The Impact Of Risk Management On Profitability Of Banks

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Abstract

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The study examines Risk Management and Credit Administration in GT Bank Plc, Murtala Mohammed square branch Kaduna. The research questions that guided this study were: How is risk managed in GT Bank Plc, Murtala Mohammed Square branch, Kaduna? What are the constraints militating against risk management and credit administration in GTBank Plc, Murtala Mohammed square branch Kaduna? What are the solutions to the identified problems. The survey method was used as the research design. The entire population of 30 person from credit department of GT Bank Plc, Murtala Mohammed Square branch Kaduna were used as the sample size. A questionnaire design in five likert scale was used as the instrument of data collection. The mean (x) was used to analyze data. The result of findings indicates that risk is mainly managed in Gt Bank Plc, Murtala Mohammed Square branch, Kaduna through embarking on insuring customer deposit with NDIC as well as proper evaluation and monitoring of policy as well as efficient appraisal of proposed on investment that would be finance with bank loan. However, the problems confronting risk management and credit administration are basically defective procedures of loan appraisal as well as dearth of knowledge and skills in credit administration and risk management. Commercial bank should establish sound and competent credit risk management units and recruit well motivated staff, credit officers are the cutting edge of credit administration. As such issue pertaining to their selection, training, placement, job evaluating reward and discipline need to be tackled effectively.

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Table of Contents

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• Title Page
• Declaration
• Certification
• Approval
• Dedication
• Acknowledgement
• Table of Contents
• Abstract

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Chapter One:

Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problem
• 1.3 Research Question
• 1.4 Objective of the Study
• 1.5 Statement of Hypothesis
• 1.6 Significance of the Study
• 1.7 Scope of the Study
• 1.8 Definition of Terms

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Chapter Two:

Literature Review

• 2.1 Introduction
• 2.2 Conceptual Framework
• 2.3 Review of Research Literature
• 2.4 Review of Related Empirical Literature
• 2.5 Summary of the Literature

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Chapter Three:

Research Methodology

• 3.1 Introduction
• 3.2 Research Design
• 3.3 Population of the Study
• 3.4 Sample Size
• 3.5 Sources and Method of Data Collection
• 3.6 Validity of Instrument
• 3.7 Reliability of the Instrument
• 3.8 Method of Data Collection
• 3.9 Method of Data Analysis

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Chapter Four:

Data Presentation and Analysis

• 4.1 Introduction
• 4.2 Respondents Characteristics
• 4.3 Data Presentation and Analysis
• 4.4 Summary of Findings
• 4.5 Discussion of Findings

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Chapter Five:

Summary, Conclusion and Recommendation

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendations
• Bibliography
• Appendix

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Chapter One

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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 nonperforming 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.

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1.2 Statement of the Problem

Commercial banks in the recent past witness rising nonperforming 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.

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1.3 Research questions

In order to actualize the objectives of this research, the following research questions was formulated to guild this study:

1. What are the Methods of Risk Management in GT Bank Plc?
2. How is Credit administered in GT Bank Plc?
3. What are the constraints of Risk Management and Credit Administration in GT Bank Plc?

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1.4 Objectives of the Study

The central objective of the study is to assess the impact of risk management on the profitability of GT Bank Plc, Murtala Mohammed Square Branch, Kaduna.

The specific objectives are:

1. To find out the method of risk management used in GT Bank Plc.
2. To identify to how credit is administered in GT Bank Plc.
3. To identify the constraints militating against risk management and credit administration in GT Bank Plc.

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1.5 Statement of Hypothesis

1. H0: Effective credit risk management is not a strong determinants of banks profitability
   H1: Effective credit risk management is a strong determinants of banks profitability
2. H0: Poor credit risk management does not lead to bank distress.
   H1: Poor credit risk management lead to bank distress.
3. H0: Risk management does not enhances the performance of banks in terms of profitability.
   H01: Risk management enhances the performance of banks in terms of profitability.

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1.4 Significance of the Study

This study will be beneficial to financial institution especially GT 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.

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1.6 Scope of the Study

To this end, the study will examine which is the best way to manage risk in GT Bank Plc, Murtala Mohammed Square branch, Kaduna. The branch manager, other staff and customers of the branch are to be questioned in the course of the study

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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.

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Chapter Five

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Summary, Conclusion and Recommendation

5.1 Summary

The study examines Risk Management and Credit Administration in GT Bank Murtala Mohammed Square Branch, Kaduna. The research questions that guided this study were: How is risk managed in GT Bank Murtala Mohammed Square Branch, Kaduna? What are the constraints militating against risk management and credit administration in GT Bank Murtala Mohammed Square Branch, Kaduna? What are the solutions to the identified problems?
The survey method was used as the research design. The entire population of 30 persons from credit department of were used as the sample size. A questionnaire design in five likert scale was used as the instrument of data collection. The mean (x) was used to analyze data.

