CREDIT MANAGEMENT AND FINANCIAL PERFORMANCE OF MICRO FINANCE

BANK IN NIGERIA

PROJECT RESEARCH

BY

MAIGARI BABA USMAN

MAF/23/0139

AUGUST, 2024
 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Micro finance Banks are profit-making organizations performing as intermediaries

connecting borrowers and lenders in bringing temporarily available resources from

business and individual customers as well as providing loans for those in need of financial

support (Uwuigbe, 2013; Driga, 2012). Banks play a vital role in developing economies

like Nigeria, Ghana, Egypt and Algeria.

Bank lending is very crucial for it make possible the financing of agricultural,

industrial and commercial activities of the countries. Banks are entrusted with the funds of

depositors. These funds are generally used by banks for their business. The fund belongs to

the customers so a programme must exist for management of these funds. The programme

must constantly address three basic objectives: liquidity, safety and income. Successful

management calls for proper balancing of all these three. Liquidity enables the banks to

meet loan demands of their valuable and long established customers who enjoy good credit

standing. As a matter of fact a bank cannot remain in business if it neglects the credit

function (Osayeme 2000).

Of interest to this paper is the credit component of the microfinance banks’

portfolio that contributes to the profit of the banks and which led to the problem of bad

debts in Nigerian microfinance banks as a result of poor management. Credit as the name

implies is described as the right to receive payments or the obligation to make payments on
demand or at some future date on account of the immediate transfer of goods or money to

another (Uwuigbe, Uwalomwa and Ben- Caleb, 2012). It is based on the faith and

confidence, which the creditor reposes in the ability and willingness of the debtor to fulfill

his promise to pay. In a credit transaction the right to receive payment and the obligation to

make payments originate at the same time.

The term debt is frequently used in reference to debtor’s obligation to make

payment. Debt and credit are therefore similar terms. Management of credit is simply the

application of four management principles which are planning, organizing directing and

controlling to credit concept. Commercial banks are major players in the financial sector of

every country’s economy. The failure or success of these banks will to a large extent affect

the financial sector and the economy at large. In recent times some commercial banks have

been wound up leaving customers to their fate. It is important to note that the main reason

of the illiquidating of most of these banks is their inefficient and ineffective management

of their capital-funds and credits. Many of them write off huge amounts of debt yearly and

also reflect some going concern issues that relate to their management of credit and

finance. It is in the light of the above, that this study examined the effect credit

management and financial performance of Microfinance bank in Nigeria.

1.2 Statement of the problem

Micro finance banks exist not only to accept deposit, but also to grant credit

facilities, these business activities therefore inevitably expose banks to huge credit risks
which might lead to financial distress, including bankruptcy. Two types of risk are

typically identified when considering banks loans than any other banking business. Firstly,

is the credit risk, that is, the possibility that promised payment will not be made. Secondly,

another type of risk is the liquidity pressure associated with bank loans. The demand for

bank loans is typically higher in boom periods when tight monetary policy causes security

price and the rate of deposit growth to decline.

However, despite the creation of risk management department in all the banks

which is responsible for managing the banks’ risks, including credit risks, available record

show that the spate of bad loans (non-performing loans) was as high as 35% in Nigerian

deposit banks between 1999 and 2009 Sanusi (2010). The increasing level of non-

performing loan rates in banks’ books, poor loan processing, inadequate or absence of

loan collaterals among other factors are linked with poor and ineffective credit risks

management that negatively impacts on bank performances.

Therefore, in this research work, proper investigation will be carried out to look

into some other areas rather, where works put forward in this area has not been properly

treated. Most of these areas include the following;

1. The impact non-performing loans have on the financial performance of

microfinance banks in Nigeria

2. The impact liquidity level has on the financial performance of microfinance

banks in Nigeria

3. The impact bad debts have on the financial performance of microfinance banks
in Nigeria

4. The impact capital adequacy has on the financial performance of microfinance

banks in Nigeria.
1.3 Research questions

The research questions gathered for the purpose of this study are as follows;

1. Do non-performing loans have any impact on the financial performance of

microfinance banks in Nigeria?

2. Do bad debts have any impact on the financial performance of microfinance banks
in Nigeria?

3. Does capital adequacy have any impact on the financial performance of

microfinance banks in Nigeria?

4. Does liquidity level have any impact on the financial performance of microfinance

banks in Nigeria?

1.4 Objectives of the study

The major objective of this study is to examine the impact of credit management on the

performance of the Nigerian banking sector. The specific objectives, however, to;

1) Determine the impact of non-performing loans on financial performance of

microfinance banks in Nigeria

2) Determine the impact of bad debts on financial performance of microfinance banks

in Nigeria

3) Determine the impact of capital adequacy on financial performance of microfinance

banks in Nigeria

4) Determine the impact of banks liquidity on financial performance of microfinance

banks in Nigeria

1.5 Research hypotheses

For the purpose of this study which seeks to evaluate the impact of credit

management on the performance of the Nigerian banking sector, the following hypotheses
have been formulated and will be tested based on the data that will be gathered by the

researcher.

H01: Non-performing loans (NPLN) have no impact on the Return on Equity (ROE) of

the micro finance bank in Nigeria

H02: Total Bad debts (TBDR) have no impact on the Return on Equity (ROE) of micro

finance banks in Nigeria

H03: Capital adequacy (CPAD) has no impact on the Return on Equity (ROE) of micro

finance banks in Nigeria

H04: Liquidity level (LQDL) has no impact on the Return on Equity (ROE) of micro

finance banks in Nigeria

1.6 Scope of the study

The study intends to determine the impact of credit management and financial

performance of micro finance bank in Nigeria, this study will focus on the outside

influences on the credit management of microfinance banks in terms of non-performing

loans, bad debts, liquidity level and an extra internal influence which will be measured by

the banks’ capital adequacy. Therefore, non- performing loans, bad debts, liquidity level

and capital adequacy will be used to measure banks’ credit management, while bank

performance for the purpose of this study will be measured by the return on equity (ROE)

which is the earning power of the shareholders’ equity (i.e. the amount of money that

shareholders’ fund is able to generate yearly). Also for the purpose of this study, secondary

data will be gathered from ten (10) microfinance banks listed on the Nigerian Stock

Exchange. This will result in a total of seventy (70) observations provided that there are no

missing data during the selected periods.

1.7 Significance of the study

Generally, every bank in Nigeria gears their financial operations their

performances. However, risk is an inevitable phenomenon in the banking industry today,

as their major operations involve safe-keeping and investments of funds. One of the major

activities of banks in Nigeria is the giving-out of loans to the general public with strict

interest rates and terms of payment attached to such loans. Despite these strict interest rates

and terms of payment, most failed banks over the years have been diagnosed of high non-

performing loans and bad debts weighing down the profitability of such banks. The

significance of this study will be evident in the fact that its result will demonstrate how;

1. Micro finance Banks will be able to establish very strict credit management policies

which must not only minimize any tendency of incurring losses of non-performing

loans, but also to improve the financial performance of microfinance banks.

2. Micro finance Banks will hence emphasize the security of loans, ensuring that

collaterals are valuable and easily convertible to cash or cash equivalents at the

expiration of the obligation, in cases where customers are unable to fulfill their own

end of the obligation.

3. Micro finance Banks will be very careful as to ensure that the rate of bad debts

written-off drastically, as it will reduce the burden on the profitability of the banks.

This is evident in the fact that bad debts are charged against profit in the banks’

year-end financial statements.

4. Finally, this study will through its result, create an understanding of the relationship

between credit management and the financial performance of microfinance banks in

 Nigeria, to enable banking firms determine such areas to focus on in order to

improve their performance.

1.8 Limitations of the study

Conducting an academic research of this nature cannot be without certain factors

that affects both the research process and the intended result. This study however is not an

exception as the researcher faces the following challenges;

Financial constrain which is a major set-back in most privately funded academic

research works. In this study however, decided to focus on only secondary data through the

use of annual reports of the selected banks and also, the annual statistical bulletin of the

Central Bank of Nigeria (CBN) due to financial constrain.

Inadequate information is another major set-back of this research and the researcher

in this case, encountered some problems trying to gather information from the annual

reports of the selected banks on the selected variables, as the terminologies for these

variables differ from one bank to another but with the same interpretation. Also, the

measure of performance i.e. the return on equity (ROE) is purely accounting in nature, and

may not in all cases reflect the true performance of the selected banks in practical reality.

The limited time available to conclude this study is another area of concern as the

researcher is expected to conclude this research within a short period of time, in a bid to

fulfill the requirement for the award of a bachelor degree. The researcher, hence, will have

to conclude this study within the stipulated time.

1.9 Definition of terms

For an in-depth understanding of this study, here is a conceptual definition of key

terms used in this study;

Credit Management: Credit management is defined as the identification, measurement,

monitoring and controlling of risks arising from the possibility of default in loan

repayment. It could also be viewed as the procedure of ensuring that buyers pay on time,

credit cost are kept low, and poor debts are managed in such a manner that payments are

received without damaging the relationship with that buyer.

Non-Performing Loans: It is a loan that is in default or close to being on default. It is the

type of loan such that payment of interest and principal are yet to be ascertained after 90

days or more, or at least 90 days of interest have been capitalized.

Bad Debts: A debt is declared “bad” when it cannot be or is improbable to be recovered

from the debtor. Debts can become bad as a result of factors that are usually related to the

debtor’s inability to fulfill his own part of the obligation. Such factors range from death to

bankruptcy and also, imprisonment of the debtor. When this occurs, it becomes evident to

the creditor that such debts cannot be recovered in part or full again.

Liquidity: It is a measure of short-term solvency. It indicates the extent to which claims of

the creditors are covered by assets that are expected to be converted to cash within a period

roughly equal to the maturity of the claim. The core responsibility of the Nigerian banking

industry is to ensure liquidity. The liquidity position of a bank will determine the amount

of loans and advances it can give out at every given point in time.

Capital Adequacy: It is also an independent variable and is chosen because it is the core

measure of a bank’s financial strength from a regulator’s point of view. Capital adequacy

ratio consists of the types of financial capital considered as the most reliable and liquid,

primarily shareholders’ equity. Bank with good Capital Adequacy Ratio have good
profitability. With good capital requirement, commercial banks are able to absorb loans

that have gone bad.

1.10 Organisation of the study

This study is organized into five different chapters in an attempt to investigate

whether credit management has a significant effect on the financial performance of the

Micro finance Bank in Nigeria. The remainder of this study will be organized as follows.

The second chapter (i.e. review of literature) will be organized into five sections,

including a brief introduction to the current status of the study, a conceptual framework on

credit management and financial performance of microfinance banks in Nigeria, a

theoretical framework with theories of credit management and their relationship with the

study. Lastly, an empirical framework on the measures of credit management such as the

non-performing loans, the total bad debts written-off, the banks’ liquidity level and capital

adequacy and their relationship with banks’ performance.

The third chapter (i.e. research methodology) will be organized into an

introduction, and statements on the research design to be employed in the study, the

population and sample size to be studied, the sampling technique with which the study

sample is to be drawn, and the technique to be used for data collection and analysis.

