks in Nigeria.
v. Effect of capital adequacy on the market performance of listed deposit money banks in Nigeria.
Statement of Hypotheses
In line with the objectives of the study, the following hypotheses have been formulated in null form:
H01: Non-performing loans have no significant influence on the market performance of listed deposit money banks in Nigeria.
H02: Loan loss provisions have no significant effect on the market performance of listed deposit money banks in Nigeria.
H03: Secured loans have no significant effect on the market performance of listed deposit money banks in Nigeria.
H04: Loans and advances have no significant influence on the market performance of listed deposit money banks in Nigeria.
H05: Capital adequacy has no significant effect on the market performance of listed deposit money banks in Nigeria.
Scope of the Study
The study was limited to the listed deposit money banks in the Nigerian stock exchange as at 31st December, 2015 as the needed data are readily available and are involve in deposit taking and money lending. The study covered a period of nine years (2007-2015). The period was considered because the deposit money banks were strengthening their corporate governance mechanisms and capital base. Market performance of listed deposit money banks was the dependent variable of the study, while non-performing loans, loan loss provisions, secured and unsecured loans, loans and advances and capital adequacy served as the independent variable for the study and provision was made to control for firm specific variable (firm size).
Significance of the Study
The research will be relevant to several groups of individuals and organizations. First of all, the result or empirical evidence of the study will enable the management of the listed deposit money banks in Nigeria, on how to assess the viability of loan collector in terms of repayment, in order to avoid default. Also, a standard needs to be set on the minimum value of collateral in relation to the amount of money being loaned to a customer.
Secondly, regulatory authorities like Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) to examine whether the listed deposit money banks in Nigeria are complying to relevant provisions, as in the Bank and other Financial Institutions Act (1999) and Prudential Guidelines in terms of capital adequacy, provisions against loan loss etc. with a view to recognizing any deterioration in credit quality..