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Credit Risk Management and Deposit Money Bank Performance in Nigeria

Credit Risk Management and Deposit Money Bank Performance in Nigeria

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Reference ID: PS-266-TM


This research work titled "Credit Risk Management and Deposit Money Bank Performance in Nigeria" is dedicated to God for his enabling grace and to all computer enthusiasts who help to make life a pleasant experience.



I owe my indebtedness to my Supervisor (Name of your Supervisor), the Head of Department (Name of your HOD), the Lecturers in the department of Banking and Finance (BF), Book Authors and Profound Scholars of existing/related research work for your moral support that facilitated the successful completion of my (Tertiary Institution level). I am grateful to God Almighty and my parent for their financial support in my career. I really appreciate you all for everything, Thank you very much.


Credit Risk Management and Deposit Money Bank Performance in Nigeria





  • 1.1 Background of the study
  • 1.2 Statement of Problem
  • 1.3 Objectives of the study
  • 1.4 Significance of the study
  • 1.5 Limitations of Study



  • 2.1 Introduction
  • 2.2 Conceptual Review
  • 2.2.1 Concept of Credit Risk Management
  • 2.2.2 Benefits of Effective Credit Risk Management
  • 2.2.3 Concept of Bank Performance
  • 2.2.4 Credit Risk Management Practices and Financial Performance
  • 2.2.5 The Effect of Risk Diversification on Financial Performance of the Bank
  • 2.2.6 Risk Appraisal and Financial Performance
  • 2.2.7 Risk Control Techniques in the Bank
  • 2.3 Theoretical Review
  • 2.3.1 Deposit Money Banks Performance
  • 2.3.2 Asymmetric Information Theory
  • 2.3.3 Signaling Hypothesis
  • 2.4 Empirical Review



  • 3.1 Conclusion
  • 3.2 Recommendation




This seminar investigates the impact of credit risk management on the performance of deposit money banks in Nigeria. The changing environment in which banks finds themselves present major opportunities for banks, but also entails complex, variable risk that challenge traditional approaches to bank management. The credit risk management in commercial banks should be adequately attended to by banks that want to succeed in its overall business operation. The role of deposit banks is very critical to the success of every economy, commercial banks play an intermediation role between the surplus and deficit units of the economy. They constitute the foundation upon which the payment system is built. They also stimulate the financial system by engendering stability and effective delivery of financial transactions. Based on the findings of the study, it is therefore recommended that deposit money banks should be cautious in setting credit policies so as not to negatively affect their operations, and ensure judicious utilization of deposits and maximization of profits in both the short and long term.


Credit Risk Management and Deposit Money Bank Performance in Nigeria


1.0 Introduction

1.1 Background of Study

Banks are an integral part of a country's development. Their major role in any economy is the ability to mobilize funds from surplus unit to the deficit unit through lending activities. When loans and advances granted are paid promptly, this serves as an impetus for additional credits to be provided to existing and future customers. However, in every imperfect market there exist some risks that affect the repayment of the credit facility by banks' customers. Basel (2001) identified credit risks as the major form of risks that affect financial institutions.

Credit risk can occur from two major sources- the bank management (through lack of thorough investigation of loan requests of the customer) and the customer (having hidden agenda, unknown to the bank, on the credit facility requested for). These combined activities of banks' management and customers lead to non-payment of both the principal sum and interest as and when due. The loans that are not paid at the agreed date are known as non-performing loans. The non-performing loan, especially when it is deemed lost, is the greatest threat to the profitability and survival of banks. When it is lost, it will hinder banks from achieving their set target and can also lead to organizational failures (Greuning & Bratanovic, 2003, Kolapo, Ayeni, &Oke, 2012 and Poudel, 2012).