The fourth chapter (i.e. data presentation and analysis) will be organized into an

introduction, data presentation, data analysis, test of hypotheses already formulated, and a

summary of the research findings. The last chapter of this study will include the discussion

of findings, conclusion on findings and recommendation of areas for further research.

1.11 Summary

This study which aims at determining the effect of credit management and financial

performance of microfinance banks in Nigeria have been critically examined from the

background of the study, and four research hypotheses have been formulated for the

purpose of this study. It has also been established that secondary data will be gathered from

the annual reports of ten (10) selected banks listed on the Nigerian Stock Exchange (NSE),

resulting in 70 observations. The next chapter will introduce us to a comprehensive review

of prior literatures relating to this area of study.

 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

In studying the effect of credit management on the performance of the Nigerian

banking sector, it is central to note that basically, banks are in place not only to accept

deposits but also to grant credit facilities, and hence they are exposed to credit risk. This

occurrence is common in emerging economies such as Nigeria, Ghana, and Egypt etc.

However, despite the series challenges that have bedeviled the industry, the banking

industry have continued to play a crucial role in the economic development of economies

(e.g. Nigeria). This is because, simultaneously satisfy the needs and preferences of both

surplus and deficit units (Owojori, Akintoye and Adidu 2011)

This chapter aims at giving us a very comprehensive overview of the concept of

credit management in the banking industry and how it has been affecting the financial

performance of microfinance banks in the industry, Emphases on this area of study will

through this study create links between prior findings from the most previous to the most

recent as presented in paragraphs above. However, the content of this

16
chapter will be structured into three major sections (i.e. the conceptual framework,

theoretical framework and empirical framework).

2.1 CONCEPTUAL REVIEW

2.1.1 CREDIT MANAGEMENT

Credit management is the process for controlling and collecting payments from

your customers. A good credit management system will help you reduce the amount of

capital tied up with debtors (people who owe you money) and minimize your exposure to

bad debts. It is a function performed within a company to improve and control credit

policies that will lead to increased revenues and lower risk including increasing

collections, reducing credit costs, extending more credit to creditworthy customers, and

developing competitive credit terms. Through credit control otherwise known as credit

management, it is sometimes possible to increase sales by granting credit to selected

clients who may choose to do business with you because of the convenience offered by a

credit account. If you choose to provide this option be sure to develop a sound credit

application process which includes a thorough check of client credit ratings

17
before granting approval.

2.1.2 CREDIT RISK

Credit risk is the current and prospective risk to earnings or capital arising from an

obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as

agreed. Credit risk is found in all activities in which success depends on counterparty,

issuers, or borrower performance. It arises any time bank funds are extended, committed,

invested, or otherwise exposed through actual or implied contractual agreements, whether

reflected on or off the balance sheet. Thus risk is determined by factor extraneous to the

bank such as general unemployment levels, changing socio-economic conditions, debtors’

attitudes and political issues.

Credit risk refers to the risk that a borrower will default on any type of debt by failing

to make required payments. The risk is primarily that of the lender and includes lost

principal and interest, disruption to cash flows, and increased collection costs.

When we speak of the credit quality of an obligation, this refers generally to the

18
counterparty’s ability to perform on that obligation. This encompasses both the

obligation’s default probability and anticipated recovery rate. To place credit exposure and

credit quality in perspective, recall that every risk comprise two elements: exposure and

uncertainty. For credit risk, credit exposure represents the former, and credit quality

represents the latter.

For loans to individuals or small businesses, credit quality is typically assessed through a

process of credit scoring. Prior to extending credit, a bank or other lender will obtain

information about the party requesting a loan. In the case of a bank issuing credit cards,

this might include the party’s annual income, existing debts, whether they rent or own a

home, etc. A standard formula is applied to the information to produce a number, which is

called a credit score. Based upon the credit score, the lending institution will decide

whether or not to extend credit. The process is formulaic and standardized.

Many forms of credit risk especially those associated with larger institutional

counterparties are complicated, unique or are of such a nature that it is worth assessing

them in a less formulaic manner. The term credit analysis is used to describe any process

for assessing the credit quality of counterparty. While the

19
term can encompass credit scoring, it is more commonly used to refer to processes that

entail human judgment. One or more people, called credit analysts, will review

information about the counterparty. This might include its balance sheet, income

statement, recent trends in its industry, the current economic environment, etc. They may

also assess the exact nature of an obligation. For example, senior debt generally has higher

credit quality than those subordinated debt of the same issuer. Based upon this analysis,

the credit analysts assign the counterparty (or the specific obligation) a credit rating, which

can be used for making credit decisions.

Many banks, investment managers and insurance companies hire their own credit analysts

who prepare credit ratings for internal use. Other firms including; Standard & Poor’s,

Moody’s and Fitchare in the business of developing credit ratings for use by investors or

other third parties. These firms are called credit rating agencies. Institutions that have

publicly traded debt hire one or more of them to prepare credit ratings for their debt. Those

credit ratings are then distributed for little or no charge to investors. Some regulators also

develop credit ratings. In the United States, the National Association of Insurance

20
Commissioners publishes credit ratings that are used for calculating capital charges for

bond portfolios held by insurance companies.

2.1.3 CREDIT RISK AND THE BANKING INDUSTRY

Credit risk according to Basel Committee of Banking Supervision BCBS (2001)

and Gastineau (1992) is the possibility of losing the outstanding loan partially or totally,

due to credit events (default risk). Credit events usually include events such as bankruptcy,

failure to pay a due obligation, repudiation/moratorium or credit rating change and

restructure. Basel Committee on Banking Supervision- BCBS (1999) defined credit risk as

the potential that a bank borrower or counterparty will fail to meet its obligations in

accordance with agreed terms. Heffernan (1996) observe that credit risk as the risk that an

asset or a loan becomes irrecoverable in the case of outright default, or the risk of delay in

the servicing of the loan. In either case, the present value of the asset declines, thereby

undermining the solvency of a bank. Credit risk is critical since the default of a small

number of important customers can generate large losses, which can lead to insolvency

(Bessis, 2002).

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 BCBS (.1999) observed that banks are increasingly facing credit risk (or

counterparty risk) in various financial instruments other than loans, including acceptances,

interbank transactions, trade financing foreign exchange transactions, financial futures,

swaps, bonds, equities, options, and in the extension of commitments and guarantees, and

the settlement of transaction. Anthony (1997) asserts that credit risk arises from non-

performance by a borrower. It may arise from either an inability or an unwillingness to

perform in the pre-committed contracted manner. Brown-bridge (1998) claimed that the

single biggest contributor to the bad loans of many of the failed local banks was insider

lending. He further observed that the second major factor contributing to bank failure were

the high interest rates charged to borrowers operating in the high-risk. The most profound

impact of high non-performing loans in banks portfolio is reduction in the bank

profitability especially when it comes to disposals.

Robert and Gary (1994) state that the most obvious characteristics of failed banks

are not poor operating efficiency, however, but an increased volume of non-performing

loans. Nonperforming loans in failed banks have typically been

22
associated with regional macroeconomic problems. DeYoung and Whalen (1994) observed

that the US Office of the Comptroller of the Currency found the difference between the

failed banks and those that remained healthy or recovered from problems was the caliber

of management. Superior mangers not only run their banks in a cost efficient fashion, and

thus generate large profits relative to their peers, but also impose better loan underwriting

and monitoring standards than their peers which result to better credit quality.

Bobakovia (2003) asserts that the profitability of a bank depends on its ability to

foresee, avoid and monitor risks, possible to cover losses brought about by credit risk. The

banks supervisors are well aware of this problem, it is however very difficult to persuade

bank mangers to follow more prudent credit policies during an economic upturn,

especially in a highly competitive environment. They claim that even conservative

mangers might find market pressure for higher profits very difficult to overcome.

The deregulation of the financial system in Nigeria embarked upon from 1986

allowed the influx of banks into the banking industry. As a result of alternative interest rate

on deposits and loans, credits were given out

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indiscriminately without proper credit appraisal (Philip, 1994). The resultant effects were

that many of these loans turn out to be bad. It is therefore not surprising to find banks to

have non-performing loans that exceed 50 per cent of the bank’s loan portfolio. The

increased number of banks over-stretched their existing human resources capacity which

resulted into many problems such as poor credit appraisal system, financial crimes,

accumulation of poor asset quality among others (Sanusi, 2002). The consequence was

increase in the number of distressed banks.

A high level of financial leverage is usually associated with high risk. This can

easily be seen in a situation where adverse rumours, whether founded or precipitated

financial panic and by extension a run on a bank. According to Umoh (2002) and Felix and

Claudine (2008) few banks are able to withstand a persistent run, even in the presence of a

good lender of last resort. As depositors take out their funds, the bank hemorrhages and in

the absence of liquidity support, the bank is forced eventually to close its doors. Thus, the

risks faced by banks are endogenous, associated with the nature of banking business itself,

whilst others are exogenous to the banking system.

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 In a collaborative study by the CBN and the Nigeria Deposit Insurance Corporation

(NDIC) in 1995, operators of financial institutions confirmed that bad loans and advances

contributed most to the distress. In their assessment of factors responsible for the distress,

the operators ranked bad loans and advances first, with a contribution of 19.5%.

Therefore, the determinants of bank performance have attracted the interest of

academic research as well as of bank management. Studies dealing with internal

determinants employ variables such as size, capital, credit risk management and expenses

management. The need for risk management in the banking sector is inherent in the nature

of the banking business. Poor asset quality and low levels of liquidity are the two major

causes of bank failures and represented as the key risk sources in terms of credit and

liquidity risk and attracted great attention from researchers to examine the their impact on

bank profitability.

Credit risk is by far the most significant risk faced by banks and the success of their

business depends on accurate measurement and efficient management of this risk to a

greater extent than any other risk (Giesecke, 2004). Increases in

25
credit risk will raise the marginal cost of debt and equity, which in turn increases the cost

of funds for the bank (Basel Committee, 1999).

To measure credit risk, there are a number of ratios employed by researchers. The

ratio of Loan Loss Reserves to Gross Loans (LOSRES) is a measure of bank’s asset

quality that indicates how much of the total portfolio has been provided for but not

charged off. Indicator shows that the higher the ratio the poorer the quality and therefore

the higher the risk of the loan portfolio will be. In addition, Loan loss provisioning as a

share of net interest income (LOSRENI) is another measure of credit quality, which

indicates high credit quality by showing low figures. In the studies of cross countries

analysis, it also could reflect the difference in provisioning regulations (Demirgiic-Kunt,

1999).

Assessing the impact of loan activities on bank risk, Brewer (1989) uses the ratio of

bank loans to assets (LTA). The reason to do so is because bank loans are relatively

illiquid and subject to higher default risk than other bank assets, implying a positive

relationship between LTA and the risk measures. In contrast, relative improvements in

credit risk management strategies might suggest that LTA is negatively related to bank risk

measures (Altunbas, 2005). Bourke (1989)

26
reports the effect of credit risk on profitability appears clearly negative This result may be

explained by taking into account the fact that the more financial institutions are exposed to

high risk loans, the higher is the accumulation of unpaid loans, implying that these loan

losses have produced lower returns to many commercial banks (Miller and Noulas, 1997).

