THE ROLE OF CREDIT RISK MANAGEMENT IN THE LIQUIDITY POSITION OF BANKS IN NIGERIA

Introduction

1.1 Background of the Study

Banks as financial intermediaries are very significant in the economy of every nation. The relevance of banks to the economy lies primarily in their ability to mobilize credit and grant credit to various economic actors. Lending operations are core banking activities and the most profitable asset of credit institutions. In many markets, banks have to operate in the economic environment that is characterized by the existence of obstacles to good credit management. Where credit is not properly channeled, controlled and administered, it leads to a devastating effect on the banks, reducing its performance, profitability and further into bank distress and failure (Berger and Christa, 2009) According to Cai and Anjan (2008), credit administration is the most important function of the banking industry. It is the most risky and difficult, and at the same time most profitable function performed by banks. The key strategic value a bank adds has always depended upon its ability to manage credit risk. This cannot be properly done without an effective risk assessment, control and follow up strategy. Risk increase when credit principles are violated. Sound banking practices require that bank management put in place standards for appraising and approving individual credit application to ensure that loans granted are repaid. However, due to poor credit administration caused by loopholes and violation in risk assessment and control techniques, bad and doubted debts still claim a bulk charge on bank performance causing many banks to witness institutionalized distress and some, total unexpected collapse. Since lending carries a reasonable portion of resource exposure of deposit banks in Nigeria, the ability of a bank to generate much profit is largely a function of effective and efficient management of its lending portfolio.

The impact of liquidity position in management of banks have remained fascinating and intriguing, though very elusive in the process of investment analysis vis-à-vis bank portfolio management. There appears to be an interminable argument in the literature over the years on the meaning, role and determinants of liquidity and credit management. Acharya and Naqvi (2012) refer to liquidity as the speed and certainty with which an asset can be converted back into cash whenever the asset holder desires. A liquid bank stores enough liquid assets and cash together with the ability to raise funds quickly from other sources to enable it meet its payment obligations and financial commitment in a timely manner. Ngwu (2006) views liquidity management as the act of storing enough funds and raising funds quickly from the market to satisfy depositors, loan customers and other parties with a view to maintaining public confidence In spite of the measures put in place and aimed at protecting depositors and other public interest, the incidence of bank distress and failure has been on the increase in deposit money banks in Nigeria. This is as a result of increased probability of bank default, reduced performance and bulk charge against profits emanating from ineffective credit and liquidity risk management.

Hence, for a bank to be viable and profitable; there must be strategic credit and liquidity risk management policies formulated and implemented in full. The tools for effective implementation of these policies will be anchored on the philosophy and mission of the bank, the overall credit risk strategy, and the credit policies adopted in the realization of strategic goals and objectives of the banks as well as the expansion prospects of such bank. The effective management of credit and liquidity risks is inextricably linked to the development of banking technology, which will enable the bank to increase its speed of decision making and at the same time reduce the cost of controlling banking risk. The development of these banking technologies that reduce operating costs and cost of risk control will inevitably yield greater earnings and returns for the bank in terms of contribution and profitability.

1.2 Statement of the Problem

With the increase of credit transactions and loan customers in the nation’s economy, credit expansion has been witnessed in the Nigerian financial sector. The trend of events in this sector shows that bank deposit-loan ratio increases daily as the economy grows daily. But credit risk has been on the increase with an increase in loan demands. Traditionally, credit was made available in association with one’s financial status, business sustainability, reputation and liquidity, but the unstable situation of the Nigerian financial market makes it difficult for banks to rely on the aforementioned determinants. Business conditions are often unpredictable and can lead to changes in the borrowers financial position and affects their ability the repay the loans at the date of maturity. With the above scenario, the bank faces a credit risk of losing part or the entire loan including the interest receivable on such loans. This negatively affects the bank and reduces its’ financial strength to meet its’ financial obligations as they fall due. As these conditions remain unchecked, the liquidity of the bank is also threatened. Liquidity is considered as the success of a bank, whose inefficient management constitutes a huge problem to both banks and the economy at large.

