CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Banks operate in a changing environment that offers real opportunities but also exposes them to complex and variable risks, which challenge traditional approaches to bank management. Among these risks, credit risk, the possibility that a borrower will fail to meet the terms of a loan, remains one of the most serious. Abubakar et al. (2025) describe it as a persistent challenge for Nigerian deposit money banks, driven by a high rate of loan defaults and, in some cases, weak capital adequacy. They also link poor credit risk management to bank distress, because unrecovered loans squeeze cash flow and, in extreme cases, can lead to institutional failure.

Banks therefore need strong risk management capabilities to survive in a competitive, market-oriented environment, to hold their own against foreign banks and to support private sector-led economic growth. For most banks, loans and advances are the largest and most visible source of both income and credit risk. A loan is a performing asset for as long as the borrower pays interest and principal on the due dates. Problems begin when payments are delayed or missed. A loan on which the borrower has failed to make scheduled payments for a specified period is classified as non-performing, meaning it is in default (Abubakar et al., 2025). Delays and defaults disrupt a bank's cash forecasts and change its risk profile, because the bank then faces greater liquidity, interest rate and credit risk at the same time.

Credit risk is not confined to loans. Banks are also exposed to it through inter-bank transactions, trade financing, foreign exchange dealings, derivatives, bonds, equities, guarantees and commitments, and the settlement of transactions. Credit risk is also difficult to measure. Loan default disclosures are often used as an indicator of it, and they may also reveal weaknesses in management decision-making, such as inadequate supervision of the loan portfolio or aggressive loan growth.

Regulators treat credit risk management as a core prudential requirement. The Central Bank of Nigeria's prudential guidelines for deposit money banks require banks to maintain a comprehensive credit policy approved by their boards, to put in place controls to identify, measure, monitor and control credit risk, and to review their credit portfolio plans quarterly (Central Bank of Nigeria [CBN], 2019). Capital is a further line of defence: the capital adequacy ratio measures a bank's available capital against its risk-weighted exposures and is designed to protect depositors and promote the soundness of the financial system (Abubakar et al., 2025).

Recent Nigerian studies show that the link between credit risk management and bank performance is not straightforward. AbdulAzeez (2025), analysing listed deposit money banks from 2013 to 2022, found that the ratio of loans to total assets had a positive and significant effect on return on assets, while the non-performing loan ratio and the capital adequacy ratio showed no significant relationship with it. Kwabe (2025) found that elements of credit policy affect debt recovery differently: credit terms and credit control procedures improved recovery, whereas collateral requirements and credit assessment procedures were negatively related to it in his sample. These findings suggest that how a bank designs and applies its credit procedures matters as much as whether it has them.

This study is concerned with credit risk management in Nigerian commercial banks, using First Bank of Nigeria Plc and Union Bank of Nigeria Plc as case studies.

1.2 Statement of the Problem

Nigerian commercial banks face a continuing problem of credit risk management, and First Bank of Nigeria Plc and Union Bank of Nigeria Plc are no exception. Defaults and unserviced loans reduce income, weaken the quality of a bank's assets and erode capital. Bank capital provides a cushion that absorbs financial and operating losses while management addresses the underlying problem (Abubakar et al., 2025), so persistent credit losses directly threaten a bank's ability to meet regulatory capital requirements and to continue operating. Poor credit risk management has been identified as a significant contributor to bank failures (Abubakar et al., 2025). The study therefore examines how credit risk affects commercial banks, what strengths the banks have in controlling it, and what role the Central Bank of Nigeria plays.

1.3 Objectives of the Study

In view of the problem stated above, the study pursues the following objectives:

1. to examine the causes of credit risk in Nigerian commercial banks;
2. to review the strengths of commercial banks in combating credit risk; and
3. to ascertain the contribution of the Central Bank of Nigeria to combating the factors that work against effective credit risk management.

1.4 Research Questions

The objectives are expressed as the following research questions, which give the study direction and scope:

1. To what extent does credit risk affect the operational efficiency of commercial banks?
2. What constitutes the strength of commercial banks in mitigating credit risk?
3. Does the Central Bank of Nigeria assist commercial banks in mitigating credit risk?

1.5 Research Hypotheses

The following null hypotheses were formulated to guide the study:

1. H01: Credit risk management does not affect the operational efficiency of commercial banks.
2. H02: The Central Bank of Nigeria does not assist commercial banks in mitigating credit risk.
3. H03: Commercial banks do not have the required techniques for mitigating credit risk.

1.6 Scope and Limitations of the Study

The study covers credit risk management at the Enugu branches of First Bank of Nigeria Plc and Union Bank of Nigeria Plc between 2007 and 2009. Because it would be very difficult to appraise credit risk management in every commercial bank in Nigeria, two banks were selected. The choice rests on the assumption that Nigerian commercial banks operate within the same regulatory framework and face broadly similar credit risk conditions (see CBN, 2019). The hypotheses test the control measures that banks have put in place to combat credit risk.