The findings of Felix and Claudine (2008) also shows that return on equity ROE and

return on asset ROA all indicating profitability were negatively related to the ratio of non-

performing loan to total loan NPL/TL of financial institutions therefore decreases

profitability.

In response to this, commercial banks have almost universally embarked upon an

upgrading of their risk management and control systems. Also, it is in the realization of the

consequence of deteriorating loan quality on profitability of the banking sector and the

economy at large that this research work is motivated.

2.1.4 CAUSES OF MAJOR CREDIT PROBLRMS IN THE BANKING INDUSTRY

Most major banking problems have been either explicitly or indirectly caused by

27
weaknesses in credit risk management. In supervisors’ experience, certain key problems

tend to recur. Severe credit losses in a banking system usually reflect simultaneous

problems in several areas, such as concentrations, failures of due diligence and inadequate

monitoring. This section summarizes some of the most common problems relating to the

broad areas of concentrations, credit processing, and market- and liquidity-sensitive credit

exposures.

Concentrations

Concentrations are probably the single most important cause of major credit

problems. Credit concentrations are viewed as any exposure where the potential losses are

large relative to the bank’s capital, its total assets or, where adequate measures exist, the

bank’s overall risk level. Relatively large lossesl5 may reflect not only large exposures,

but also the potential for unusually high percentage losses given default. Credit

concentrations can further be grouped roughly into two categories:

Conventional credit concentrations: would include concentrations of credits to single

borrowers or counterparties, a group of connected counterparties, and sectors or industries,

such as commercial real estate, and oil and gas.

28
Concentrations based on common or correlated risk factors: reflect subtler or more

situation- specific factors, and often can only be uncovered through analysis. Disturbances

in Asia and Russia in late 1998 illustrate how close linkages among emerging markets

under stress conditions and previously undetected correlations between market and credit

risks, as well as between those risks and liquidity risk, can produce widespread losses.

Examples of concentrations based on the potential for unusually deep losses often embody

factors such as leverage, optionality, correlation of risk factors and structured financings

that concentrate risk in certain tranches. For example, a highly leveraged borrower will

likely produce larger credit losses for a given severe price or economic shock than a less

leveraged borrower whose capital can absorb a significant portion of any loss. The onset of

exchange rate devaluations in late 1997 in Asia revealed the correlation between exchange

rate devaluation and declines in financial condition of foreign exchange derivative

counterparties resident in the devaluing country, producing very substantial losses relative

to notional amounts of those derivatives. The risk in a pool of assets can be concentrated in

a securitization into subordinated tranches and claims on

29
leveraged special purpose vehicles, which in a downturn would suffer substantial losses.

Credit Process Issues

Many credit problems reveal basic weaknesses in the credit granting and

monitoring processes. While shortcomings in underwriting and management of market-

related credit exposures represent important sources of losses at banks, many credit

problems would have been avoided or mitigated by a strong internal credit process.

An example of the problem is the expanded use of credit-scoring models in

consumer lending in the United States and some other countries. Large credit losses

experienced by some banks for particular tranches of certain mass-marketed products

indicate the potential for scoring weaknesses. Some credit problems arise from subjective

decision-making by senior management of the bank. This includes extending credits to

companies they own or with which they are affiliated, to personal friends, to persons with

a reputation for financial acumen or to meet a personal agenda, such as cultivating special

relationships with celebrities.

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 Many banks that experienced asset quality problems in the 1990s lacked an

effective credit review process (and indeed, many banks had no credit review function).

Credit review at larger banks usually is a department made up of analysts, independent of

the lending officers, who make an independent assessment of the quality of a credit or a

credit relationship based on documentation such as financial statements, credit analysis

provided by the account officer and collateral appraisals. At smaller banks, this function

may be more limited and performed by internal or external auditors. The purpose of credit

review is to provide appropriate checks and balances to ensure that credits are made in

accordance with bank policy and to provide an independent judgment of asset quality,

uninfluenced by relationships with the borrower. Effective credit review not only helps to

detect poorly underwritten credits, it also helps prevent weak credits from being granted,

since credit officers are likely to be more diligent if they know their work will be subject

to review.

A related problem is that many banks do not take sufficient account of business

cycle effects in lending. As income prospects and asset values rise in the ascending portion

of the business cycle, credit analysis may incorporate

31
overly optimistic assumptions. Many Industries such as; retailing, commercial real estate

and real estate investment trusts, utilities, and consumer lending often experience strong

cyclical effects. Sometimes the cycle is less related to general business conditions than the

product cycle in a relatively new, rapidly growing sector, such as health care and

telecommunications. Effective stress testing which takes account of business or product

cycle effects is one approach to incorporating into credit decisions a fuller understanding

of a borrower’s credit risk. More generally, many underwriting problems reflect the

absence of a thoughtful consideration of downside scenarios. In addition to the business

cycle, borrowers may be vulnerable to changes in risk factors such as specific commodity

prices, shifts in the competitive landscape and the uncertainty of success in business

strategy or management direction. Many lenders fail to “stress test” or analyze the credit

using sufficiently adverse assumptions and thus fail to detect vulnerabilities.

Market and Liquidity-Sensitive Credit Exposures

Market and liquidity-sensitive exposures pose special challenges to the credit

processes at banks. Market-sensitive exposures include foreign exchange

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and financial derivative contracts. Liquidity-sensitive exposures include margin and

collateral agreements with periodic margin calls, liquidity back-up lines, commitments and

some letters of credit, and some unwind provisions of securitizations. An issue faced by

virtually all financial institutions is the need to develop meaningful measures of exposure

that can be compared readily with loans and other credit exposures. This problem is

described at some length in the Basel Committee’s January 1999 study of exposures to

highly leveraged institutions. Market-sensitive instruments require a careful analysis of the

customer’s willingness and ability to pay. Most market-sensitive instruments, such as

financial derivatives, are viewed as relatively sophisticated instruments, requiring some

effort by both the bank and the customer to ensure that the contract is well understood by

the customer. The link to changes in asset prices in financial markets means that the value

of such instruments can change very sharply and adversely to the customer, usually with a

small, but non-zero probability.

Liquidity-sensitive credit arrangements or instruments require a careful analysis of

the customer’s vulnerability to liquidity stresses, since the bank’s

33
funded credit exposure can grow rapidly when customers are subject to such stresses. Such

increased pressure to have sufficient liquidity to meet margin agreements supporting over-

the-counter trading activities or clearing and settlement arrangements may directly reflect

market price volatility. In other instances, liquidity pressures in the financial system may

reflect credit concerns and a constricting of normal credit activity, leading borrowers to

utilize liquidity backup lines or commitments. Market- and liquidity-sensitive instruments

change in riskiness with changes in the underlying distribution of price changes and

market conditions. For market-sensitive instruments, for example, increases in the

volatility of price changes effectively increases potential exposures. Consequently, banks

should conduct stress testing of volatility assumptions. Market- and liquidity-sensitive

exposures, because they are probabilistic, can be correlated with the creditworthiness of

the borrower. This is an important insight gained from the market turmoil in Asia, Russia

and elsewhere in the course of 1997 and 1998. That is, the same factor that changes the

value of a market- or liquidity-sensitive instrument can also influence the borrower’s

financial health and future prospects.

34
2.2.5 CONCEPT OF THE RESEARCH VARIABLES Non-

Performing Loans

Non-Performing Loans (NPL) is an independent variable and it is chosen because it

is an indicator of credit risk management. NPL, in particular, indicates how banks manage

their credit risk because it defines the proportion of loan losses amount in relation to Total

Loan amount (Hosna et al., 2009). We expected non-performing loans to have an adverse

relationship with RCBs performing.

Bad debts

The term debt is frequently used in reference to debtor’s obligation to make

payment. Debt and credit are therefore similar terms. Management of credit is simply the

application of four management principles which are planning, organizing directing and

controlling to credit concept. Commercial banks are major players in the financial sector of

every country’s economy. The failure or success of these banks will to a large extent affect

the financial sector and the

35
economy at large. In recent times some commercial banks have been wound up leaving

customers to their fate. It is important to note that the major cause of the winding up of

some of these banks is the poor management of their finance and credit. The reason for the

failure of these banks has sparked the interest of the researcher in conducting further

studies into the management of finance and credit in Nigerian banks. It is in the light of the

above, that this study examined the relationship between credit management and bank

performance in Nigeria.

Capital Adequacy Ratio

Capital Adequacy Ratio (CAR) is also an explanatory variable and is chosen

because it is the core measure of a bank’s financial strength from a regulator’s point of

view. Capital adequacy ratio consists of the types of financial capital considered as the

most reliable and liquid, primarily shareholders’ equity. Bank with good Capital Adequacy

Ratio have good profitability. With good capital requirement, commercial banks are able to

absorb loans that have gone bad.

Return on Equity (ROE)

Return on Equity (ROE) represents an explained variable and it measures

36
the return on shareholders’ investment in the bank. ROE was used as the indicator of the

profitability in the regression analysis because ROE along- with ROA has been widely

used in earlier research (Altunbas, 2005). It shows the effectiveness of management in the

utilization of the funds contributed by shareholders of a rural bank.

2.2 THEORETICAL FRAMEWORK

2.2.1 PORTFOLIO THEORY

Since the 1980s, companies have successfully applied modern portfolio theory to

market risk. Many companies are now using value at risk models to manage their interest

rate and market risk exposures. Unfortunately, however, even though credit risk remains

the largest risk facing most companies, the practice of applying modern portfolio theory to

credit risk has lagged (Margrabe, 2007). Traditionally, organizations have taken an asset-

by-asset approach to credit risk management. While each company’s method varies, in

general this approach involves periodically evaluating the quality of credit exposures,

applying a credit risk rating, and aggregating the results of this analysis to identify

37
a portfolio’s expected losses. The foundation of the asset-by-asset approach is a sound

credit review and internal credit risk rating system. This system enables management to

identify changes in individual credits, or portfolio trends in a timely manner. Based on the

changes identified, credit identification, credit review, and credit risk rating system

management can make necessary modifications to portfolio strategies or increase the

supervision of credits in a timely manner. While the asset-by-asset approach is a critical

component to managing credit risk, it does not provide a complete view of portfolio credit

risk, where the term risk refers to the possibility that actual losses exceed expected losses.

2.2.2 ARBITRAGE PRICING THEORY (APT)

A more interesting alternative was the Arbitrage Pricing Theory (APT) of Ross

(1976). Stephen Ross's APT approach moved away from the risk vs. return logic of the

CAPM, and exploited the notion of pricing by arbitrage to its fullest possible extent. As

Ross himself has noted, arbitrage-theoretic reasoning is not unique to this particular theory

but is in fact the underlying logic and

38
methodology of virtually all of finance theory. This theory subscribes to the fact that an

estimate of the benefits of diversification would require that practitioners calculate the

covariance of returns between every pair of assets. In their Capital Asset Pricing Model

(CAPM), Morris (2001) solved this practical difficulty by demonstrating that one could

achieve the same result merely by calculating the covariance of every asset with respect to

a general market index. With the necessary calculating power reduced to computing these

far fewer terms (betas), optimal portfolio selection became computationally feasible.

