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