The findings indicates that risk is mainly managed in GT Bank Murtala Mohammed Square Branch, Kaduna, through embarking on insuring customer deposit with NDIC as well as proper evaluation and monitoring of policy as well as efficient appraisal of proposed on investment that would be finance with bank loan.

However, the problems confronting risk management and credit administration are basically defective procedures of loan appraisal as well as dearth of knowledge and skills in credit administration and risk management.

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5.2 Conclusion

Risk Management and Credit Administration is a dynamic strategy that seeks to minimize the exposure of commercial bank to risk emanating from loan delinquencies and default. As such the basic objective of risk management is to prevent default and bad debt. As such inspite of the identified constraint of risk management and credit administration in GT Bank Murtala Mohammed Square Branch, Kaduna; the importance cannot be overemphasized.

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5.3 Recommendations

The following measures will help to minimize credit risk in commercial bank:

1. Commercial bank should establish sound and competent credit risk management units and recruit well motivated staff, credit officers are the cutting edge of credit administration. They perform a range of functions from project appraisal to credit disbursement. As such issue pertaining to their selection, training, placement, job evaluating reward and discipline need to be tackled effectively.
2. Proper loan appraisal and follow up including very careful loan screening procedure and timely disbursement of approved loans should be undertaken by credit officers to reduce delinquencies and defaults.
3. There should be strict enforcement of loan repayment obligations by credit officers. Borrowers should understand terms and conditions of the loans, disbursement phases and repayment schedules and should be reminded a month before commencement of repayment.
4. Banks should not be mere disbursement windows. Prospective borrowers should be people with business links with the bank such as owners of current and/or deposit accounts.
5. Precaution in credit administration is important in reducing credit risks and can be achieved through (i) demand for appropriate collateral security before granting loan, and (ii) effective loan supervision and monitoring credit officer.
6. GT Bank Murtala Mohammed Square Branch, Kaduna must operate within sound, well-defined credit-granting criteria. These criteria should include a clear indication of the bank’s target market and a thorough understanding of the borrower or counterpart, as well as the purpose and structure of the credit, and its source of repayment. Establishing sound, well-defined credit granting criteria is essential to approving credit in a safe and sound manner. The criteria should set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the credits should be granted. GT Bank Murtala Mohammed Square Branch, Kaduna. must receive sufficient information to enable a comprehensive assessment of the true risk profile of the borrower or counterpart. Depending on the type of credit exposure and the nature of the credit relationship to date, the factors to be considered and documented in approving credits include:
   1. The purpose of the credit and sources of repayment;
   2. The current risk profile (including the nature and aggregate amounts of risks) of the borrower or counterpart and collateral and its sensitivity to economic and market developments;
   3. The borrower’s repayment history and current capacity to repay, based on historical financial trends and future cash flow projections, under various scenarios;
   4. For commercial credits, the borrower’s business expertise and the status of the borrower’s economic sector and its position within that sector;
   5. The proposed terms and conditions of the credit, including covenants designed to limit changes in the future risk profile of the borrower; and
   6. Where applicable, the adequacy and enforceability of collateral or guarantees, including various scenarios.
7. In addition, in approving borrowers or counterparties for the first time, consideration should be given to the integrity and reputation of the borrower or counterpart as well as their legal capacity to assume the liability. Once credit-granting decisions. This information will also serve as the basis for rating the credit under the bank’s internal rating system.
8. GT Bank Murtala Mohammed Square Branch, Kaduna. need to understand to whom they are granting credit. Therefore, prior to entering into any new credit relationship, a bank must become familiar with the borrower or counterpart and be confident that they are dealing with an individual or organization of sound repute and creditworthiness. In particular, strict policies must be in place to avoid association with individuals involved in fraudulent activities and other crimes. This can be achieved through a number of ways, including asking for references form known parties, assessing credit registries, and becoming familiar with individuals responsible for managing a company and checking their personal references and financial condition. However, a bank should not grant credit simply because the borrower or counterpart is familiar to the bank or is perceived to be highly reputable.
9. GT Bank Murtala Mohammed Square Branch, Kaduna. should have procedures to identify situations where, considering credits, it appropriate to classify a group of obligors as connected counterparties and, thus, as a single obligor. This would include aggregating exposures to groups of accounts exhibiting financial interdependence, including corporate or non-corporate, where they are under common ownership or control or with strong connecting links (for example, common management, familial ties). Banks should also have procedures for aggregating exposures to individual clients across business activities.

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