2.2.3 Information Theory

Derban, Binner and Mullineux (2005) recommended that borrowers should be

screened especially by banking institutions in form of credit assessment. Collection of

reliable information from prospective borrowers becomes critical in accomplishing

effective screening as indicated by symmetric information theory. Qualitative and

quantitative techniques can be used in assessing the borrowers although one major

challenge of using qualitative models is their subjective nature. However according to

Derban, Binner and Mullineux (2005),

39
borrowers attributes assessed through qualitative models can be assigned numbers with the

sum of the values compared to a threshold. This technique minimizes processing costs,

reduces subjective judgments and possible biases.

2.3 EMPIRICAL REVIEW

It is universally acknowledged that the banking industry plays a catalytic role in the

process of economic growth and development (Uwuigbe, Uwuigbe and Daramola, 2014).

This acknowledgement is reinforced by contemporary conceptualization to the effect that

banks are veritable vehicles for mobilizing resources (funds) from surplus units and

channeling them to deficit units. These resources belong to customers so a programme

must exist for the management of these funds.

Prior studies suggests that a good credit risk architecture, policies and structure of

credit risk management, credit rating system, monitoring and control contributes to the

success of credit risk management system Bachi (2003). Similarly, Muninarayanappa and

Nirmala (2004) in a related study opined that the success of credit risk management require

maintenance of proper credit risk

40
environment, credit strategy and policies. Thus the ultimate aim should be to protect and

improve the loan quality. In the same vein, findings from Salas and Saurina (2002)

revealed that growth in GDP, rapid credit expansion, bank size and capital ratio had a

significant impact on the non-performing loans.

Felix and Claudine (2008) examined the association between the financial

performance of microfinance banks and credit risk management. As part of their findings,

they observed that return on equity and return on assets both measuring profitability were

inversely related to the ratio of non-

41
 performing loans to total loans of financial institutions thereby leading to a decline in

profitability. Also, Hosna, et al. (2009) in their study opined that credit risk has a

significant positive effect on the profitability of commercial banks in Sweden.

Correspondingly, Kithinji (2010) examined the effects of credit risk management on

commercial banks profitability in Kenya. They observed that the level of credit was

high in the early years of the implementation of Basle II but decreased significantly in

2007 and 2008, probably when the Basle II was implemented by commercial banks.

The findings revealed that the bulk of the profits of commercial banks are not

influenced by the amount of credit and non-performing loans suggesting that other

variables other than credit and non-performing loans impact on profits. Funso et al.

(2012) investigates the quantitative effect of credit risk on the performance of

commercial banks in Nigeria for the period 2000-2010. Findings from their study

showed that the effect of credit risk on bank performance measured by the return on

assets of banks is cross sectional invariant.

Robert and Gary (1994) stated that most obvious characteristics of failed banks are not

poor operating efficiency, however, but an increased volume of non-performing loans.

Nonperforming loans in failed banks have typically been associated with regional

macroeconomic problems. Koehn and

42
Santomero (1980), Kim and Santomero (1988) and Athanasoglou et al. (2005), suggest

that bank risk taking has pervasive effects on bank profits and safety. Bobakovia

(2003) asserts that the profitability of a bank depends on its ability to foresee, avoid

and monitor risks, possible to cover losses brought about by risk arisen.

In Nigeria, Kargi (2011) examined the impact of credit risk on the profitability of

Nigerian banks. Findings from the study revealed that credit risk management has a

significant impact on the profitability of Nigerian banks. Hence, they opined that

banks’ profitability is inversely influenced by the levels of loans and advances, non-

performing loans and deposits thereby exposing them to great risk of illiquidity and

distress. Although, some considerable amount of literature exists on the interaction

between finance and credit management on banks liquidity position, however, the

same is not true in developing economies like Nigeria where there is a relatively dearth

in literature in this area, coupled with the huge institutional differences between

Nigeria and other developed economies.

The deregulation of the financial system in Nigeria embarked upon from 1986 allowed

the influx of banks into the banking industry. As a result of alternative interest rate on

deposits and loans, credits were given out indiscriminately without proper credit

appraisal (Philip, 1994). The resultant

43
 effects were that many of these loans turn out to be bad. It is therefore not surprising

to find banks to have non-performing loans that exceed 50 per cent of the bank’s loan

portfolio.

A high level of financial leverage is usually associated with high risk. This can easily

be seen in a situation where adverse rumours, whether founded or precipitated

financial panic and by extension a run on a bank.

Owojori et al (2011) highlighted that available statistics from the liquidated banks

clearly showed that inability to collect loans and advances extended to customers and

directors or companies related to directors/managers was a major contributor to the

distress of the liquidated banks. At the height of the distress in 1995, when 60 out of

the 115 operating banks were distressed, the ratio of the distressed banks’ non-

performing loans and leases to their total loans and leases was 67%. The ratio

deteriorated to 79% in 1996; to 82% in 1997; and by December 24 th the licenses of 35

of the distressed banks had been revoked. In 2003, only one bank (Peak Merchant

Bank) was closed. No bank was closed in the year 2004. Therefore, the number of

banking licenses revoked by the CBN since 1994 remained at 36 until January 2006,

when licenses of 14 more banks were revoked, following their failure to meet the

minimum recapitalization directive of the CBN. At the time, the banking licenses were

revoked, some of the banks had ratios of performing credits that

44
were less than 10% of loan portfolios. In 2000 for instance, the ratio of non-

performing loans to total loans of the industry had improved to 21.5% and as at the

end of 2001, the ratio stood at 16.9%. In 2002, it deteriorated to 21.27%, 21.59% in

2002 and in 2004, the ratio was 23.08% (NDIC Annual Reports-various years).

In a collaborative study by the CBN and the Nigeria Deposit Insurance Corporation

{NDIC} in 1995, operators of financial institutions confirmed that bad loans and

advances contributed most to the distress. In their assessment of factors responsible for

the distress, the operators ranked bad loans and advances first, with a contribution of

19.5%.

The role of bank remains central in financing economic activity and its effectiveness

could exert positive impact on overall economy as a sound and profitable banking

sector is better able to withstand negative shocks and contribute to the stability of the

financial system (Athanasoglou et al, 2005). Increases in credit risk will raise the

marginal cost of debt and equity, which in turn increases the cost of funds for the bank

(Basel Committee, 1999).

45
2.4 SUMMARY

This chapter has introduced us to the current state of this area of study and the current

state of credit risk management in the Nigerian banking industry as we have previously

established in through the study of Kargi (2011) that credit risk management has a significant

impact on the profitability of Nigerian banks. So, the next chapter of this study intends to

establish the methodology that will be used in achieving the objectives of this research.

46
 CHAPTER THREE

RESEARCH METHODOLOGY 3.1

INTRODUCTION

For every form of research, there must be a methodology for data collection and

analysis, which will also provide the basis for testing hypotheses and drawing

conclusions. However, research methodology is the process used to collect data and

information for analysis, in order to test the previously formulated hypotheses and to

draw conclusions for decision making purposes. It refers to the systematic rules and

procedures upon which a research is based against which claims for knowledge

assumption are proved in favor of a decision (Asika, 2004).

Research involves a process of asking and answering questions that may lead to

interplay between inductive and deductive thinking, the methods used in answering

such questions is what brings about research methodology. Hence, research

methodology is a way to find out the result of a given test carried out on a specific

matter referred to as research problem. It is basically a way of searching or solving a

research problem (Industrial Research Institute, 2010). While Bryman and Bell (2007)

believes that research methodology is the framework for collecting and analyzing data.

The research design appropriately explains the way a researcher gathers evidence and

arrive at

47
conclusion. For the purpose of studying the effect of credit management on the

performance of the Nigerian banking sector, this chapter focuses on the methodology

used for this research work. It involves the methods and procedures for carrying out

this study which consists of the following: Research design, population and sample

size, sample techniques, method of data collection and technique of data analysis.

3.2 RESEARCH DESIGN

A research design is a systematic plan to study a scientific problem; it can be

described as the. Program guides the researcher in the process of collecting, analyzing

and interpreting data. A research design is basically the overall framework for

answering question or testing the research hypothesis. The type of research design

adopted in this study is the ex-post facto research design. The ex-post facto research

design is used because this study involves an empirical study of the effect that credit

management has on the performance of the Nigerian banking sector.

Furthermore, the research approach taken by any researcher will be a factor of the

technique adopted. There are two fundamental approach associated with the

quantitative research technique: the inductive and the deductive approach (Saunders,

Lewis and Thornhill 2012). Deductive approach focuses of testing already formulated

theories with a view to accepting or rejecting

48
 them through a range of formulated research objectives, questions, and research

hypotheses. In this study, the researcher formulates the hypotheses and questions to

test the theories of capital structure with a view to rejecting or accepting them.

Consequently, the deductive research approach is adopted in line with the authors

mentioned above. In addition, the researcher is highly objective as much as possible

and independent of the variables being observed to establish unbiased results. This

means the researcher’s approach focuses on positivism philosophy, a term usually

associated with deductive approach.

3.3 POPULATION AND SAMPLE SIZE

This research work will be focusing on the ten selected banks in the Nigerian banking

industry, currently listed on the Nigerian stock exchange (NSE). Hence, the population

size is a total o: ten (10) banks currently listed on the Nigerian Stock Exchange (NSE)

and which includes the following; First bank plc, United Bank for Africa plc, Zenith

bank plc Eco bank plc, Guarantee Trust bank plc, Fidelity bank plc, Union bank plc,

Access bank plc, Skye bank plc and the Sterling bank plc.

Studies as this, are supposed to be carried out on all the commercial banks

listed on the NSE, but as a result of the researcher’s limited resources available,

limited access to the annual financial statement of certain

49
companies (inaccessible population), and the short period of time available for

carrying out this research (time constrain), only ten (10) banks currently listed on the

NSE has been included which covers as much as approximately 50% of the entire

population of study. This study will cover a period of seven (7) years ranging between

2008- 2014 financial years.

3.4 SAMPLING TECHNIQUES

A sampling technique is a plan specifying how elements will be drawn from the

population (Olannye, 2006). With regards to this research that deals with deposit

money banks in Nigeria, the ten (10) banks which the researcher intends to study were

selected judgmentally (i.e. the judgmental sampling technique) as a result of the

researcher’s limited access to the required data and financial constrain. However, the

sample size of ten (10) selected banks actually covers as much as 50% of the entire

population.

3.5 METHOD OF DATA COLLECTION

This involves how data is gathered for the study. It involves the development of

relevant instruments with satisfactory properties and administering these to the

subjects involved in the study (Olannye, 2006). The method of data collection used in

this study is the secondary source of data. For the purpose of this study, data will be

obtained from two major

50
sources which include the annual financial reports of the ten (10) selected banks and

Central Bank of Nigeria statistical bulletins.

