Overview Of The Risks Associated With Bank Lending In The Banking Sector
Bank lending in the banking sector involves various risks that financial institutions must navigate. Credit risk is a primary concern, as banks face the possibility of borrowers defaulting on their loans due to economic downturns, financial instability, or unforeseen circumstances. Market risk arises from fluctuations in interest rates, exchange rates, and other market variables that can impact the value of loans and the overall financial health of the bank. Operational risk involves potential disruptions in internal processes, technology failures, or human errors that may affect the lending operations. Additionally, macroeconomic factors such as inflation, regulatory changes, and geopolitical events can introduce systemic risk, influencing the entire banking sector. Effective risk management strategies, thorough credit assessments, and vigilant monitoring are crucial for banks to mitigate these challenges and ensure the stability of their lending activities.
Risk as we know it, is an action taken with varied and unlimited certainty, when applied in the course of lending several options and end points are obtained.
Why do you lent?
As bankers we lend to fill the gap created from those having deficit to those having surplus, but at a profit.
In the course of lending, several things have to be noted, investigated, amitiorated and controlled, ranging from industry risk, credit risk, price risk, micro economic instability, fluctuation in govt policy, globalization etc.
In chapter one of this study, we shall attempt to introduce the concept of risk and illusidate on its core and periferials.
Chapter two comprise of the literature review whereby we shall by to harmonize past and present data/events as regards to risk as expanciated by several leading authors and authorities.
Chapter three comprises of the made made at which the questionnaires were distributed, oral & written interview carried out and mode at which information were sourced.
Chapter four is a theoretical frame work, going by the result of three and backed up by literature review of two, we obtain an inmate theory as per risk with regards to the best possible method, technique, criteria, methodology of handling risk and we now apply such in the practical sense or various credit request made in the banking sector.
Chapter five borders on the outcome of the application of the theory, the gliches observed and the recommended solutions towards a best possible and in order to safeguard bank fund and equally not render ourselves (i.e the credit officers) liable for professional negligence\incompetence, which may have dial consequences.
An overview of risk associated with bank loading in the banking sector is a topic Chosen from the financial field.
The purpose of this research work is to identify the factors and effect of risk in the financial institutions with special reference to banks.
This research work will expose us to:
1. Find out the extent to which risk of lending constituted major problems.
2. find out the extent to which risk is associated with lending in the banking sector.
3. Find out the need for effective & efficient of risk in the growth of banks.
4. Find out the need for effective & efficient analysis of risk inherent in bank lending.
TITLE PAGE
APPROVAL PAGE
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
TABLE OF CONTENT
CHAPTER ONE
1.0 INTRUDUCTION
1.1 BACKGROUND OF THE STUDY
1.2 STATEMENT OF PROBLEMS
1.3 PURPOSE/OBJECTIVE OF THE STUDY
1.4 RESARCH QUESTIONS
1.5 STATEMENT OF STUDY
1.6 SIGNIFICANCE OF STUDY
1.7 SCOPE, LIMITATIONS AND DELIMITATIONS
1.8 DEFINITIONE OF TERMS.
REFERENCE
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 NATURE AND DIMENSIONS OF RISKS
2.2 FUNCTIONAL DEFINITION OF RISK
2.3 RISKS MANAGEMENT
2.3.1 RATIONAL FOR BANK WODE RISK MAMAGEMENT
2.3.2 TYPES OF BANK RISKS
2.4 RISK AND UNCERTAINLY
2.5 BANKS & RISK OF LENDING
2.5.1 THE CONCEPT OF CREDIT RISK
2.5.2 THE CREDIT RISK IDENTIFIACTION
2.5.3 CREDIT RISK ASSESSEMENT
2.5.4 CLASSIFIACTION & HANDLING OF RISKS.
2.6 FRAMEWORK FOR LENDING
2.6.1 LENDING PRINCILES
REFERENCES.
CHAPTER THREE
3.0 RESEARCH DESIGN AND LETHODOLOGY
3.1 RESEARCH DESIGN
3.2 AREA OF STUDY
3.3 POPULATION
3.4 SAMPLE AND SAMPLING TECHNIQUE
3.5 INSTRUMENT FOR DATA COLLECTION
3.6 METHODS OF DATA PRESENTATION
3.7 TECHNIQUE OF DATA ANALYSIS
REFERENCES.
