Abstract
The study examines the role of credit risk management in value creation process among commercial banks in Nigeria. The study reviews the concepts, theories, legal acts and standards relating to the credit risk management and then develops a conceptual model with four antecedents to credit risk. The study analyzes the impact of these antecedents such as antecedents are loan and advance loss provision, total loan and advances, non-performing loan and total asset on accounting Return on Equity (ROE) and Return on Asset (ROA). The panel data come from 10 commercial banks listed on Nigeria Stock Exchange (NSE) between 2006 and 2010. The results reveal that credit risk management has significant effect on financial performance of commercial banks and further recommend that maintaining minimum level of non-performing loans vis-a-vis provision for loans and advances will enhance financial performance through its positive effect on return on equity.
Highlights
The increased competition associated with the process of capitalization, liberalization and globalization and the attempts of Nigerian banks to increase their presence in other markets may have affected the efficiency and credit risk of the Nigerian banking institutions
The results reveal the following: (i) the greatest exposures banks face are credit risk, liquidity risk, interest rate risk, foreign exchange risk and operating risk; (ii) significant differences exist in the application of risk management practices among public sector and local private commercial banks; and (iii) commercial banks staff basically understand risk management but additional training is required to enhance their expertise in the area
The results revealed that proportion of non-performing loans and advances to provision for loans and advances has positive effect of greater magnitude than ratio of total loans and advances to total assets, as indicated by their respective coefficients of 0.001782 and 0.008041
Summary
The increased competition associated with the process of capitalization, liberalization and globalization and the attempts of Nigerian banks to increase their presence in other markets may have affected the efficiency and credit risk of the Nigerian banking institutions. The first of these aspects, already analyzed in other studies, is based on the incentive to the banks to reduce costs and to improve the management of their resources in order to gain competitiveness. Despite the importance of these two aspects, banking literature has usually analyzed banking efficiency without considering them together.
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