This piece of research will adopt the quantitative research techniques. The

techniques adopted in any research are carefully guided by the research objectives,

philosophy and the nature of data collected. In accomplishing the objectives set in this

research work, the researcher collects quantitative data from the annual report of firms

which are generally regarded as secondary data. Consequently, quantitative research

techniques become more suitable than a qualitative one. These qualitative data will be

collected for a period of seven years ranging from 2008-2014.

3.6 MODEL SPECIFICATION

The model specified for this study will be adopted from the work of Idowu and

Awoyemi (2014) and Uwuigbe et al (2015) where the performance of Nigerian banks

was proxy against non-performing loans, performing loans, liquidity ration and return

on investment. Therefore, for the objectivity of this study the model will be modified

thus; ROE = F (NPLN, TBDW, CPAD, LQDL)

The linear equation will become;

ROE = β0 + β1NPLN + β2TBDW + β3CPAD + β4LQDL…………….....2

51
The econometric equation will then be thus;

ROE t-1 = β0t-1 + β1NPLNt-1 + β2TBDWt-1 + β3CPADt-1 + β4LQDLt-1 + µt-1...3

Where;

ROE = Return on Equity of selected Nigerian Banks NPLN = Non-Performing

Loans of selected Nigerian Banks TBDW = Total Bad Debts Written-off of

selected Nigerian Banks CPAD = Capital Adequacy of selected Nigerian Banks

LQDL = Liquidity Level of selected Nigerian Banks

β0 = the intercept, the value of y when the independent variables assume zero as value.

β1 – β4= coefficient of the independent variables or parameters

µ = stochastic variable/error term

3.7 TECHNIQUE OF DATA ANALYSIS

The technique of analysis used in analyzing the data subjected for this research

is the ordinary least square (OLS) for its statistical regression analysis since it

will be used to explain the impact of the independent variables on the

dependent variable. The correlation analysis will be used to explain the

significant relationship among the variables while

52
 the student t-test will be used in testing the formulated hypotheses subjected for

the study. The f-test will be used in explaining the significant level of the model

specification while the Durbin Watson model will be used to explain the

evidential level of autocorrelation between the dependent variable and

independent variables. Moreover, a simple percentage will be used in analyzing

the performance of sample banks over the years selected for the study.

3.8 SUMMARY

This chapter has really shown us the methods used in the process of carrying out this

research study (i.e. the research methodology). Thus, showing us the

53
right methods needed in this research work as applicable to research design, population

and sample size, method of data collection and the technique of data analysis. A

sample of ten (10) banks in Nigeria have been drawn for study over a period of seven

(7) years, in order to investigate the impact of credit management on the performance

of the Nigerian banking sector. Banks’ performance will be measured by the return on

equity (ROE) Idowu and Awoyemi (2014), while credit management will be measured

by non-performing loans (NPLN), total bad debts written-off (TBDW), capital

adequacy (CPAD), and the liquidity level which is measured by the acid-test ratio

(LQDL); (Idowu and Awoyemi (2014) and Uwuigbe et al (2015)). In the next chapter,

data collected on these variables will be presented and analyzed in order to enable the

researcher draw a conclusion based on the findings.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS 4.1

INTRODUCTION

As stated earlier in this study, our aim is to determine the impact of

54
credit management on the performance of the Nigerian banking sector, focusing on ten

(10) selected banks listed on the NSE for a period of seven

(7) years. Hence, it is a correlation research that links credit management variables of

non-performing loan, total bad debts written-off, bank liquidity and capital adequacy to

financial performance of the selected banks measured by the return on equity (ROE) in

order to achieve its objectives. This chapter encompasses the presentation and analysis

of data collected from ten (10) banks through the secondary data collection method.

The secondary data obtained is presented in a tabular form and analyzed through the

application of regression analytical technique using the SPSS statistical tool. The

choice of selected banks in the sample was motivated by data availability from such

firms on all variables included in the model.

4.2 DATA PRESENTATION

For the purpose of this study, the banks included in the sample are First bank,

United Bank for Africa Plc, Zenith bank Plc, Eco bank plc, Guarantee Trust bank Plc,

Fidelity bank Plc, Union bank plc, Access bank plc, Skye bank plc and the Sterling

bank Plc which are listed on the Nigerian Stock Exchange (NSE) as at the time this

study is being conducted. Data collected from the annual financial reports of the

selected banks for a period of seven (7) i.e.

55
from 2007 to 2013 were discussed respectively. Credit management for the purpose of

this study is captured by the following variables; Non-Performing Loans: this is

denoted by (NPLN) for the purpose of this study and it refers to the ratio of non-

performing loans to total loans and advances for the selected financial periods. This

study intends to determine how non-performing loans can affect the financial

performance of microfinance banks in Nigeria. However, non-performing loans ratio

(NPLN) are determined as follows; Non-performing loant / Total loans and advances

Total Bad Debts Written-Off: this is denoted by (TBDW) for the purpose of this study

and it refers to the ratio of bad debts written-off to total debts for the selected financial

periods. This study intends to determine how bad debts written-off can affect the

financial performance of microfinance banks in Nigeria. However, the total bad debts

written-off (TBDW) are determined as follows;

Bad debts written-off, / Total debtst

Bank Liquidity Level: this is denoted by (LQDL) for the purpose of this study and it

refers to the liquidity level of the selected banks for the selected financial periods. This

study intends to determine how the liquidity level of banks in Nigeria can affect their

performance. However, the liquidity levels

56
 of the selected banks (LQDL) are determined by the current ratio as follows; Current

assets/Current liabilities

Capital Adequacy: this is denoted by (CPAD) for the purpose of this study and it refers

to the bank’s financial strength of all the selected banks from a regulator’s point of

view. This study intends to determine how the financial strength of banks can affect

the performance of such banks in Nigeria. However, the capital adequacy ratios

(CPAD) are determined as follows;

(Tier 1 capital, - Tier 2 capitalt) / Risk-weighted assetst

The dependent variable of this study which is performance of the Nigerian banking

industry (i.e. banks’ performance) will be captured by the return on equity (ROE) which is

the earning power of shareholders’ equity. This study intends to determine the impact of

credit management as measured by all the above variables, on the performance of the

Nigerian banking industry as measured by the return on equity (ROE). However, the return

on equity (ROE) is determined as follows; Profit after tax (PAT)t/ Shareholders’ equityt

The sample of ten (10) selected banks listed on the NSE as stated in the previous chapter were

studied over a period of seven (7) years resulted in 70 observations. The sample is presented

in tables below:

Number of firms

57
 Banks listed on the NSE 21

Selected banks 10
Total Observations 70

Adapted from moneyhub.net (Copyright 2001 - 2012; All Rights Reserved)

Table 4.2.2 as shown below reveals the list of all the ten (10) selected banks

considered for the purpose of this study.

Table 4.2.2
S/N SELECTED BANKS
1 Access Bank Plc
2Union Bank Plc
3First Bank Plc
4Zenith Bank Plc
5Eco Bank Plc
6Fidelity Bank Plc
7United Bank for Africa (UBA) Plc
8Skye Bank Plc
9Sterling Bank Plc
10Guarantee Trust Bank (GTB) Plc

The data computed from the annual financial reports of the selected banks are as

presented in tables below:

Table 4.2.3: Presentation of Data for Access Bank Plc

Independent variables Dependent

years NPLN TBDW LQDL CPAD ROE

2008 0.099688078 0.067277037 0.917745777 0.303163453 0.214319618

2009 0.099688078 0.252234985 1.637587863 1.016587882 0.093350435

58
 2010 0.022379852 0.010325291 0.352412511 1.177456749 0.123820269

2011 0.005281451 0.008951655 0.188993682 0.815595105 0.070855342

2012 0.015261973 0.015175037 0.204501917 0.684131729 0.073507902

2013 0.177364982 0.00225725 0.160728548 0.516320856 0.150723745

2014 0.077041554 0.001311737 0.309595128 0.47137261 0.106907703

Source: Computed from the Annual Financial Reports of Access Bank Plc. 2008-2014

Table 4.2.4 Presentation of Data for Union Bank Plc

Independent variables Dependent

variable

Years NPLN TBDW LQDL CPAD ROE

2008 0.063044669 0.00087003 0.081850609 0.010629484 1.435421055

2009 0.071185834 0.000557024 0.433608908 0.001284624 0.927427339

2010 0.095489457 0.000792783 0.384614815 0.00206124 0.738690264

2011 0.113764205 0.001250408 0.325703414 0.003839099 0.653858219

2012 0.208508887 0.001176745 0.304434730 0.003865343 0.53624936

2013 0.195437364 0.001455604 0.279773263 0.005202799 0.521308801

2014 0.153306747 0.001564726 0.222658593 0.007027465 0.462023716

Source: Computed from the Annual Financial Reports of Union Bank Plc. 2008-2014

Table 4.2.5: Presentation of Data for First Bank Plc

Independent variables Dependent
variable
Years NPLN TBDW LQDL CPAD ROE

2008 0.007161873 0.00802289 0.343912958 0.023328257 0.191763861

2009 0.007161873 0.001227889 0.628593862 0.001953391 0.198559337

2010 0.024585288 0.018713813 0.513011981 0.036478316 0.196222778

59
 2011 0.015318187 0.013504413 0.527300053 0.025610491 0.176647223

2012 0.001359372 0.01440358 0.396713851 0.036307228 0.1775385

2013 0.004348057 0.014357162 0.210238708 0.068289812 0.214402916

2014 0.005881332 0.010079447 0.205580475 0.049029203 0.234323253

Source: Computed from the Annual Financial Reports of First Bank Plc. 2008 – 2014

Table 4.2.6 Presentation of Data for Zenith Bank Plc

Independent variables Dependent
variable

Years NPLN TBDW LQDL CPAD ROE

2008 0.374093457 0.374184715 0.422130436 0.886419656 0.136232393

2009 0.279704894 0.361057712 0.412345005 0.875620432 0.108093453

2010 0.308170719 0.380856433 0.384727561 0.989938002 0.069016664

2011 0.399863555 0.363611746 0.474608776 0.76612942 0.220753853

2012 0.431769284 0.330326715 0.558790934 0.591145444 0.199829238

2013 0.483741202 0.045793229 0.652707745 0.070158857 0.20569601

2014 0.45733868 0.45310748 0.375220028 1.20757808 0.171816898

Source: Computed from the Annual Financial Reports of Zenith Bank Plc. 2008-2014

Table 4.2.7: Presentation of Data for Eco Bank Plc

Independent variables Dependent
variable
Years NPLN TBDW LQDL CPAD ROE

2008 0.23937357 0.214826477 0.123204986 1.743650839 0.042193941

2009 0.268440095 0.27754927 0.02234641 12.42030709 0.028818187

2010 0.223396137 0.291620582 0.269447071 1.082292641 0.030954152

60
 2011 0.231675905 0.282384204 0.529611375 0.53319135 0.06977623

2012 0.264658079 0.248092979 0.051989731 4.771961184 0.060792109

2013 0.278625108 0.222088051 0.280992198 0.790370883 0.045049625

2014 0.389641055 0.206423437 0.374362813 0.551399418 0.037415398

Source: Computed from the Annual Financial Reports of Eco Bank Plc. 2008-2014
Table 4.2.8 Presentation of Data for Fidelity Bank Plc
Independent variables Dependent
variable