The far reacting consequences of poor credit and liquidity management apart from decline in profit include loss of confidence in the bank’s ability to fulfill its short term and long term obligations, lack of trust on the part of depositors and other customers alike and the concomitant reduction in the level of operations In spite of the importance of credit and liquidity risk management to bank survival, no paper has so far analyzed the relationship between credit and liquidity risk on a broad range and its different dimensions in the Nigerian banking industry. As a consequence, many important questions regarding this topic remain unanswered. What is the general relationship between credit and liquidity risk in banks? Do they jointly influence bank probability of default? What impact do these consolidated risks have on bank profitability? And if so, what measures should be adopted to manage both risks together?

In view of the above, this study is centred on the credit risk management, liquidity position of banks in Nigeria and viable remaking of deposit money banks in Nigeria.

1.3 Objective of the Study

1. To understand the significance effect of Credit risk management in the Nigerian banking industry.
2. To know the role of non-performing loans on credit operations in the Nigerian banking industry.
3. To identify the relationship between credit risk management and credit operations in the Nigerian banking industry.
4. To know the role of credit risk management in the liquidity position of banks in Nigeria.

1.4 Research Question

1. What is the significance effect of Credit risk management in the Nigerian banking industry?
2. What is the role of non-performing loans on credit operations in the Nigerian banking industry?
3. Is there a relationship between credit risk management and credit operations in the Nigerian banking industry?
4. What is the role of credit risk management in the liquidity position of banks in Nigeria?

1.5 Research Hypothesis

Hypothesis One

• H0: Credit risk management has no significant effect in the Nigerian banking industry
• H1: Credit risk management has no significant effect in the Nigerian banking industry

Hypothesis Two

• H0: Non-performing Loans has no influence on credit operations in the Nigerian banking industry
• H1: Non-performing Loans has influence on credit operations in the Nigerian banking industry

Hypothesis Three

• H0: There is no relationship between credit risk management and credit operations in the Nigerian banking industry.
• H1: There is relationship between credit risk management and credit operations in the Nigerian banking industry

Hypothesis Four

• H0: Credit risk management has no significant impact on the liquidity position of banks in Nigerian banking industry.
• H1: Credit risk management has significant impact on the liquidity position of banks in Nigerian banking industry

1.6 Significance of the Study

The importance of credit risk management on liquidity position in the banking industry cannot be over emphasized. Since not much contribution was made on the topic, credit and liquidity management, the researcher will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability.

It is hoped that the result obtained from the study will benefit management of commercial banks, non-bank financial institutions, business enterprises, students of accounting, banking & finance and other related business.

Readers of this study/work will be emposed as regards the imput of future study. The basis of this research work is the position of liquidity of Nigeria commercial banks as a determinant of profitability.

1.7 Scope of the Study

The study focuses on the role of credit risk management in the liquidity position of banks in Nigeria. Fifteen selected commercial banks in Osogbo, the Osun state capital was used as a study, which are (Access Bank, Diamond Bank, Ecobank Nigeria, Fidelity Bank Nigeria, First Bank of Nigeria, First City, Guaranty Trust Bank, Keystone Bank Limited, Skye Bank,

Stanbic IBTC Bank, Sterling Bank, Union Bank,

United Bank for Africa (UBA), Unity Bank plc, Wema Bank, Zenith Bank).

1.8 Definition of the Study

Credit risk management:

Its the practice of mitigating losses by understanding the adequacy of a bank’s capital and loan loss reserves at any given time.

Credit Risk:

Its the probability of loss due to a borrower’s failure to make payments on any type of debt.

Credit:

Its the trust which allows one party to provide money or resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead promises either to repay or return those resources (or other materials of equal value) at a later date.

Risk:

Its the potential of gaining or losing something of value.

Management:

Its the process of dealing with or controlling things or people.

liquidity position:

Its the difference between the sum of liquid assets and incoming cash flows on one side and outgoing cash flows resulting from commitments on the other side, measured over a defined period, being the measure of the liquidity risk.

Liquidity:

Its the availability of liquid assets to a market or company.

Position:

Its a situation, especially as it affects one’s power to act.

Banks:

Its a financial institution that accepts deposits from the public and creates credit.