1.6.1 Limitations of the Study

Several constraints affected the work. They include:

1. limited time, finance and other resources;
2. unwillingness of some interviewees to take part; and
3. poor communication and the withholding of vital information by some bank staff, which would otherwise have made the study more thorough.

1.7 Significance of the Study

A commercial bank with wide responsibilities for service delivery cannot afford to neglect credit risk management, because doing so undermines its overall efficiency and effectiveness. Given the continuing problems in this area, the study will be significant in the following ways:

1. it will give bank managers procedures for identifying and controlling credit risk;
2. it will give stakeholders, including depositors, investors, bank staff and legislators, information on the liquidity position of the banks reviewed;
3. it will serve as a reference for lecturers, financial analysts and other researchers in the field;
4. it will offer stakeholders a practical, evidence-based model for assessing credit risk management in Nigerian commercial banks;
5. it will help regulatory and supervisory agencies, such as the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation, in their shared mission of maintaining stability and public confidence in the banking sector; and
6. it will help bank management focus on the areas that give rise to credit risk so as to improve operational efficiency.

1.8 Profile of the Selected Banks

Two banks were selected for review using judgmental sampling: Union Bank of Nigeria Plc and First Bank of Nigeria Plc.

1.8.1 Union Bank of Nigeria Plc

Union Bank traces its history to 1917, when it was established as Colonial Bank. In 1925 it became Barclays Bank DCO (Dominion, Colonial and Overseas) following its acquisition by Barclays Bank. After Nigeria's independence and the Companies Act of 1968, it was incorporated locally as Barclays Bank of Nigeria Limited. With the move to Nigerian ownership it was renamed Union Bank of Nigeria. During the Central Bank of Nigeria's banking sector consolidation, the bank acquired Universal Trust Bank Plc and Broad Bank Ltd. Following the 2009 banking crisis and intervention by the Central Bank through the Asset Management Corporation of Nigeria (AMCON), it was recapitalised with a $500 million injection from Union Global Partners Limited. Titan Trust Bank later became its majority shareholder, and the bank has since been delisted from the Nigerian Stock Exchange (Union Bank of Nigeria, n.d.).

1.8.2 First Bank of Nigeria Plc

First Bank was founded in 1894 by Sir Alfred Jones, a Liverpool shipping magnate, and began trading as the Bank of British West Africa. It changed its name to Bank of West Africa in 1957 and was incorporated locally in 1969 as Standard Bank of Nigeria Limited in line with the Companies Decree of 1968 (FBN Bank UK, n.d.). It was later renamed First Bank of Nigeria and now operates within a holding company structure. It is regarded as Nigeria's oldest bank.

1.9 Acronyms and Definition of Terms

CBN: Central Bank of Nigeria.

Commercial banks: Banks that carry out retail banking by accepting deposits from customers and granting loans to companies and individuals.

Commercial loan: A loan made by a bank to a business to finance its short-term needs, such as working capital, receivables and inventory.

Loan: A sum of money lent to another for temporary use, to be repaid with or without interest in line with the terms of the loan agreement.

Credit risk: The possibility that a borrower will fail to repay a loan or meet the agreed terms.

Non-performing loan: A loan on which the borrower has failed to make scheduled payments for a specified period, so that it is classified as in default (Abubakar et al., 2025).

Capital adequacy ratio: A bank's available capital expressed as a percentage of its risk-weighted credit exposures (Abubakar et al., 2025).

Liquidity: A bank's ability to meet its financial obligations as they fall due using its assets.

Risk: The possibility that an expected event may or may not occur, with a potentially adverse result.

Risk management: A comprehensive process through which an organisation seeks to minimise the adverse effects of the risks inherent in its business.

REFERENCES

AbdulAzeez, F. O. (2025). Credit risk management and financial performance of listed deposit money banks in Nigeria. Federal University Oye-Ekiti institutional repository. https://repository.fuo.edu.ng/items/79d8179f-d21e-41dc-8985-b8075e404d12/full

Abubakar, N., Hamza, H. D., & Ibrahim, U. Y. (2025). Effect of credit risk management on financial performance of listed deposit money banks in Nigeria. Kashere Journal of Management Sciences, 8(2), 82–95.

Central Bank of Nigeria. (2019). Prudential guidelines for deposit money banks in Nigeria [Exposure draft, August 2019]. https://www.cbn.gov.ng/Out/2019/FPRD/Exposure_DMBs%20%20August%202019.pdf

FBN Bank UK. (n.d.). Our history. https://www.fbnbank.co.uk/our-history/

Kwabe, J. A. (2025). Moderating influence of loan monitoring on the relationship between credit policy and debt recovery of some selected commercial banks in Nigeria. ADSU International Journal of Applied Economics, Finance and Management, 10(2). https://ajaefm.adsu.edu.ng/index.php/journals/article/view/179

Union Bank of Nigeria. (n.d.). Our history. https://www.unionbankng.com/?p=1285