The Impact of Credit Risk Management on the Performance

of Commercial Banks in Cameroon.

Author - Fabrice Tchakounte Kegninkeu

Journal - Global Journals

Published in Year 2018

OBJECTIVE
The main objective is to study and examine the impact of credit risk
management on the performance of commercial banks.

Specific Objectives Include:-

- Finding out the various risk management tools used by the bank to
manage credit risk.
- Evaluating the efficiency of loan assessment techniques of the
institution.
- To investigate the problems associated with credit risk management at
the bank.
- Making necessary recommendations based on findings.
 BACKGROUND
● In the USA, the Federal Reserve released a listing of the US largest banks
ranked by consolidated assets in which the first three are JP Morgan
Chase BANK, Bank of America, and Wells Fargo Bank.
● In China, the China Banking Regulatory Commission (CBRC) published a
report, in which the three largest banks in China are Industrial and
Commercial Bank of China, China Construction Bank,and Bank Of China.
● The 3 biggest banks in Nigeria include First Bank of Nigeria, followed by
Zenith Bank PLC and United Bank for Africa.
LITERATURE REVIEW
• Literature review would be what various authors have written about
this Topic. It includes
1. Conceptual review
2. Review of related literature
3. Empirical literature
4. Theoretical literature
1. Conceptual Review
In this part various authors gave basic definitions of some terms which forms the
basis of our study:
I. Risk
II. Loans
III. Credit Risk
IV. Credit risk management
V. Commercial banks
VI. Banks performance and its determinants
2. Review of related literature
• Types of Risk affecting banks: Apart from credit risk, a commercial
bank faces a lot more different types of risks, which include:
• Interest rate risk • Capital risk • Reputation risk
• Market risk • Operational risk • Strategic risk
• Liquidity risk • Off- balance sheet risk
• Currency risk • Legal and compliance risk

• Credit risk management and banks: It is a process that involves the

identification of potential risks, the appropriate treatment and the
actual implementation of risk models. Different methods involve:
• Avoidance • Screening • Credit rationing
• Diversification • Loan commitments • Specialization in lending
• Compensating balances • Long term relationship • Credit derivatives
• Monitoring of business building
• Collateral requirement
2. Review of related literature
• Credit assessment of Banks: The process of assessing, analysing and
making recommendations on the destiny of most loan applications
done by credit department is called credit assessment. It involves
stages such as:
• Collection of credit info. • Condition • Capacity
• Credit evaluation • Collateral • Financial statement analysis
• Capital • Character

• Decision Stage: The decision on whether to give the loan lies in the
hands of the credit officer, managers and sometimes the Board of
Directors.
3. Empirical Literature
• Here we compare the dependence/relation of credit risk
management (CMR) and performance of bank.
• Various researchers did different performance analysis and found
different relations ranging from negative to positive. Few examples of
which are:
I. Kargi (2011) evaluated Nigerian Banks and stated that profitability is
inversely related to loans, NPLs and deposits leading to greater risk of
illiquidity.
II. Kithinji (2010) evaluated Banks of Kenya and stated that loans and
profitability has no relation.
III. Hosna et al (2009) evaluated Banks in Sweden using NPLR and ROE, and
found that CRM has effects on profitability on all the 4 banks.
4. Theoretical Literature
• Portfolio Theory of CRM: Banks are using Modern portfolio theory (MPT)
to manage market risk. Still Practical of MPT to credit risk has lagged.
Banks also use Earnings at risk and value at risk models to manage risk.
• Asset by Asset Approach: It is based on sound loan review and internal
credit risk rating system. It enables changes in single credit risk hence
helps in assessing the portfolio changes.
• Portfolio Approach: Portfolio approach becomes important because of
the added risk of correlated borrowings , which are not considered in
asset by asset approach.
• Traditional Approach: It comprise of 4 models – (a) Expert systems, (b)
Artificial neural networks, (c) internal rating at banks, (d) Credit scoring
system
METHODOLOGY
• Background to the area of study: It is a case study of CRM effects on The
performance of Bamenda branch of BICEC. For this we study bank’s historical
evolution, its various products and services and its organizational structure. It
was formed on March 14,1997 after liquidation of BICIC.
Products and services:
a) Bank Cards – Visa Gold, Visa Classic, Visa Electron, Express card, Comfort Card, MOOV
Card
b) Insurance – Schengen Travel insurance, Super Retraite, Securicartes, Securitedecouvert
c) Short term financing – Three types of short term loans, namely, Reserve leader, School
fee loans, and Overdraft facilities.
d) Investment Savings – It includes BICEC Immo, and Certificate of deposit. Bank also
offers other credit facilities like BICEC Junior, remote banking for corporate bodies,
professional SMEs and SMIs, international expertise, and other financing facilities for
farmers.
METHODOLOGY
• Method of collecting data: Major data collected is from secondary
source, which was appropriate for various analysis performed. Data
was taken from BECIC balance sheet, trading profit and loss
statements, journals, annual reports and other related document.
 
