CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
The
Nigerian Banking Industry for the past decades has witnessed series of Banking
distress and subsequent failures. Banks that had been doing well suddenly
announced large losses due to credit exposures that turned sour, interest rate
position taken or derivate exposures that may or may not have been assumed to
hedge balance sheet risk. In response to this, there is indeed urgent need for
banks in Nigeria to devote enough attention to the management of financial
risks in the Nigerian Banking Industry. The 1989 annual report and statement of
account of NDIC revealed that classified loans and advances or bad debts
amounted to 9.4 billion which contributed 40.8 percent of total loans and
advances and 280 percent of shareholders’ funds” (Hall, 1991:8). It is the
development of his nature that have led to the introduction of the CBN
prudential guidelines for banks.
Cooker
(1989:115), observes that “the main function of a bank is the collection of
deposits from those with surplus cash resources and the lending of these cash
resources to those with an immediate need for them” in fulfilling this:
·
It must be easily understood
·
It must be permanent
·
It must be able to absorb
losses
These three features are expected to guide member
countries, including Nigeria, in assessing instruments to be used in raising
bank capital. The bottom line in the debt capital is a risk instrument for
financing bank operations and should be discourage as much as possible. The
Basel Committee on banking supervision also introduced the “New Capital Accord”
which was implemented in 2007. The New Capital Accord required capital charges
to be made for credit, market and operational risks. This is aimed at
protecting depositors, consumers, and the general public against losses arising
from bank fragility and failure (Umoh: 2005). Ever since 1988, captains of the
Nigerian Banking industry have shown keen interest in improving the risk
analysis, measurement and management capacity of firms in the banking sector.
Recently risk managers of major banks came together in Lagos to form an
organization named Credit Risk Association of Nigeria (CRAN). It is hoped that
CRAN will offer them opportunities for networking on issues of bank risk
management. Concerted efforts are also being made by captains of banking
industry to reduce the risk exposure of banks in lending to borrowers generally
but especially to commercial bank, which is traditionally prone to market and
credit risk. Coincidentally to this activity, and in part because of our
recognition of the industry’s vulnerability to financial risk, the Wharton
Financial Institutions centre with the support of the Slon Foundation, has been
involved in an analysis of financial risk management processes in the banking
sector. In the banking sector, system evaluation was conducted covering many of
North America’s super regional and quasi money centre commercial banks as well
as a number of major investment banking firms.
The
Nigerian economy is increasing begin globalized by the deliberate government
actions since July 1986 when the federal government began the implementation of
the Structural Adjustment Programme (SAP). The SAP sought to deregulate and
free the economy from government control with a view to allowing market forces
determine the production and consumption decisions of economic agent within the
country. The deregulation process, which was accompanied by privatization and
commercialization government enterprises, had far-reaching impacts on the
entire economy. In particular, deregulation of interest rates affected bank
lending to the real sectors of the economy. In more recent times, government
adopted business consolidation strategies viz: merges, acquisitions and taken
over as part of its efforts to facilitate the ability of firms in financial services
industry to become global market Players.
According
to the governor of the Central Bank of Niger (CBN), business consolidation in
the banking sector was to, among other things; make Nigeria banks complete
favorably in the global financial market” and to generate a high capital base
that “will provide banks with the resources to meet the cost of compliance in
the areas of credit and market risk management” (Soludo, 2005:98-99).
1.1
Statement of the Problem
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 main objective of this study is
to determine the effect of compensation management on employee performance.
Specific objectives include.
i.
To
evaluate the impact of market risk on the Nigeria economy.
ii.
To determine how asset quality can be
efficiently and effectively monitored.
iii.
To examine the effects of credit risk
exposure on growth and profitability of Nigeria commercial banks.
1.4 Research
Questions
i.
How does deposit of banks affect the
portfolio of credit by banks?
ii.
How does the quality of banks assets in
terms of risks exposures affect banks profitability?
iii.
What are the effects of credit risk
exposures on growth and profitability of banks?
1.5 Research
Hypotheses
Hypothesis
I
H0: There is no significant impact of
bank deposit on portfolio of credit by banks.
Hi: There is significant impact of
bank deposit on portfolio of credit by banks.
Hypothesis
II
H0: There is no significant impact of
quality of bank assets in terms of risks exposures affect banks
profitability.
Hi: There is significant impact of
quality of bank assets in terms of risks exposures affect banks
profitability.
Hypothesis
III
H0: There is no significant impact of the
effect of credit risk exposures on growth and profitability of banks.
Hi: There is no significant impact of the
effect of credit risk exposures on growth and profitability of banks.
1.6 Significance
of the Study
This
study has a number of significant dimensions.
1.
The result of this study should
provide information to the
commercial banks risk management department on the progress so far
made in identifying and evaluating risks as to enhance growth and profitability
of the financial institutions.
2.
The result of this study should
also reveal how much such progress has impacted on the growth of the entire
commercial banks in Nigeria.
3.
Essentially, this work is a
step in a right direction to assist and enlighten the general public on what
risk management in commercial banks is all about and hence guide them in their
immediate decision of handling risks.
4.
Furthermore, there is need to
provide a reference document for further researchers and evaluation of risk
management conducted by other Nigerians/other Nations. This research work will
go a long way to increase the availability of literature in the field of risk
management in the banks and other related business associates that involve risk
in the day-to-day running of the businesses.
5.
Finally, the study is of immense
benefit to policy makers, investors, financial managers lecturers and the
general public.
1.7 Scope
of the Study
This
study covers risk management in Access Bank Nigeria PLC and Fidelity Bank
Nigeria PLC. Pre and Post banking consolidation in Nigeria, specifically
between 2003 and 2008.
1.8 Limitations
of the study
The demanding schedule of
respondents made it very difficult getting the respondents to participate in
the survey. As a result, retrieving copies of questionnaires in timely fashion
was very challenging. Also, the researcher is a student and therefore has
limited time as well as resources in covering extensive literature available in
conducting this research. Information provided by the researcher may not hold
true for all research under this study but is restricted to the selected
respondents used as a study in this research especially in the locality where
this study is being conducted. Finally, the researcher is restricted only to
the evidence provided by the participants in the research and therefore cannot
determine the reliability and accuracy of the information provided. Other
limitations include:
Financial constraint: Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information
and in the process of data collection (internet, questionnaire and interview).
Time
constraint: The
researcher will simultaneously engage in this study with other academic work.
This consequently will cut down on the time devoted for the research work.
1.8 Definition
of Terms
Portfolio Management: The process of
making and carrying out a decision to invest in securities (Anyafo, 2001: 93).
Portfolio - Akinsulire (2002:357).
Defined portfolio “as the combination or collection of several securities on
behalf of an investor.
Hedging: According to (Ebhalaghe, 1995:
161) defined hedging as a system employed to smoothen out unpredictable
fluctuations in financial variables so as to aid planning and avoid
embarrassment induced by cash shortfalls.
Forward Contracts: This is a contract
usually between a bank and customer to buy or sell a specified quantity of
foreign currency at an agreed future data (Akinsulire, 2002: 467).
Tenor Mismatch: Involves matching the
tenor of an investment with the tenor of the borrowed funds, so invested or a
mismatch is said to occur when the tenor of investments in aggregative exceeds
the contractual tenor of the borrowed funds (Ebhalaghe, 1995:144).
Currency
Swap: This is a simultaneous borrowing and lending operation
whereby two parties exchange specific amount of two currencies on the outset at
the sport rate (Akinsulire, 2002:474).
