Evaluation of Credit Risk Management on the Performance of Nigerian Banks

Introduction

1.1 Background to the Study

Credit risk refers to the probability of incurring losses resulting from non-payment of loans or other forms of credit by debtors. Credit risks are faced by lenders to consumers, lenders to business, business and even individuals. Credit risks, nevertheless, are mostly encountered in the financial sector particularly banking institutions. The biggest risk facing banking and financial intermediaries, however, remains credit risk, the risk of customer or counter party default. In between the late 1990s were years of financial boom, as the number of players increased substantially in the system. The banks witnessed rising non-performing credit portfolios in banks and these significantly contributed to the financial distress in the banking sector. Also identified was the existence of predatory debtor in the banking system whose modus operandi involved the abandonment of their debt obligations in some banks only to contract new debts in other banks. The increase in the number of banks over-stretched the existing human resources capacity of banks which resulted into many problems such as poor credit appraisal system, financial crimes, accumulation of poor asset quality among others (Sanusi, 2002). The consequence was the increase in the number of distressed banks.

In Nigeria, the rising cases of bank failures have also become a major source of concern for policy makers. It is not surprising to find banks to have non-performing loans that exceed 50 per cent of the bank's loan portfolio. The deregulation of the financial system embarked upon from 1986 allowed the influx of banks into the banking industry.