Years NPLN TBDW LQDL CPAD ROE

2008 0.156584224 0.909260557 0.34580919 2.629370715 0.150351884

2009 0.273620253 1.272811545 0.588044787 2.164480618 0.090927039

2010 0.013706799 0.355613582 0.584261404 0.608654927 0.123918717

2011 0.00532774 0.466390497 5.987944963 0.07788824 0.026485554

2012 0.027295157 0.622184866 0.508757276 1.222950305 0.082118725

2013 0.032548972 0.595579367 0.612543346 0.972305668 0.054798381

2014 0.00113467 0.528249613 0.568820153 0.928675979 0.04389588

Source: Computed from the Annual Financial Reports of Fidelity Bank Plc. 2008-2014

Table 4.2.9: Presentation of Data for United Bank for African (UBA) Plc

Independent variables Dependent

variable
Years NPLN TBDW LQDL CPAD ROE

2008 0.314174772 0.289556493 0.756367154 0.382825314 0.120318406

2009 0.29714275 0.243017258 0.429569071 0.565723359 0.096553892

2010 0.307988935 0.28823044 0.29537116 0.975824586 0.068657114

61
 2011 0.378016385 0.243534012 0.57589274 0.422880851 0.217001043

2012 0.46542499 0.291302192 0.443001066 0.657565443 0.21898927

2013 0.208064163 0.358400309 0.405122779 0.88467084 0.215031069

2014 0.45733868 0.289287639 0.340188916 0.850373499 0.179099014

Source: Computed from the Annual Financial Reports of UBA Plc. 2008-2014

Table 4.2.10 Presentation of Data for Skye Bank Plc

Independent variables Dependent
variable

years NPLN TBDW LQDL CPAD ROE

2008 0.099653653 0.258177928 0.452934197 0.570012001 1.456938434

2009 0.041155305 0.276603166 0.213450459 1.295865874 1.669612866

2010 0.051934235 0.341422006 0.123196891 2.771352463 0.597584384

2011 0.011556616 0.320865717 0.136357449 2.353122038 0.534459314

2012 0.023272273 0.344387729 0.153380185 2.245320862 0.512982162

2013 0.018224935 0.333443475 0.139168828 2.395963806 0.579370074

2014 0.035275538 0.338876553 0.226313268 1.497378196 0.580439635 Source:

Computed from the Annual Financial Reports of Skye Bank Plc. 2008-2014

Table 4.2.11: Presentation of data for Sterling Bank Plc

Independent variables Dependent

variable
Years NPLN TBDW LQDL CPAD ROE

2008 0.064743584 0.917745777 0.070546316 0.214319618

0.108262061

2009 0.045563416 0.025709387 1.637587863 0.015699547 0.093350435

2010 0.021024963 0.011489729 0.352412511 0.032603068 0.123820269

62
 2011 0.020930282 0.026738328 0.188993682 0.141477365 0.070855342

2012 0.016903719 0.013653203 0.204501917 0.066763203 0.073507902

2013 0.086289539 0.002007476 0.160728548 0.012489852 0.150723745

2014 0.094824993 0.002440838 0.309595128 0.007883967 0.106907703

Source: Computed from the Annual Financial Reports of Sterling Bank Plc. 2008-2014

Table 4.2.12 Presentation of Data for Guarantee Trust Bank (GTB) Plc
Independent variables Dependent
variable

Years NPLN TBDW LQDL CPAD ROE

2008 0.013026807 0.102104885 0.289966754 0.352126179 0.133433568

2009 0.01839349 0.001431132 0.535705816 0.002671489 0.156352763

2010 0.160954507 0.018285235 0.358337499 0.051027969 0.126531165

2011 0.148449411 0.015957974 3.647442977 0.004375113 0.273484462

2012 0.112517169 0.017717692 0.316090994 0.056052505 0.335883958

2013 0.080359252 0.017998504 0.198154805 0.090830519 0.297564003

2014 0.081000124 0.011135623 0.181146351 0.061473076 0.259506663

Source: Computed from the Annual Financial Reports of GTB Plc. 2008-2014

4.3 DATA ANALYSIS

Although the data have been presented in 4.2 with respect to the various banks

from which they are computed, however, these data from different banks will be
pooled together for the purpose of having a broader analyses both cross-sectional and

inter-firm, and also to determine the fixed effect and

63
the ransom effect of credit management variables on the financial performance of

microfinance banks as measured by the return on equity (ROE).

The first column represents the various years selected for this study which has a period

of seven (7) years spread between 2007 and 2013. This is the same with regards to all

the tables represented above. The next column in each table represents the Non-

performing loan ratio (NPLN) which is the ratio of non-performing loans to total loans

as presented in decimals. This is derived by dividing the total non-performing loans by

the total loans and advances in a given year (t). Guarantee Trust Bank Plc had a non-

performing loan ratio of 0.013026807 in 2007 and then 0.081000124 in 2013, while

Fidelity Bank Plc had 0.156584224 in 2007 and then 0.00113467 in 2013. NPLN =

Total Non-Performing Loans

Total Loans and Advances

The third column in each table represents the Total bad debts written-off (TBDW)

which is the ratio of total bad debts written-off to total debts in decimals. This is

derived by dividing the total bad debts written-off by the total debts of a bank in a

given year (t). Access Bank Plc had a total bad debts ratio of 0.099688078 in 2007 and

then 0.077041554 in 2013, while Union Bank Plc had a bad debts ratio of 0.063044669

in 2007 and then 0.153306747 in 2013.

64
 TBDW = Total Bad Debts Written-off
Total Debts

The fourth column in each table represents the Liquidity position of the

selected banks as measured by the current ratio, being a liquidity ratio (LQDL)) which

is the ratio of total current^ assets to total current liabilities in decimals. This is

derived by dividing the total current assets by the total current liabilities of a bank in a

given year (t). Sterling Bank Plc had a current ratio of 0.108262061 in 2007 and then

0.094824993 in 2013, while United Bank for Africa (UBA) Plc also had a current ratio

of 0.314174772 in 2007 and then 0.45733868 in 2013.

LQDL = Total Current Assets

Total Current Liabilities

The fifth column in each table represents the financial strength of the selected

banks as measured by the capital adequacy ratio, which is the ratio of (tier-1 capital-

tier-2 capital) divided by the total risk-weighted assets in decimals. This is derived by

dividing the total current assets by the total current liabilities of a bank in a given year

(t). The capital adequacy ratio of Skye Bank Plc in 2007 was 0.570012001, but in

2013, the capital adequacy ratio became 1.497378196, while that of Zenith Bank Plc in

2007 is 0.886419656 in 2007 and then 1.20757808 in 2013.

65
 CPAD = Tier-1 Capital-Tier-2 Capital
Risk-Weighted Assets

The last column in each table represents the performance of the selected banks as

measured by the return on equity (ROE) ratio, which is the earning power of the

shareholders’ equity i.e. the amount of income received by the total amount of money

invested by the shareholders. The return on equity (ROE) is derived by dividing the net

income or profit after tax by the shareholders’ equity of a bank in a given year (t). First

Bank Plc had a return on equity (ROE) of 0.191763861 in 2007 and then 0.234323253 in

2013, while Eco Bank Plc had a return on equity (ROE) of 0.150351884 in 2007 and then

0.04389588 in 2013. ROE = Profit after Tax or Net Income

Shareholders’ Fund

4.4 TEST OF HYPOTHESIS

The hypotheses formulated in chapter one is tested to ascertain the objectives

set out for the study. The tests of hypotheses will be carried out using data from the ten

(10) selected banks listed on the Nigerian Stock Exchange (NSE) and as presented in

table 4.2.2 above. The hypotheses formulated are stated as follows:

66
 Hypothesis 1

H01: Non-performing loans have no significant effect on the performance of the

Nigerian banking sector

Hypothesis 2

H02: Bad debts written-off have no significant effect on the financial performance of

microfinance banks in Nigeria

Hypothesis 3

H03: Capital adequacy has no significant effect on the financial performance of

microfinance banks in Nigeria

Hypothesis 4

H04: Liquidity level has no significant effect on the financial performance of

microfinance banks in Nigeria

The approach used in this study is the panel data regression method (Fixed effect

model) and the correlation analysis the test of significance. To do this, GRETL statistical

package was used to perform the analysis. The results gotten from the analysis are

summarized in the following tables:

4.4.1 Descriptive Statistics

67
VARIABLES N MEAN MINIMUM MAXIMUM STANDARD
DEVIATION

NPLN 70 0.14693364 0.00113467 0.483741202 0.143908651

TBDW 70 0.19708630 0.00055702 1.272811545 0.23390905

LQDL 70 0.52495646 0.02234641 5.98794496 0.818166865

CPAD 70 0.85684177 0.00128462 12.4203070 1.647914545

ROE 70 0.270859061 0.026485554 1.669612866 0.327495618

Source: GRETL Computed from 10 selected Nigerian Banks over 7 years

Table 4.4.2 Correlation Matrix

NPLN TBDW LQDL CPAD ROE

NPLN 1

TBDW 0.03546** 1

LQDL -0.08343* 0.03427** 1

CPAD 0.75497 -0.10564 0.03420** 1

ROE -0.04358** -0.04634** 0.02367** 0.76815 1

Source: GRETL Output Computed from 10 selected Nigerian Banks over 7years

Pooled OLS, using 70 observations

Included 7 cross-sectional units
Time-Series Length: Minimum 7, Maximum 12
Dependent Variable: ROE

Table 4.4.3 Regression Table

Reg. Coefficient Std. Error t-statistic p-value

Constant -2.12338 0.618841 -3.4312 0.00123***

1_NPLN -0.812664 0.24663 -3.2951 0.00183***

1_TBDW -0.0440922 0.140058 0.3148 0.75424

68
1JLQDL 0.193131 0.032629 5.9190 0.00001***

1_CPAD 0.373628 0.0657285 -5.6844 0.03791**

Source: Data Extracted from GRETL Regression Output

* Significance at a level of 1%
* Significance at a level of 5%

Significance at a level of 10%

Mean dependent var 0.270859 S.D dependent var 0.327496

R-squared 0.661918 Adjusted R-squared 0.634319

S.E. of regression 2.040862 Akaike info criterion 235.0427

Sum squared resid 16.11992 Schwarz criterion 244.9876

Log likelihood -112.521 F-Statistic 23.98377

Durbin-Watson stat 2.041678 Prob (F-Statistic) 0.002036

Decision Rule:

Accept the Null hypothesis (Ho) if the P-value of the t-statistics is greater than P-

value tabulated (i.e. P-valuecal>P-valuetab) at 0.05 significant which is less than 95% degree

of confidence, but not significant, otherwise Reject (H0) and accept Hi if the null hypothesis

(H0) of the P- value of P-value tab at 0.05 significant level which is significant for the study.

