INTRODUCTION
1.0 Background to the Study
The concept of credit can be traced back in history and it was not appreciated until and after the Second World War when it was largely appreciated in Europe and later in Africa (Kiiru, 2004). Credit risk management has been an integral part of the loan process in banking business. Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed. (Kargi, 2011). When banks grant loans, they expect the customers to repay the principal and interest on an agreed date.
Banks and their customers have different perceptions of bank credit or lending. To most bankers, credit is not a capital–market activity, yet to many corporate customers’ particularly small and medium-sized companies, bank loans are their most important source of capital. The demand for medium-term or long-term lending comes mainly from commercial and industrial companies and from private individuals. However, amongst all the services provided by banks, credit creation is the main income generating activity for the banks. But this activity involves extremely high risks to both the lender (financial institution) and the borrower (client). The risk of a trading partner not fulfilling his or her obligation as per the contract can greatly hinder the smooth functioning of a bank’s operation. On the other hand, a bank with high credit risk faces potential insolvency and this does not give depositors confidence to place deposits with it.
Some financial institutions have collapsed or experienced financial problems due to inefficient credit risk management systems typified by high levels of insider loans, speculative lending, and high concentration of credit in certain sectors among other issues. Credit risk management practices and poor credit quality continue to be a dominant cause of bank failures and banking crises worldwide. Again, Financial Institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties (Gil, 1994).
Terms of Use: This is an academic paper. Students should NOT copy our materials word to word, as we DO NOT encourage Plagiarism. Only use as a guide in developing your original research work. Thanks.
Disclaimer: All undertaking works, records, and reports posted on this website, eprojectguide.com are the property/copyright of their individual proprietors. They are for research reference/direction purposes and the works are publicly supported. Do not present another person’s work as your own to maintain a strategic distance from counterfeiting its results. Use it as a guide and not duplicate the work in exactly the same words (verbatim). eprojectguide.com is a vault of exploration works simply like academia.edu, researchgate.net, scribd.com, docsity.com, course hero, and numerous different stages where clients transfer works. The paid membership on eprojectguide.com is a method by which the site is kept up to help Open Education. In the event that you see your work posted here, and you need it to be eliminated/credited, it would be ideal if you call us on +2348064699975 or send us a mail along with the web address linked to the work, to eprojectguide@gmail.com. We will answer to and honor each solicitation. Kindly note notification it might take up to 24 – 48 hours to handle your solicitation.