The global financial meltdown of 2008 accelerated a fundamental change in the banking industry the world over. It led to the diversification of banking services in order to become more competitive and also allowed for mergers and acquisitions in the industry. The impact of the meltdown was so much that almost all sectors of global business was affected; with the banking sector most affected. Because of the intermediation functions of deposit money banks, which include credit creation, they are exposed to a lot of risks including default and credit risks. These risks if not properly handled most times lead to financial distress and ultimately bankruptcy. Deposit money banks generate credit to their customers with the major objective of making profit in the process. The non-payment of loans or other forms of credit by debtors plays an important role in banks profitability because a large part of banks revenue is interest generated from loans.

Banks' management recognizes the fact that mitigating the occurrence of the risk of non-performing loans can only come from the institution of pragmatic credit administration policy and the policy must incorporate risk assessment and follow up mechanism. Capital adequacy as an ingredient of credit risk measure depicts the extent to which shareholders funds cover non-performing loans. It helps to prevent bank failure if it is properly controlled and managed. The prescribed ratio is usually provided by the regulatory institution, such as the Central Bank of Nigeria (CBN). Profitability is essential for the survival of any firm that is in business and banks do rely on interest income generated from loans and advances extended to their customers. Thus, non-performing loans, advances and bad debt can erode the profitability of banks.

1.2 Statement of Problems

Risk management is at the core of lending in the banking industry. Many Nigerian banks had failed in the past due to inadequate risk management exposure. This problem has continued to affect the industry with serious adverse consequences. Banks are generally subject to wide array of risks in the course of their business operations. Nwankwo (1990:15) observes that ‘the subject of risks today occupies a central position in the business decisions of bank management and it is not surprising that every institution is assessed an approached by customers, investors and the general public to a large extent by the way or manner it presents itself with respect to volume and allocation of risks as well as decision against them'. Other risks include insider abuse, poor corporate governance, liquidity risk, inadequate strategic direction, among others. These risks have increased, ‘especially in recent times as banks diversity their assets in the changing market. In particular, with the globalization of financial markets over the years, the activities and operations of banks have expanded rapidly including their exposure to risks.

1.3 Objectives of the study

The primary objective of the current work is to empirically explore the relationship between credit risk management practices of Nigerian listed deposit money banks and financial performance.

The following are the specific objectives of the study:

  1. To examine the effects of credit risk exposure on growth and profitability of Nigeria commercial banks.
  2. To examine the causes of credit risk in Nigeria commercial banks.
  3. To examine the impact of credit risk management on total loans and advances of deposit money banks in Nigeria.
  4. To assess the impact of credit risk management on return on assets of deposit money banks in Nigeria.

1.4 Significance of Study

This study will be of immense benefit to the following groups:

  1. Banks: The result of this study should provide information to the deposit money banks on the level of performance in the face of their credit risk management in place. This is likely to spur them to critical review of their credit risk management styles,
  2. Investors: The study will provide investor with the knowledge they need about risk management in banks. They will then be able to study the extent to which a bank is exposed to risk and be able to take wise decisions regarding where to invest.
  • The General Public: The product of this study can create the awareness on the extent of credit risk and its management in banks. This can serve as eye-opener to the general banking public visa-vis the safety of their deposits in banks.
  1. Researchers: Essentially, the results of this study can provide a reference document for further researches and evaluation of risk management by other researchers. This research will increase the availability of literature in the field of risk management in banks.
  2. Policy Makers: Finally, the study will be of immense benefit to the policy makers as it will provide more insight into risk management and guide them in policy making and implementation.

1.5 Limitations of Study

In carrying out this research there are possible constraints which may occur which pose little hindrance to the effective and successful completion of the project work by the researcher. Such constraints are highlighted as follows; financial constraint i.e, there is limited finance available in harnessing research materials such as foreign journals, publications, e.t.c. because the cost of getting research journals were quite enormous to be used in the research work. Time was also a constraint as time frame that was given in carrying out this seminar was limited.


2.0 Literature Review

2.1 Introduction

This chapter focuses on the review of related literature. A literature review includes the current knowledge as well as theoretical and methodological contributions to a particular topic. It documents the state of the art with respect to the topic you are writing. It surveys the literature in the topic selected. In this research work the literature review includes the …

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