From table 4.4.2, we can see the correlation between the explanatory variables and the

dependent variable (Return on Equity).

69
 It is seen from the correlation matrix table (i.e. table 4.4.2) that Non - performing loan

ratio (NPLN) has a significant negative relationship of -0.04358** with return on equity

(ROE) which is the dependent variable of the study and this indicates that as the non-

performing loan ratio rises, return on equity (ROE) falls respectively, vice-versa. However,

while relating nonperforming loan (NPLN) with other independent variables of the study, we

can discover from the table that it also has a significant negative relationship with liquidity

level (LQDL). But a significant positive relationship with total bad debts and a positive

relationship with capital base (CPAD).

Total bad debts written-off (TBDW) has a significant negative relationship of -

0.04634** with return on equity (ROE) which is the dependent variable of the study, and this

indicates that as the total bad debt written off (TBDW) rises, the return on equity (ROE) falls

and vice-versa. However, while relating total bad debt written-off (TBDW) with other

independent variables, we can discover from the correlation matrix table that it has a

significant positive relationship with non-performing loan ratio (LQDL) and a negative but

insignificant relationship with liquidity level (LQDL); but in the case of capital adequacy

ratio (CPAD), total bad debt written-off also has a negative relationship with capital adequacy

ratio and significant.

Liquidity level (LQDL) has a significant positive relationship of 0.02367**

70
with return on the equity (ROE) which is the dependent variable of the study, and this

indicates that as the liquidity level (LQDL) rises, the return on equity(ROE) also rises and

vice-versa. However while relating the liquidity level (LQDL) to other independent variables,

we can discover from the correlation matrix table that it has a significant relationship with the

capital adequacy ratio (CPAD), and a significant positive relationship with total bad debt

written-off (TBDW); and also in the case of capital adequacy ratio (CPAD) liquidity level has

a significant positive relationship with capital adequacy ratio.

Capital adequacy ratio (CPAD) has a positive relationship of 0.76815 with return on

equity (ROE) which is the dependent variable of study, and this indicate that as the capital

adequacy ratio (CPAD) rises the return on equity (ROE) also rises and vice-versa, although

not significant. However, while relating the capital adequacy (CPAD) to other independent

variables, we can discover from the correlation matrix that it also has a significant positive

relationship with non-insignificant relationship with total bad debt written-off (TBDW).

4.4.1 Hypothesis one (Non-performing loans ratio, NPLN)

From table 4.4.3, the co-efficient of regression of -0.8127 indicates that there is a

negative relationship between the non-performing loans ratio (NPLN) and the performance as

measured by the return on equity (ROE).The coefficient of -0.8127

71
indicates that non-performing loans ratio (NPLN) has a negative impact on the selected banks

as measured by return on equity (ROE). This therefore indicates that return on equity (ROE)

will improve as the non-performing loans ratio diminishes or falls. However, the p-value of

0.00183*** shows that non-performing loans ratio (NPLN) significantly impacts return on

equity (ROE) at 1% level of significance, leading to the rejection of the null hypothesis which

states that non- performing loans have no significant effect on the financial performance of

microfinance banks in Nigeria. This result is consistent with the findings of Kolapo, Ayeni

and Oke (2012), Felix and Claude (2008), Kithinji (2010) and Epure and Lafuente (2012).

4.4.2 Hypothesis two (Total bad debt written-off, TBDW)

From table 4.4.3, total bad debt written-off (TBDW) negatively impact return on

equity (ROE) with a regression coefficient of -0.0440922 and a p-value of 0.75424.This

means that the total bad debt written-off negatively impacts performance through the co-

efficient of regression is not significant as shown by the p-value 0.75424. The negative

relationship indicates that increase in total bad debt written-off (TBDW) result in decrease in

banks’ performance as measured by the return on equity (ROE). However, since the

coefficient of regression is not significant at 5% level, this will lead to the acceptance the null

hypothesis which states that total bad debt written-off (TBDW) has no significant effect on

the

72
financial performance of microfinance banks in Nigeria.

4.4.3 Hypothesis three (Liquidity Level, LQDL)

From the table 4.4.3, the coefficient of regression 0.193131 indicates that there is a

positive relationship between the liquidity level of banks in Nigeria (LQDL) and their

performance as measured by the return on equity (ROE). The coefficient of 0.193131

indicates that liquidity level (LQDL) has a positive impact on the performance of the selected

banks as measured by return on equity (ROE). This therefore indicates that return on equity

(ROE) will improve as the liquidity level of banks increase. However, the p-value of

<0.00001*** shows that the liquidity level of banks in Nigeria (LQDL) significantly impacts

the performances measured by the return on equity (ROE) at 1% level of significance, leading

to the rejection of the null hypothesis which states that liquidity level has no significant effect

on the financial performance of microfinance banks in Nigeria. This result is consistent with

the findings of Al-khouri (2011) and Umoh (2012).

4.4.4 Hypothesis four (Capital Adequacy ratio, CPAD)

From the table 4.4.3, the coefficient of regression of 0.373628 indicates that there is a

positive relationship between the capital adequacy ratio (CPAD) and the financial

performance of microfinance banks in Nigeria as measured by the return on equity (ROE).

The coefficient of 0.373628 indicates that the capital adequacy (CPAD) has a positive

73
impact on the performance of the selected banks as measured by return on equity (ROE). This

therefore indicates that return on equity (ROE) will improve as the capital adequacy ratio of

banks increase. However, the p-value of 0.03791** shows that the capital adequacy of banks

in Nigeria (CPAD) significantly impacts their performance as measured by the return on

equity (ROE) at 5% level of significance, leading to the rejection of the null hypothesis which

states that capital adequacy has no significant effect on the financial performance of

microfinance banks in Nigeria. This result is consistent with the findings of Idowu and

Awoyemi (2014).

4.5 DISCUSSION OF FINDINGS

This study examined the effect of credit management on the performance of ten

(10) selected banks in Nigeria for a period of seven (7) years spread between 2008 and

2014. The independent variables used being credit management mechanisms include

non-performing loan ratio (NPLN), total bad debts written-off (TBDW), liquidity level

measured by the current ratio (LQDL) and the capital adequacy ratio (CPAD) while

the dependent variable being financial performance is measured by the return on equity

(ROE) which represents the earning power of shareholders' fund. After a rigorous

process of data collection, analysis, and test of all the hypotheses formulated for this

purpose of this study, the findings are discussed as follows;

74
4.5.1 Non-Performing Loan Ratio (NPLN) and Banks Performance in Nigeria

As shown in table 4.4.3 and as discussed under the test of hypotheses one in the

previous chapter, the null hypothesis which states that non-performing loans ratio

(NPLN) have no significant impact on the financial performance of microfinance

banks in Nigeria was rejected because the result revealed that the coefficient of

regression of -0.8127 indicates that there is an inverse relationship between non-

performing loans ratio (NPLN) and performance as measured by the return on equity

(ROE). Indicating therefore, that by having a regression coefficient of-0.8127, non-

performing loans have a negative impact on the performance of the selected banks as

measured by return on equity (ROE); and by having a p-value of 0.00183***, non-

performing loans ratio (NPLN) significantly impacts return on equity (ROE) at 1%

level of significance. This result is evident in the subsequent losses that banks sustain

as a result of their inability to recover both the interest and the original amount of the

loan from the customer, hence, such loans are written-off as charges against banks’

earnings which will further force the return on shareholders’ equity to fall drastically.

This result conforms to the findings of Kolapo et al (2012) who carried out an

empirical investigation into the quantitative effect

75
of credit risk on the performance of commercial banks in Nigeria over a period of

eleven (11) years (2000-2010). Using a panel model analysis to estimate the

determinants of the profit function, the result revealed that the effect of credit risk on

the financial performance of microfinance banks is cross-sectional invariant; that is,

the effect is similar across banks in Nigeria, suggesting that banks in Nigeria should

enhance their capacity in credit analysis and loan administration.

This result also confirms the position of Felix and Claude (2008) who

investigated the relationship between bank performance and credit management. It

could be inferred from their findings that return on equity (ROE) and return on assets

(ROA) both measuring profitability were inversely related to the ratio of

nonperforming loans to total loans of banks, thereby leading to a decline in

profitability as measured by ROE and ROA. Evidence outside Nigeria also places the

findings of Epure and Lafuente (2012) and Kithinji (2010) in conformity to the result

of this study, as Epure and Lafuente concluded in Costa-Rica that non-performing

loans negatively affect financial performance of microfinance banks and Kithinji

whose findings revealed that bulk of commercial banks’ profit is influences by their

total amount of credit and non-performing loans.

4.5.2 Total Bad Debts Written-Off (TBDW) and Banks’ Performance in Nigeria

76
 As shown in table 4.4.3 and as discussed under the test of hypotheses in the

previous chapter, the null hypothesis which states that total bad debts ratio (TBDW)

have no significant impact on the financial performance of microfinance banks in

Nigeria was accepted because the result revealed that the total bad-debts written-off

ratio (TBDW) negatively impacts return on equity (ROE) with a regression coefficient

of -0.0440922 and a p-value of 0.75424.And by having a p-value of 0.75424, the

negative impact of total bad debts written-off ratio (TBDW) on return on equity (ROE)

is not significant. Therefore, as total bad debts written-off ratio (TBDW), the negative

effect is that return on equity which represent banks’ performance fall respectively.

This is an inverse relationship and may be as a result of the fact that when debts are.

written-off as bad, the full amount of the debts are written-off against total profit for a

given accounting year, hence, the profit after tax (PAT) or net income of banks will be

drastically reduced, leading to a fall in the return on equity (ROE). One major area of

concern in credit management is that poor credit management will ultimately result in

huge outside debts and non-performing loans which will consequently lead to increase

in total debts that will be written-off as bad in a given accounting year. This result is

consistent with the finding of Umoh (2002) who concluded that as banks write off

debts as bad-debts, the financial implication is closer than just the name it bears as it

77
will be evident in the financial statements as a charge against profit, thereby effecting

financial financial performance of microfinance banks in Nigeria.

4.5.3 Banks’ Liquidity (LQDL) and their Performance as Measured by the Return on
Equity in Nigeria
As shown in table 4.4.3 and as discussed under the test of hypotheses in the

previous chapter, the null hypothesis which states that the liquidity level of banks has

no significant impact on the financial performance of microfinance banks in Nigeria

was rejected because the result indicated that the coefficient of regression of 0.193131

shows that there is a positive relationship between banks’ liquidity level as measured

by the current ratio, and banks’ performance as measured by the return on equity

(ROE), and a p-value of <0.00001***. Indicating that by having a regression

coefficient of 0.193131, the liquidity level of banks (LQDL) has a positive impact on

the performance of the selected banks as measured by return on equity (ROE); and by

having a p- value of <0.00001***, banks’ liquidity level (LQDL) significantly impacts

return on equity (ROE) at 1% level of significance.

