CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Banks are important to economic development through the financial services they offer. Their intermediation role can be said to be a catalyst for economic growth. The recent failure of banks has been a concern for Central bank of Nigeria and shareholder of these banks. Loans and advances is a major source of earnings for banks. Banks are exposed to high risk as a result of lending to customers. Banks face the risks of borrowers not being able to repay principal and interest as they fall due. Experience shows that poor credit risk management typified by high level of insider loans, speculative lending and high concentration of credit in certain sector among other issues impede the stability and profitability of banks. Over the years banks in Nigeria have been carrying huge non-performing loans that rose progressively from year to year without being reported through sound credit risk management. In the past several banks failed as a result of high non performing loans running into several billions of naira. Attractive interest rate on deposits and loans in the 1990’s led to indiscriminate granting of loans without credit risk appraisal and management. This led to bad and irrecoverable loans. Despite measures put in place to check the trend, the rising profile of non-performing loans, continued unabated into 2000’s. The study is motivated by the negative effect of non performing assets on shareholders fund and would be relevant as it addresses how credit risk affects bank profitability. Greening and Bratanovic (2003) posits, that because of the potentially dire effect of credit risk, it is important to perform comprehensive evaluation of banks capacity to evaluate,monitor and manage loans and advances granted to customers. The study evaluates the extent to which failure in credit risk management impede profitability of banks in Nigeria.
1.2 Statement of the Problem
It is generally accepted that credit risk is the most prominent risk in terms of the level to which it impacts on the quality of risk assets as well as bank profitability and eventually bank failure. Banks grant large portion of their deposits as loans to customers which account for a large portion their income. Provisions made on non performing loans will have negative impact on the profitability of the banks. Inadequate information about borrowers made the Central Bank of Nigeria to set up Credit Risk Management system. This system ensures that loans granted by banks are captured and made available to all the banks in Nigeria. The objectives of CBN Credit Risk Management System is to provide information, monitor the level of borrowings, and facilitating consistent classification of credit. As part of effort to stem the problem of credit risk Asset Management Corporation of Nigeria was established in 2010 to buy o the nonperforming loan of banks in Nigeria and take over eight weak banks.
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