GLOBAL ECONOMIC CRISIS AND CREDIT RISK MANAGEMENT IN NIGERIAN DEPOSIT MONEY BANKS A Case Study of First Bank Nigeria Limited

0
447

GLOBAL ECONOMIC CRISIS AND CREDIT RISK MANAGEMENT IN NIGERIAN DEPOSIT MONEY BANKS A Case Study of First Bank Nigeria Limited

CHAPTER ONE

INTRODUCTION

  1. Background of the Study

The global economic crisis has begun in August 2007 and has been considered the worst economic crisis since the` Great Depression by George Soros, Alan Greenspan, Joseph Stiglitz, Jean Claude Trichet, and the International Monetary Fund. Among the factors that contributed to the current economic crisis are cited: increased innovation in economic products and their growing complexity; inappropriate regulation and supervision of financial markets; poor credit risk management practices at Nigerian deposit money banks and other financial institutions; increased complexity of financial systems; financial market speculation; predatory lending practices; a combination of cyclical and structural factors (Dianu and Lungu, 2008); Credit risk management is described in the financial literature  as being concerned with identifying and managing a firm’s exposure to financial risk; financial risk is defined as the variability in cash flows and market values caused by unpredictable changes in the commodity prices, interest rates and exchange rates (Kaen, 2005).

Credit risk management has become a booming industry starting ’90 as a result of the increasing volatility of financial markets, financial innovations (financial derivatives), the growing role played by the financial products in the process of financial intermediation, and important financial losses suffered by deposit money banks without credit risk management systems (for example, First Bank, Eco Bank and GT Bank etc). Some credit risk management practices in recent years appear to have been driven by the need to meet regulatory expectations set by such initiatives as in Nigeria. Forward contracts, futures, options, swaps, and other more complex financial instruments allow today banks to transfer risks to other economic agents who are able or more willing to bear them (Kaen, 2005).

Credit risk management is nowadays considered as a key  activity for all banks. Many of the disastrous losses of the 1990s, such as those at Orange County in 1994 and Barings bank in 1995, would have been avoided if good credit risk management practices have been in place (Hull, 2007).

In today’s world, managing risk has become a necessity, not an option. Sanusi, (2010) pointed out that in recent years excessive credits and financial asset growth went unchecked. Risk, in insurance terms, is the possibility of a loss or other adverse event that has the potential to interfere with an organization’s ability to fulfill its mandate, and for

which an insurance claim may be submitted. The current CBN Governor (Sanusi) sanitization in the banking industry revealed the holes in the Nigerian banking industry, especially on the recklessness of the bank chief executives. But before that, the former CBN Governor Soludo (2004) made it known in one of his speeches that Nigerian banking system today is fragile and marginal.

GLOBAL ECONOMIC CRISIS AND CREDIT RISK MANAGEMENT IN NIGERIAN DEPOSIT MONEY BANKS A Case Study of First Bank Nigeria Limited

GLOBAL ECONOMIC CRISIS AND CREDIT RISK MANAGEMENT IN NIGERIAN DEPOSIT MONEY BANKS A Case Study of First Bank Nigeria Limited