This result simply indicates how the availability of cash and cash equivalents in

banks can improve the performance of such banks. Banks being financial firms that

mostly involve deposits keeping and disbursements have a major priority of ensuring

that they are liquid in order to meet the daily

78
withdrawal demand of the customers, and also to ensure that credit facilities are

granted to customers at fair interest rates which will help to boost the customer-base of

the banks. However, a liquid bank can also invest such excess liquidity into profitable

ventures or investments with high rate of returns that are reliable and within a short

period of time. This result is consistent with the findings of Umoh (2002) and Al-

khouri (2011) who assessed the impact of banks’ specific credit characteristics, and the

overall banking environment on the performance of 43 commercial banks operating in

6 of the Gulf Cooperation Council (GCC) countries over a period 10 years between

1998 and 2008. Using a fixed effect regression analysis, the result showed that credit

risk, liquidity risk and capital risk are the major factors that affect banks’ performance

when profitability is measured by the return on assets (ROA), while the only risk that

affects profitability when measured by the return on equity (ROE) is the liquidity risk.

4.5.4 Capital Adequacy Ratio (CPAD) and Banks’ Performance in Nigeria

As shown in table 4.4.3 and as discussed under the test of hypotheses in the previous

chapter, the null hypothesis which states that the capital adequacy ratio (CPAD) has no

significant impact on the financial performance of microfinance banks in the Nigerian

banking sector was rejected because the result revealed that the

79
capital adequacy ratio (CPAD) positively impacts return on equity (ROE) with a

regression coefficient of 0.373628. Furthermore, by showing a p-value of 0.03791**,

this indicates that the capital adequacy ratio significantly impacts return on equity

(ROE) at 5% level of significance. This result conforms to the findings of Idowu and

Awoyemi (2014) that carried out a study on the impact of credit risk management on

the commercial banks’ performance in Nigeria using a total of seven (7) commercial

banks analyzed over seven (7) years between 2005 and 2011.

The result though generally revealed that credit management as indicated by the

capital adequacy ratio has a significant impact on the profitability of commercial banks

in Nigeria; however, it further stated that commercial banks with high capital adequacy

ratio can better advance more loans and absorb credit losses whenever they crop up

and therefore-record better profitability. The regulatory authority should, pay more

attention to banks’ compliance to, relevant provisions of the Banks and other Financial

Institutions Act (BOFIA) 1991 and the prudential guidelines.

80
 CHAPTER FIVE

DISCUSSION OF FINDINGS, CONCLUSION AND

RECOMMENDATION

5.1 SUMMARY OF FINDINGS

This chapter covers the summary, conclusion and provides recommendations for the

data that has been analyzed, interpreted and discussed of the data obtained from the ten

(10) banks on the Nigerian banking sector which are listed on the Nigerian Stock

Exchange (NSE).The analysis was carried out using the regression model (Panel data).

For a more accurate analysis, GRETL (i.e. Gnu Regression, Econometrics and Time-

Series Library) was used to run the regression analysis. Each of the stated hypotheses

was tested using result from this analysis and our tests have shown that Non-

performing loans, Total bad debt written-off, capital adequacy and liquidity level have

a significant impact on the performance of Nigerian banks.

The correlation matrix result showed that non-performing loans and total debts

written-off have a weak negative relationship with banks return on equity while capital

adequacy and liquidity level have a weak positive correlated relationship with banks

return on equity. The R2 value of 0.661918 explained that 66.19% of variation in the

independent variables used in the study determines the dependent variable while

0.338082 (ie 33.81%)

81
variation of other variables not mentioned in the study will determine the dependent

variable. The f-statistics (prob.) value of 0.002036 shows that the variables included in

the model specified for the objectivity of the study is statistically significant while the

Durbin Watson (DW) value of 2.041678 explains that there is was no evidence of

autocorrelation among the variables since this value is between the stipulated 2.00 and

4.00 criterion for autocorrelation.

5.2 CONCLUSION

This study which was set to investigate the impact of credit management on the

financial performance of microfinance banks in Nigeria have been able to stand its test

of time by achieving the aim and specified objectives stated in the earliest chapter of

this study. The result have shown that credit management of banks in Nigeria as

indicated by the non-performing loans ratio (NPLN), the liquidity level of banks

(LQDL) and the capital adequacy ratio (CPAD) significantly impacts the financial

performance of microfinance banks in the Nigeria where performance is measured by

the return on equity. The result also indicated that though total bad debts written-off

negatively impacts the financial performance of microfinance banks in Nigeria,

however, such negative impacts are not significant. The findings also indicate that the

sampled have poor credit risk management practices; hence the high levels of

82
the non-performing loans in their loans portfolios. Despite the high levels of the non-

performing loans (NPLN), their profit levels keep rising as an indication of the transfer

of the loan losses to other customers in the form of large interest margins.

The changing of higher rates is likely to discourage microenterprises from accessing

loans from commercial banks. Those who are able take up such loans may also find it

very difficult to repay because of the exorbitant interest rates. This situation has the

tendency of creating ‘Loan-Losses high-interest cycle’ phenomenon. Commercial

banks are thus recommended to establish sound and competent credit risk management

units which are run by best practices in risk management such as the institution of a

clear loan policy and the adherence to underwriting authority and limits. Staffs of

commercial banks credit units such as project and advance managers, credit/loan

officers and field officers perform a range of functions from project appraisals through

credit disbursement, loan monitoring to loans collection. Thus issues pertaining to their

selection, training, placement, job evaluation, discipline, and remuneration need to be

tackled effectively.

The study also revealed that commercial banks with higher capital adequacy ratio can

better advance more loans and absorb credit losses whenever they crop up and

therefore record better profitability. The regulatory authority

83
 should pay more attention to banks’ compliance to relevant provisions of the Bank and

other Financial Institutions Act 1991 and prudential guidelines.

5.3 RECOMMENDATIONS

Following the result obtained from this study and based on the above conclusions, the

following policy recommendations are suggested.

1. Management of deposit money banks in Nigeria should enhance their skills in

credit analysis and loan administration. This is to ensure that risk of non-

performing loans and total bad debts written-off are drastically reduced and/or

eliminated from banks.

2. CBN and other regulatory bodies should pay more attention to banks

compliance to relevant provisions of BOFIA (1999) and prudential guidelines.

The compliance of Nigerian banks to the requirements state in the BOFIA 1991

and the prudential guideline is a major prerequisite for ensuring an effective

credit management system in Nigerian banks.

3. The commercial banks should review their interest rate charges on customers’

loans so as to avoid the entrant of non-performing loans in their credit

management.

4. The commercial banks should make use of the capital market channels in

improving their capital adequacy ratio to create an edge of credit

facilitation and management to their numerous creditors and absorbs

84
 credit losses.

5. The Central Bank of Nigeria (CBN) should create a channel or premise where

credit losses facilities could be sold publicly to government and investors just

as the stock market scenario for trading securities to assist commercial banks in

recovery from credit losses.

5.4 CONTRIBUTIONS TO KNOWLEDGE

The following are the contributions this research has provided in this field of

knowledge; thus;

1. The use of the GRETL statistical software in computing the data sourced

through secondary source in revealing the relationship between the dependent

and independent variables.

2. The research through the use of the GRETL software has shown that the non-

performing loans have a negative impact on the return on equity of the

commercial banks.

3. The use of the Risk-Adjusted Return on Capital (RAROC) Model originated by

the Deutsche Bank later adopted by the USA and British Banks in reviewing

the total amount of capital available for providing credit as loans to their

customers and also measures the returns on its ROA.

4. The empirical result of the research showed that the liquidity level

85
 maintained by the commercial banks will always have a significant impact on

performance in the financial system.

5.5 SUGGESTIONS FOR FURTHER STUDIES

The following below are recommended for further research. They are;

1. This research suggests that other commercials banks should be selected as

samples to checkmate the findings of this research.

2. This research suggests that the credit management of micro-finance banks in

Nigeria financial system should be researched on empirically to evaluate the

effect of their credit management on their performance.

3. Also, it suggests that other variables in measuring credit risk management

should be used in finding empirical results in checkmating these research

findings.

4. Other financial institutions are suggested to be subject for empirical findings in

their credit risk management on their performance in a pool data.

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 APPENDIX
Result from ten (10) Banks for a Period of seven (7) years (i.e. 2007-2013)
GRETL Stat.
Summary Statistics:
Nature of Data Used: Panel Data Dependent Variable:
ROE Method: Least Squares Date: 24/07/2015 Time:
9:00pm Sample (adjusted): 2007-2013
Included observations: 70 with no adjustment to endpoints
Variables Mean Median Minimum Maximum
NPLN 0.146933646 0.01645756 0.00113467 0.4837412
TBDW 0.197086301 0.34356479 0.00055702 1.272811545
LQDL 0.524956466 0.69823459 0.02234641 5.987944963
CPAD 0.856841774 0.66007800 0.001284624 12.42030708
ROE 0.270859061 0.17645639 0.026485554 1.669612866

Variables Std. Dev. C.V Skewness Ex. Kurtosis

NPLN 0.143908651 0.303820 0.244326 -0.881988

TBDW 0.233909055 0.276192 -0.720900 0.00676304
LQDL 0.818166865 0.474620 -0.942287 -0.629203
CPAD 1.647914545 4.96534 7.52946 54.8047
ROE 0.327495618 0.628385 0.211036 -0.759191
Variables 5% 95% I.Q Range Missing Obs.
NPLN 4.00000 12.00000 4.500000 0
TBDW 0.20250 0.748214 0.100000 0
LQDL 0.65000 81.35500 43.60750 0
CPAD 0.00000 0.890000 0.660000 0
ROE 0.00703544 0.291710 0.185092 0

94
 CORRELATION MATRIX

NPLN TBDW LQDL CPAD ROE

Constant 1
1_NPLN 0.03546** 1
1_TBDW -0.08343* 0.03427** 1
1_LQDL 0.75497 -0.10564 0.03420** 1
1_CPAD -0.04358** -0.04364 0.02367** 0.76815 1

Pooled OLS, using 70 observations

Included 7 cross-sectional units
Time-series length: Minimum 7, Maximum 12
Dependent Variable: l_ROE

Reg. Coefficient Std. Error t-statistic p-value

Constant -2.12338 0.618841 -3.4312 0.00123***
1_NPLN -0.812664 0.24663 -3.2951 0.00183***
1_TBDW -0.0440922 0.140058 0.3148 0.75424
1_LQDL 0.193131 0.032629 5.9190 0.00001***
1_CPAD 0.373628 0.0657285 -5.6844 0.03791**

Mean dependent var 0.270859 S.D dependent var 0.327496

R-squared 0.661918 Adjusted R-squared 0.634319
S.E. of regression 2.040862 Akaike info criterion 235.0427
Sum squared resid 16.11992 Schwarz criterion 244.9876

Log likelihood -112.521 F-statistic 23.98377

Durbin-Watson stat 2.041678 Prob(F-statistic) 0.002036
Output from GRETL
KEY:
*Significant at 10 per cent level (i.e.
Sig. @ 10%) ** Significant at 5 per cent
level (i.e. Sig. @ 5%)
*** Significant at 1 per cent level (i.e. Sig. @ 1%
95