CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The global economic crisis has begun in August 2007 and has been considered the worst economic crisis since the` Great Depression by George Soros, Alan Greenspan, Joseph Stiglitz, Jean Claude Trichet, and the International Monetary Fund. Among the factors that contributed to the current economic crisis are cited: increased innovation in economic products and their growing complexity; inappropriate regulation and supervision of financial markets; poor credit risk management practices at Nigerian deposit money banks and other financial institutions; increased complexity of financial systems; financial market speculation; predatory lending practices; a combination of cyclical and structural factors (Dianu and Lungu, 2008); Credit risk management is described in the financial literature as being concerned with identifying and managing a firm’s exposure to financial risk; financial risk is defined as the variability in cash flows and market values caused by unpredictable changes in the commodity prices, interest rates and exchange rates (Kaen, 2005).
Credit risk management has become a booming industry starting ’90 as a result of the increasing volatility of financial markets, financial innovations (financial derivatives), the growing role played by the financial products in the process of financial intermediation, and important financial losses suffered by deposit money banks without credit risk management systems (for example, First Bank, Eco Bank and GT Bank etc). Some credit risk management practices in recent years appear to have been driven by the need to meet regulatory expectations set by such initiatives as in Nigeria. Forward contracts, futures, options, swaps, and other more complex financial instruments allow today banks to transfer risks to other economic agents who are able or more willing to bear them (Kaen, 2005).
Credit risk management is nowadays considered as a key
activity for all banks. Many of the disastrous losses of the 1990s, such as those at Orange County in 1994 and Barings bank in 1995, would have been avoided if good credit risk management practices have been in place (Hull, 2007).
In today’s world, managing risk has become a necessity, not an option. Sanusi, (2010) pointed out that in recent years excessive credits and financial asset growth went unchecked. Risk, in insurance terms, is the possibility of a loss or other adverse event that has the potential to interfere with an organization’s ability to fulfill its mandate, and for which an insurance claim may be submitted. The current CBN Governor (Sanusi) sanitization in the banking industry revealed the holes in the Nigerian banking industry, especially on the recklessness of the bank chief executives. But before that, the former CBN
Governor Soludo (2004) made it known in one of his speeches that Nigerian banking system today is fragile and marginal.
Commercial banks are in the risk business, in the process of providing financial services, they assume various kinds of financial risks Anthony (2009). On 22nd July 2008, The Basel Committee on Banking Supervision issued for public comment Guidelines for Computing Capital for Incremental Risk in the Trading Book as well as Proposed Revisions to the Basel II market risk framework. In Basel II, risk management is divided into credit, market and operational risk management. In many cases, credit and market risks are handled through a company’s financial department, whereas operational risk management is through a company’s coordinated centrally but most commonly implemented in different operational units.
1.2 Statement of the Problem
The Nigerian money deposit banks has been strained by the
deteriorating quality of its credit assets as a result of the significant dip in equity market indices, global oil prices and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks’ loan assets hindered credit risk management in Nigeria deposit money banks to extend more credit to the domestic economy, thereby adversely affecting credit risk management. This prompted the Federal Government of Nigeria through the
instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of non-performing loans that bedeviled Nigerian banks. According to Ahmad and Ariff
(2007), most banks in economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high non-performing loans and significant increase in credit risk Management during global economic crisis, which resulted in the closing down of several banks in Nigerian.
In a globalised world, transactions are carried out in different countries in integrated markets. The world has over the past two decades headed towards liberalization and deregulation, with the goal of integrating world markets. Nigerian markets, although not well integrated into the world market, have been facing serious destabilizing effects since the emergence of the global economic crisis in July 2008.
The capital market has been shrinking: major international hedge funds have been withdrawn; and the international credit line has faded out of loadable funds for domestic industry (Soludo, 2009).
1.3 Objectives of the Study
The main objective of this study is to determine global economic crisis and credit risk management in Nigerian deposit money bank. To determine the effects of global economic crisis and credit risk management on the performance of deposit money banks in Nigeria. The specific objectives of the study are to:
– Assess the global economic crisis and credit risk management in
Nigerian deposit money banks on share price of banks.
– Evaluate the global economic crisis and credit risk management in Nigerian deposit money banks on capital adequacy of banks
– Evaluate the global economic crisis and credit risk management in Nigerian deposit money banks on asset quality of banks; and
– Assess the global economic crisis and credit risk management in
Nigerian deposit money banks on liquidity ratio of banks.
1.4 Research Hypothesis
The following hypotheses were formulated in line with the research objectives:
H0: There is no significant relationship between economic crisis and credit risk management on the performance of deposit money banks.
1.5 Scope and Limitation of the Study
This study essentially covers the Global Economic Crisis and
Credit Risk Management in Deposit Money Banks in Nigeria with First Bank Ltd as a case study. However due to time constraints, the main limitations of this study would be the gathering of data from all financial institutions within the limited time frame of the study.
1.6 Significant of the Study
The study will assist policy makers in taking timely actions or decisions on banks in times of future crises and also to put in place measures of early warning detection system. A lot has been written on the global economic crisis and credit risk management in Nigerian deposit money banks on the Nigerian financial sector as a whole, but little efforts have been put in place in terms of research on the impact global economic crisis and credit risk management in Nigerian deposit money banks. The study serves as a centre piece of the financial institutions and also bridges that gap and provides a basis for further research.
1.7 Chapterization
Chapter One: This chapter is considered as the introductory part of the whole work. It highlights the genesis of the project, the statement of the problem under study, followed by the objectives of the study. The research hypothesis coupled with the scope and limitations of the study were presented following the above order, and then the significance of the study is being looked into in this chapter and organization of the study followed.
Chapter Two: Is the review of the related literatures.
Chapter Three: Is the Research methodology, where research design, research population, sample and sampling techniques, sources and method of data collection and the techniques of data analysis .
Chapter Four: In this Chapter we look at the Data analysis and hypothesis testing, data presentation and analysis test of hypothesis and summary of the findings.
Chapter Five: This chapter attempts to provide summary, draw conclusion and finally make recommendations.