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 DESIGNS AND FEATURES OF FINANCIAL REPORTS IN THE
BANKING SECTOR.
4.2 ASSESSMENT OF INSTITUTIONAL STRUCTURE FOR RISKS
MANAGEMENT.
4.3 PRSENTATION OF DATA ANALYSIS
4.4 TEST OF HYPOTHESIS
REFERENCES
CHAPTER FIVE
FINDINGS, RECOMMENDATION AND CONCLUSION
5.0 SUMMARY OF FINDINGS
5.1 RECOMMENDATIONS
5.3 CONCLUSION
REFERENCES
BIBLOGRAPHY
INTRODUCTION
1.1 BACHGROUND OF THE STUDY
Banking can be aptly described as a high-risk business. For this reason a lot of attention is directed at risk management in banking. The need of such emphasis on risk management becomes even more urgent as banks go apple with large volumes of non-performing assets. This thinking is shared by Rose (1987:54), who points out that while the 1950s focused on techniques for the management of banks assets and the 1960s and 1970s emphasized liability management banking in the eighties was concerned with risk-how to measure risk and how to control risk for the betterment of banks and its customers. This view of risk remains true and on issue for bank management in the lending functions.
It is obvious that the subject matter of “risk” assume considerable importance in determing business success and failures, especially in banking of course, the conventional approach to appreciating that fact in financial management is often linked to inverse between the plausible business outcomes, a high risk heads to more profit value and vice versa.
In banking strictly speaking, we can extend this argument to imply that the more a bank achieves and retains liquidity (less risk) the less it gains in profitability (less returns).
Unfortunately, Uncertainty-another variable also affects business outcomes is not easily understood as in the case of ‘risk” yet we must reckon with the decisive dicey and irrational subjective chances, what do we exactly mean by the term “risk” and “uncertainty”? The answer to these questions forms the basis for the discussion of the overview, which comprise of impact and implications of the term for bank management.
1.2 STATEMENT OF PROBLEMS:
The risk of lending can be innumerable sometimes intractable. But there are also riskless loan in the sense that such loans are more than 100% cash collateralized In any case, the number characteristics of risk can only be analyzed meaningfully in the content of specified loans.
For this reason clearing the lending doubts begins with:-
1. Risk identification
2. Discovering and knowing the risk including their structure and incidence.
3. Enabling financial analyst identify in his credit report that a particular loan request can be associated with certain risks.
4. Enable the analysts conceivably identify and give an indication of their nature (risk) and characteristics.
5. Idently and integrating risk inherent in the so called 5os of lending (credit)
6. Finally, getting over the hump in CAMEL.
1.3 PURPOSE\OBJECTIVE OF THE STUDY
The purpose of the study is to.
1. Check the effect of lending on bank risk
2. To weigh the relationship between risk and lending
3. To check the effect of risk associated with bad debt as regards growth in the banking sector.
4. To analyses the credit process and issues
5. To analyze the need for security documentation of credit.
1.4 RESEARCH QUESTIONS
An indepth look into the following questions would present sufficient solution to the problems of study.
1. What is the effect of lending in the banking sector.
2. What is the relationship between risk and lending as regards growth in the banking sector
3. What are credit processes and issue
4. Is there any need for security documentation of credit?
1.5 STATEMENT OF HYPOTHESIS
In this research work we shall formulate a policy that is based on the assumption that lending if well articulated and efficiently executed can serve as a potent tool in the banking sector.
The following are the hypothesis of the study.
Ho: The blending and risks of lending if properly taken cannot boost the growing rate of banks in Nigeria.Hi: The lending and risk of lending if properly taken can boost the growing rate of banks in Nigeria.
Ho: There exist a negative relationship between risk and lending.
Hi: There exist a positive relationship between risk and lending.
Ho: Grow in the banking sector is not affected by crisis of bad debt.
Hi: Credit processed and issue should not be greatly looked into by Banks.
Hi: Credit processes and issue should be greatly looked into.
Ho: There is need for security documentation by banks.
Hi: There is need for security documentation by banks.
1.6 SIGNIFICANC OF STUDY
Without an indepth look into risk management banks survival will be greatly threatened. This is one of the reasons why some banks fold up since there are no adequate information on risk management as regards lending in banks.
Thus, this study is directed at throwing more light into the need for an overview of risk associated with bank lending i.e risk management and control in the bank sector.
