AN
ASSESSMENT OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN UNION BANK NIGERIA
PLC, KADUNA
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
Risk
Management is the identification assessment and prioritization of risks. It is
the effect of uncertainty on objectives, whether positive or negative followed
by coordinated and economic of application of resources to monitor and control
the probability and/or impact of unfortunate events or to maximize the
realization of opportunities (Okeh, 2006).
The
survival of every commercial bank depends on its ability to manage its risks
and loans or advance portfolio effectively. However in the recent past,
commercial banks in Nigeria witnessed rising non-performing credit portfolios
and these significantly contributed to the financial distress in the banking
sector.
Financial
organization need to manage the credit risk inherent in the entire portfolio as
well as the risk in individual credit or transaction. This is so because the
survival and ability of financial institution to compete depend on their
ability to profitability and manage credit risk. This is the reasons why
lending is based on the two fundamental products of banking: money and
information. Banks obtain these products from customers themselves by offering
customer valuable services. They package money and information about their
borrowers together with valuable banking services to create loan agreements and
sell the loan agreements back to their customers (Hempel and Simonson, 2007).
As
such, risk rating system in financial institution contains both objective and
subjective elements. Objective aspect are based on financial statements and
application of certain financial ratio that reflect liquidity, leverage and
earnings. Despite the requirement that risk be quantified, risk rating systems
always have a subjective dimension that attempts to capture intangibles such as
the quality of management, the borrower’s status within the industry, and the
quality of financial reporting. These subjective items may result in
inconsistencies.
It
is in this regard that many financial institutions have faced difficulties over
the years arising from their inability to effectively manage credit risk. As
such the major cause of serious banking problems continues to be directly
related to tax credit standard for borrowers and counterparties, poor portfolio
risk management, or lack of attention lead to a deterioration in the credit
standard of a bank’s counterparties. Hence, the need to investigate the subject
matter of this research becomes imperative.
1.2 Statement of the Problem
Commercial
banks in the recent past witness rising non-performing credit portfolios sequel
to the inability of their management to effectively manage risk and credit
administration. That problem resulted to high bad debts in commercial bank and
a number of other commercial banks were classified as distressed banks by the
monetary authorities.
Consequently,
the need to examine the subject matter: An Assessment of risk management and
credit administration in Union Bank Plc, Kaduna Main branch becomes worthy of
investigation.
1.3 Objectives of the Study
The
central objective of the study is to assess risk management and credit
administration in Union Bank Plc, Kaduna.
The specific objectives are:
i)
To examine risk
management system in Union Bank Kaduna Main Branch.
ii)
To assess credit
administration in Union Bank Kaduna Main Branch.
iii)
To identify the
constraints militating against risk management and credit administration in
Union Bank.
iv)
To proffer workable
solutions to the identified problems.
1.4 Significance of the Study
This
study will be beneficial to financial institution especially Union Bank Plc, as
they utilize the finding of this study as a basis for policy formulation
regarding risk management and credit administration in Banks. The shareholders,
stakeholders and the entire society will benefit from this study.
1.5 Research Questions
i) How is risk managed in Union Bank Kaduna
Main Branch?
ii) How is credit administered in Union Bank
Plc Kaduna Main Branch?
iii)
What are the
constraints militating against risk management and credit administration in
Union Bank Plc Kaduna Main Branch?
iv)
What are the
solutions to the identified problems?
1.6 Scope of the Study
The
study shall cover an empirical examination of the assessment of risk management
and credit administration in Union Bank Plc Kaduna. To this end, the study will
examine how risk is managed in Union Bank as well as credit administration. The
study shall cover a time from 2006 – 2011.
1.7 Definition of Terms
1. Credit Risk: This refers to
delinquency and default by borrowers i.e. failure to make payment as at when
due.
2. Pure Risk: This refers to reduction
in business value as a result of damage to business property by theft, robbery,
fire, flood or the prospect of premature death of employee due to work-related
illness or accident.
3. Price Risk: This refers to
variability in cash flows due to change in input and output prices.
4. Credit Administration: This is the
system used in managing the exposure of financial institution to loan
delinquency and default.
5. Business Risk: This refers to
variability in cash flow.
6. Loan Appraisal: This is the process
of determining in advance the various lending parameters and determining the
overall loan limit for each borrower based on his debt capacity, loan duration.