ABSTRACT
The emergence of Banks owned by
the local private sector began in the mid-1970s. Financial markets in the
period since independence have been dominated by foreign and government owned
commercial banks. But deficiencies in financial intermediation provided an
opportunity for local private investors to enter financial markets. Between the
late 1970s and the mid-1980s, 13 local Banks were set up in Nigeria. The growth
of local banks accelerated dramatically in the second half of the 1980s, with
70 Commercial and Merchant Banks established between 1986 and 1991 when the
Central Bank of Nigeria suspended issuing new licenses: almost all of these
were wholly owned by local investors.
In Nigeria, the rising cases of
bank distress have also become a major source of concern for policy makers. As
a result of attractive interest rate on deposits and loans, credits were given
out indiscriminately without proper credit appraisal. The resultant effects
were that many of these loans turn out to be bad. It is in realization of the
consequence of deteriorating loan quality on the banking sector and the economy
at large that this paper is motivated. This paper, therefore, attempts to
evaluate the effect of risk management in bank lending, using Equitorial Trust
Bank as a case study.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The Nigerian financial
institutions have faced difficulties over the years for a multitude of reasons
but the major cause of serious banking problems in recent times continues to be
directly related to lax credit standards for borrowers and counterparties, poor
portfolio risk management or a lack of attention to changes in economic or
other circumstances that can lead to a deterioration in the credit standing of
a bank’s counterparties. Credit risk is most simply defined as the potential
that a bank borrower will fail to meet the obligations in accordance with
agreed terms. The goal of risk management in bank lending is to maximize a
bank’s risk adjusted rate of return, maintaining risk exposure with acceptable
parameters.
The problem of Bank distress in
the Nigerian Banking Sector has been observed since 1930s. In fact, between
1930 and 1958, over 21 Bank failures were recorded. The Bank failures during
the time were attributed to the domination of foreign Banks in terms of the
exclusive patronage by British firms.
Other factors that led to mass
failure of the indigenous banks were low capital base, lack of managerial
expertise and untrained personnel.
The deregulation of the
financial system was embarked upon by the military administration in 1986 as
part of the Structural Adjustment Programme (SAP). The deregulation witnessed
sharp changes in banks’ operations, regulatory environment and the distress syndrome
resurfaced again in Nigeria. The changes brought about by SAP included the
liberalization of the foreign exchange and money markets, the introduction of
prudential guidelines and accounting standards, increase in minimum paid-up
capital, establishment of Nigerian Deposit Insurance Corporation (NDIC),
relaxation of mandatory sectoral allocation of credits, etc.
The Late 1980s and early 1990s
were years of financial boom, as the number of players increased substantially
in the system? For instance, between 1986 and 1989, about 38 new commercial and
merchant banks were created. The increase in the number of banks
over-stretched the existing human resources capacity of banks which resulted to
many problems such as poor credit appraisal system, financial crimes,
accumulation of poor asset quality, among others. The consequence was increase
in the number of distress banks. During 1994 alone, two banks had their
licenses suspended (Republic Bank Ltd and Broad Bank of Nigeria Ltd). Another four
banks has their licenses revoked. Also in 1994, the number of banks adjudged
distressed by the Central Bank rose by 10 to 42, excluding the four banks that
were closed during the year. By the end of year in 1994, non-performing loans
and advances constituted about 60.33 percent of the total deposits of the
entire banking industry. Furthermore, the ratio of non-performing loans and
advances to the total loans and advances in the entire banking industry was
43.03 percent while that for the distressed banks was 64.5 percent according to
CBN Annual Report 1994. By the year 1998, up to 31 banks were being liquidated......
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Item Type: Postgraduate Material | Attribute: 81 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
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