The findings of the study will be useful to the following:
1. Existing banks as well as those yet to be established.
2. The management of the selected banks chosen for the study of risk management and control.
Specially, this study will provide information and relevant data to the bank management to enable her cope with the task of development in the midst of credit risk. The study is also justified as it would be relevant due to its usefulness to loan officers as well as the generality of banks who would also bear the strain of loan recovery, including the fact that the study will also make it possible to examine hoe bad debt reduction will be achieved and sustainable banking growth and also make the bank management and generality of banks to be aware of what role they have to play in the extension of credit.
1.7 SCOPE, LIMITATIONS AND DELIMITATIONS:
This research work is limited by its main objectives being empirical analysis of risk associated with bank lending. The effect of its burden will then be analysis to see if it conforms with the course of banking.
The study as regards lending and also it will be restricted to risk management, control and lending as regards banking.
1.8 DEFINITION OF TERMS:-
RISK: Risk is the possibility of loss, injury, disadvantage or destruction.
RISK MANAGEMENT: Risk management is the sum of all proactive management – directed activities within a program that are intended to acceptable accommodate the possibility of failures in elements of the program.
LENDING: Lending is the extension of credit to investor\borrowers who ware in most need of the money for investment purposes.
CREDIT: Credit is the permission to delay payment for goods or services until after they have been received.
OR
“The status of being trusted to pay money back to somebody who lends to one”.
Risks Associated With Bank Lending In The Banking Sector:
Bank lending is a fundamental activity in the banking sector, and it comes with various risks. Understanding and managing these risks is essential for the stability and profitability of banks. Here are some of the key risks associated with bank lending:
- Credit Risk: This is the most significant risk banks face when lending money. Credit risk arises when borrowers fail to repay their loans or interest on time. It can result from factors such as borrower insolvency, economic downturns, or poor creditworthiness assessments.
- Interest Rate Risk: Banks often borrow money at one interest rate and lend it at another. Fluctuations in interest rates can impact a bank’s profitability. When interest rates rise, banks may face higher borrowing costs and potential losses on fixed-rate loans, while falling interest rates can reduce interest income.
- Market Risk: Banks may hold securities or other assets related to their lending activities, and the value of these assets can fluctuate due to market conditions. Market risk encompasses the potential losses resulting from changes in market prices of these assets.
- Liquidity Risk: This risk arises when banks are unable to meet their short-term obligations due to a mismatch between the maturity of their assets and liabilities. If a bank has made long-term loans but relies on short-term deposits for funding, a sudden withdrawal of deposits can create liquidity problems.
- Operational Risk: This risk includes losses resulting from inadequate internal processes, systems, or human errors. For example, errors in loan documentation, mismanagement, or cybersecurity breaches can all lead to operational losses.
- Compliance and Regulatory Risk: Banks must adhere to a multitude of laws and regulations governing lending practices. Non-compliance can result in penalties, fines, or legal action. Regulatory changes can also impact the bank’s lending operations.
- Reputation Risk: Poor lending practices, customer complaints, or ethical issues can damage a bank’s reputation. A tarnished reputation can lead to a loss of customers, trust, and future business opportunities.
- Country Risk: Banks operating internationally may face risks associated with the political, economic, and legal conditions in the countries where they have exposure. Sudden political upheavals, currency devaluations, or changes in government policies can impact the bank’s loans and investments.
- Concentration Risk: Concentration risk occurs when a bank has a significant portion of its loan portfolio concentrated in a particular sector or with a few large borrowers. If that sector or those borrowers experience financial difficulties, the bank’s overall financial health can be at risk.
- Collateral Risk: When banks accept collateral for loans, they are exposed to collateral risk. If the value of the collateral drops significantly, it may not be sufficient to cover the outstanding loan amount in the event of default.
- Fraud Risk: Banks are vulnerable to fraud from borrowers who misrepresent their financial condition or use loan proceeds for fraudulent activities. Proper due diligence and risk assessment processes are crucial for mitigating this risk.
- Interest Rate Mismatch Risk: This risk arises when banks borrow short-term and lend long-term. If interest rates rise suddenly, the cost of borrowing can increase significantly, impacting the bank’s profitability.
To mitigate these risks, banks employ various risk management strategies, including credit analysis, diversification of loan portfolios, stress testing, risk modeling, and adherence to regulatory guidelines. Additionally, effective risk management practices are essential for maintaining financial stability and ensuring the long-term viability of banks in the banking sector.