• Method of Data analysis: Data is analysed using inferential statistics,
while Variables were analysed based on correlation between them.
• Sample Design: Descriptive research design has been used. BECIC is in
the top 3 performing Commercial banks of Cameroonian sector
• Limitation of Study: Not very recent data has been used in the study.
DATA USED
● The main source of data collection for this research is the secondary source
because based on research objectives, secondary data are more appropriate
for the various analyses that were to be done.
● Data has been collected from the BICEC balance sheet, trading profit and
loss statements, journals, annual reports and other related document.
● BICEC has been used as a sample of a commercial bank from which a period
of 5 years will be used for the study.
● Data collected on deposits, loans and profits and losses and credits will be
analyzed using inferential statistics.
● Variables will be analyzed based on the correlation that exists between
them.
RESULTS
• The study aimed at finding out the relationships between the
following indicators of credit risk associated with the bank and
tracing their impact on bank’s profit using correlation on
historical data :
1. NPL to total loans ratio,
2. Total loans to deposits ratio,
3. Loans to total assets ratio,
4. NPL to deposits ratio,
5. Loan provision to NPL ratio and
6. Percentage change in profits.
• Here, r2= 0.58 indicating a positive relation between NPL to
total loans and profit %.
• Means 58.5% of the variation in profit percentages is due to
the NPL to total loans ratio.
• Here r2 = 0.65, meaning that there is a strong negative
correlation between total loans to deposit and profit % ratios.
• Means 65% of the variation in profit percentages is due to total
loans to deposit ratio.
• Here, r2 = 0.35, means strong negative correlation
between loans to total assets ratio and percentage
profits.
• Only 35% of variation in profits is due to the change in
loans to total assets ratios.
• R2 = 0.065, this indicates weak negative correlation between
NPL to total deposits ratio and profit %.
• Only 6.5% of variation in the profits is due to change in NPL
to total deposits ratio.
• R2 = 0.781, mean strong positive correlation between
loan provision to NPL ratio and profit %.
• As much as 78% of variation in profits can be
explained by looking at loan provision to NPL ratio.
FINDINGS & RECOMMENDATIONS
• Bank’s loan to deposit ratio should be kept at around 65% to avoid the
liquidity risk.
• To avoid uncovered loans, the loan provision to NPL ratio should be
maintained at around 1.25. This will also reduce reputation risk.
• Banks should try at their fullest to nullify any NPL from their financial
sheets. If NPL to total loans ratio is minimized(to approximately a zero),
credit risks will be greatly reduced.
• Banks must adhere to prudential banking practices.
• They should also diversify more in lending to avoid repetitive losses in
particular types of loan issued to their customers.
• The results of the research showed that credit risk management is an
important predicator of a bank’s financial performance; thus bank’s
performance depends on credit risk management.
THANK YOU

• Made By:-
• Ambuj Garg (2016B2A20059P)
• Pranav Lathi (2016B3A10540P)
• Kartik Patil (2016B3A40571P)
• Shubham Lather (2016A7PS0006P)
• Devyash Parihar (2016A7PS0066P)