CREDIT RISK MANAGEMENT TECHNIQUES AND LOAN PORTFOLIO QUALITY OF NIGERIAN COMMERCIAL BANKS (2006 – 2015)

 ABSTRACT

Commercial banks engage primarily in the business of intermediation, which is, mobilizing funds from surplus units of the economy and lending same to the deficit units.  In rendering these services, a large percentage of the loans granted are not repaid or serviced as at when due, leading to bank distress. Defective credit risk management practices, laxity of the supervisory and regulatory authorities have been identified as the problems. This study examined the effect of the credit risk management techniques on the loan portfolio quality of Nigerian commercial banks.

The study employed ex-post facto and cross sectional designs. Target population comprised 3097 credit risk managers drawn from 21 commercial banks in Nigeria and a sample of 425 was selected using the stratified random sampling technique. A structured questionnaire was validated for the study.  Secondary data were also obtained from the audited accounts of the selected banks over the period covered by the study (2006 – 2015). The Cronbach’s alpha coefficient for the construct ranged between 0.782 and 0.941. The response rate from 425 copies of the questionnaire administered was 95.5%. The data collected were analyzed using descriptive and inferential (simple and multiple regression) statistics.

Findings revealed that credit risk management techniques had significant effects on loan portfolio quality (R² = 0.675, p<0.05), credit risk environment had significant effect on loan portfolio quality (R² = 0.577, p<0.05), credit analysis had positive significant influence on loan portfolio quality (R² = 0.656, p<0.05), credit administration had significant effect on loan portfolio quality (R² = 0.638, p<0.05), credit control had negative and significant relationship with loan portfolio quality (r = -.615, p<0.05), supervisory and regulatory roles had significant effect on loan portfolio quality of Nigerian commercial banks (R² = 0.487, p<0.05).

The study concluded that credit risk management techniques were capable of impacting loan portfolio quality of Nigerian commercial banks. It recommended that the management of lending institutions should establish and maintain sound credit risk management structures that match best practices and global standard. The banks should automate their credit-risk process in line with Basel Accord and local regulatory requirements. Credit control functions should be strengthened to ensure strict compliance with policies and minimization of unauthorized lending.

 Keywords:      Credit risk management, Loan portfolio, Credit administration, Credit control, Credit analysis