Abstract

Credit risk management is of paramount importance to businessmen and the business world as a whole. This study seeks to investigate the effect of credit risk management on the performance of commercial banks in Cameroon with NFC Bank Bamenda as a case study.

The study specifically investigates the effect of credit risk control, loan policy, and liquidity risk on the financial performance of NFC Bamenda. Data was collected using questionnaires which were designed and administered to staff and employees of NFC Bank Bamenda, 30 respondents were selected using purposive sampling technique, analysis was performed in the Statistical Package for Social Sciences (SPSSv21) using descriptive and inferential statistics (regression analysis).

The study findings revealed that there was a positive significant relationship between client appraisal, collection policies, stringent policies, and financial performance of NFC Bank Bamenda. It was, therefore, recommended that there is a need for commercial banks institutions to enhance their credit risk control; this will help in decreasing default levels as well as their non-performing loans.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The strength of a banking system in every economy is an essential requirement to ensure economic stability and growth (Halling & Hayden, 2006). Banks are the main part of the financial sector in every economy performing valuable activities on both sides of the balance sheet. The health of a financial system has an important role in the country as its failure can disrupt the economic development of the country (Das & Ghosh, 2007).

A company’s financial performance is the ability to generate new resources, from the day–to–day operation over a given period and is gauged by net income and cash from the operation. The asset side enhances the flow of funds by lending to the cash-starved users of funds, while they provide liquidity to savers on the liability side (Diamond & Rajan, 2001).

Bank ensures productive capital investments to stimulate economic growth and help develop new industries thereby increasing employment and facilitating growth. They also facilitate the payment, settlement and support the smooth transfer of goods and services. New banking risk management techniques emerged in the early 1990s. To be able to manage the different types of risk (Credit risk, interest rate risk, liquidity risk, market risk, foreign exchange risk, operations risk, and solvency risk) one has to define them. The bank performance measure can be divided into traditional measures and market-based measures (Aktan & Bulut, 2008).

Risk management is found to be one of the determinants of the returns of bank stocks. In 2010, Holland observed that a risk management failure is considered as one of the main causes of the credit risk crisis, risks are natural elements of business and the community life as a whole. It is a condition that raises the chance of losses/gains and uncertain potential events which could manipulate the success of financial institutions. Risk management is the human activity that integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources (Sensarma & Jayadev, 2009).

Determinants of bank performance are divided into both internal and external factors. The internal factors focus on the special characteristics of banks such as bank size, bank capital, credit risk, and liquidity risk while the external factors include the macroeconomic variables that are is Gross Domestic Product (GDP) and inflation.

Several commercial banks have collapsed or experienced financial problems due to inefficient risk Management systems such as Banque Meridien BIAO Cameroon. The past decade has seen dramatic losses in the banking industry. Firms that had been performing well suddenly announced large losses due to credit exposures that turned sour.

As a result of the fact pointed out by the Reserve Bank of Zimbabwe, also known as RBZ, on what it terms “imprudent credit risk management practices” as being one of the major causes of the banking crisis of 2004, commercial banks have almost universally embarked upon an upgrading of their risk management system.

Banks are exposed to different types of risks, which affect the performance and activities they carry out, the primary goal of banking management is to maximize the shareholders’ wealth, so in achieving this goal banks’ manager should assess the cash flows and the assumed risks as a result of directing its financial resources in different areas of utilization. There is plenty of differentiation between types of banks and much of this differentiation rests in the products and services that banks offer (Howells & Bain, 2008,).

Commercial banks hold deposits, bundling them together as loans. Credit risk management is very important to banks as it is an integral part of the loan process. It minimizes bank risk, adjusted the risk rate of return by maintaining credit risk exposure to shield the bank from the adverse effects of credit risk. (Howells & Bain, 2008,).  Credit risk is one of the most significant risks that banks face, considering that granting credit is one of the main sources of income in commercial banks. The importance of credit risk management in banks is due to its ability in affecting the banks’ financial performance, existence and growth. (Li & Zou, 2014). The effective management of credit risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of any banking organization.

The future of these banks depends on the possession of good credit risk management dynamics. Since exposure to credit risk continues to be the leading source of problems in banks worldwide, bank management should be able to draw useful lessons from past experiences. As a result of this analysis, the study seeks to find the effects of credit risk management on the financial performance of commercial banks, the case of National financial Credit, also known as NFC.

1.2 Statement of the Problem

As banks perform their role of financial intermediation in the economy, they constantly and consciously take the risk. They experience the following risk; which includes credit risk, interest rate risk, liquidity risk, foreign exchange risk and operational risk. Managing these risks is essential for their survival and prosperity. Any loss from a single loan or a material breakdown in controls can eliminate the gain on many other transactions.

In Cameroon, commercial banks have registered an unsatisfactory financial performance as reflected from increasing loss ratios such as current ratios, quick ratio, net profit ratio, and return on capital employed ratio. Inappropriate lending practices have exposed Banks to different credit risks, Herrero (2003), in his paper, the determinants of the Venezuela banking crisis argued that among the reasons for bank failure was inappropriate lending practices that exposed banks to different risks and losses.

The Cameroonian banking industry has continued to grow both in terms of new local and foreign entrants, customers, and deposit base, digitization, and increase in scrutiny from the regulation specifically the Bank of Central African States (BEAC). The banking sector in Cameroon has liberalized an increase in the adoption of information technology and improve the business environment due to reforms being undertaken in the political, economic, social, and cultural fields (IMF country report 2009).

As earlier explained, banks are exposed to different types of risk. The most peculiar is; credit and liquidity risk. Credit risk deals more with the customers who take credits in the bank whereas liquidity risk deals with the bank itself. How banks manage credit greatly determines their performance. Many banks that failed to manage their credit risk very well have performed poorly while those that managed them properly have had good profits.

NFC has a credit policy set to reduce risk and NPL as a critical role in financial performance. The extent to which credit risk management contributes to the financial performance of NFC is not clear. It is in this regard that the study seeks to examine the effect of credit risk management on the financial performance of commercial banks, using National financial credit as a case study.

1.3 Research Questions

The research questions shall be divided into the main and the specific research questions, this could be done as follows;

1.3.1 Main Research Question

What is the effect of credit risk management on the financial performance of NFC bank Bamenda?

1.3.2 Specific Research Questions

1. What is the effect of credit risk control on the financial performance of NFC Bamenda?
2. What is the effect of loan policy on the financial performance of NFC Bamenda?
3. What is the effect of liquidity risk on the financial performance of NFC Bamenda?

1.4 Research Objectives

Looking at the research questions, the following research objectives could be generated. They are separated into the main and specific objectives.

1.4.1 Main Research Objective

The main objective of the study is to determine the effect of credit risk management on the financial performance of NFC Bamenda.

1.4.2 Specific objectives

1. To assess the effect of credit risk on the financial performance of NFC Bamenda.
2. To investigate the effect of loan policy on the financial performance of NFC Bamenda.
3. To assess the effect of liquidity risk on the financial performance of NFC Bamenda.