Abstract

Credit risk management practices is of paramount importance to business men and business world as whole. This study seeks to investigate the effect of credit risk management practices on the performance of commercial banks in Cameroon with NFC Douala 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 Douala.

Data was collected using questionnaires which were designed and administered to employees of NFC bank Douala, 30 respondents were selected using purposive sampling technique, analysis were performed in the Statistical Package for Social Sciences (SPSSv21) using descriptive and inferential statistics (regression analysis).

The study findings revealed that was a positive significant relationship between client appraisal, collection policies, stringent policies, and financial performance of NFC bank Douala. 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

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 (Gieseche, 2004). Credit risk management has its roots in the early practices of banking. In ancient civilizations, money lenders and early banking instiutions assessed credit worthiness based on personal relationships, reputation, and collateral. These practices were relatively informal, and credit risk management was primarily based on the individual judgments of lenders. With the emergence of modern banking in the 17th and 18th centuries, credit risk management became more formalized and structured.

During the 19th century, banks started to develop more systematic approaches to credit risk assessment. Banks began analyzing borrowers’ financial statements, credit histories, and collateral to evaluate creditworthiness. This marked the beginning of more data-driven credit risk management practices. In the late 19th and early 20th centuries, credit bureaus were established to collect and share credit information on individuals and businesses. These bureaus provided lenders with credit reports, enabling them to make more informed lending decisions. In response to financial crises and to maintain stability in the banking sector, regulatory bodies introduced guidelines and regulations for credit risk management practices. Notable examples include the Basel Accords, which established minimum capital requirements and risk measurement methodologies.

In the U.S.A. for instance, the Federal Reserve released a listing of the U.S largest banks ranked by consolidated asserts expressed in Million U.S Dollars ($), in which the first three are JP Morgan chase BANK, Bank of America, and Wells Fargo Bank with consolidated assert of 1.945.467, 1.433.716 and 1.373.600 respectively as of 31 December 2013.

In China, the China Banking Regulatory Commission (C.B.R.C) 2012 published a report, in which the three largest banks in China are, in order of decreasing size, Industrial and Commercial Bank of China (I.C.B.C), China Construction Bank (C.C.B), and Bank of China (B.O.C) with IPO’s in 2006 of respectively US $22 Billions, US $17 Billions, and US $13 Billions, added to their capital.

Furthermore in Africa, on one hand, the Ghanaian Banking System is made up of 26Banks operating in the country among which the first group of the Six largest ones including Ghana Commercial Bank Ltd (G.C.B), Standard Chartered Bank Ltd (S.C.B), Barclays Bank of Ghana Ltd (BBG), Eco Bank Ghana Ltd (EBG), Agricultural Development Bank (ADB), and Stanbic Ghana Bank. Their total operating assets cumulated increased by 95% GH₵ 4.3 Billions, (2007) to GH₵ 8.4 Billion (2010), according to the Bank of Ghana statistics.

On the other hand, Commercial Banks have also been active in the Nigerian Economy for many centuries now. According to the IMF country report NO 13/146 of May 2013, Nigeria has a financial sector made up of thousands of financial institutions among which there exist 21 Commercial Banks, with a Total Banking Sector assets of ₦18.21 Trillion as at end December 2011, which represented 56.6% of the country’s GDP.

More so, banks have also evolved in Cameroon over the years and have played a key role in the financial system. The Cameroonian banking system is constituted of 13 commercial banks among which the first three are; Societe Generale de Banque du Cameroun (SGBC), Banque Internationale Du Cameroun pour l’Epargne et le Credit (BICEC) and Afriland First Bank with respective capital of 12.5 Billion XAF, 12 Billion XAF and 15.8 Billion XAF. And in terms of total assets, SGBC registered 668.661 Billion XAF, followed by BICEC with 658.468 Billion XAF and Afriland First Bank with 654.902 Billion XAF.

Cameroon experienced a severe economic crisis in the early 1990’s  which resulted to a drop of 50% in the value of its currency, the CFA Franc which used to be pegged to the former French Franc. Then, the banking system watched the failure of two major banks namely with the liquidation of Banque Meridien BIAO Cameroun (BMBC) in 1990’s, and Credit Agricole   du Cameroun (CAC) in 1997.

Although COBAC put in place better policies and prudential norms to ensure the stability of the system, it still experienced the failure of Amity Bank PLC in 2008 whose asserts where bought over by Atlantic Bank in May 2009 and later in 2011, Union Bank of Cameroon PLC was recapitalized by Oceanic Bank in Nigeria and which was bought over just recently by ECOBANK.

1.2 Statement of the Problem

Majority of commercial banks in Cameroon are found to approve the loans that are not well examined and may lead to increase the loan defaults. Despite all efforts put in place by National Financial Credit (NFC) bank, their credit risk in the form of collection policy, risk control exists on their bank’s loan portfolio. In addition, weak credit risk management practice is the primary cause  of  National Financial Credit (NFC) Douala failures.

This is due to overlapping functions, such as the failure to assess customer’s capacity to repay loan, to check the policies implemented which result to them being mixed up with the type of risk to focus on, since the other types of risks such as interest rate risk, market risk, liquidity risk and operational risk also exist.

Also, with the information asymmetry that exists between borrowers and lenders has led to credit experts to be more likely to select projects that are doubtful. Since exposure to credit risk continue to be the leading source of problems in banks worldwide, NFC banks and their supervisor should be able to draw useful lessons from their past experiences.

NFC bank should now have a keen awareness of the need to identify, measure, monitor and control credit risk.  As a result of all this management of risk problems, the principal concern of this research is to access the relationship between risk management practices and financial performance of commercial banks in Cameroon.

1.2.1 Research Questions

1.2.1.1 Main Research Question

What is the effect of credit risk management practices on the financial performance of commercial bank?

1.2.2.1 Specific Research Questions

1. What is the effect of credit risk control loans on the financial performance of commercial banks?
2. What is the effect of collection policy on the financial performance of commercial banks?
3. What is the effect of liquidity risk on the financial performance of commercial banks?

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