Greater
prominence have been said to be associated with banking industry in Nigeria
because of the role it plays in her economic environment. The banking industry
plays a great influence and in the provision of credit facilities in Nigeria.
However the tendency to incur financial losses due to failure to repay loans or
credit facilities by borrowers which is regarded as credit risks are most often
faced by banking institutions in the financial sector (Muhammad & Shahid,
2012).

The
bank’s credit function enables investor’s exploits ventures that are considered
profitable (Kargi, 2011). This function however, exposes the banks to the risk
of credit default. Credit risk as defined in 2001 by the Banking Supervision of
the Basel Committee as the possibility of an outstanding credit going
absolutely or partially lost due to default effect (credit risk). Default
effect or credit risk is assumed an internal measurement factor of the
performance of banks. The higher the level of bank’s exposure to credit risk,
the higher the possibility of the bank to likely experience financial crisis
and so on. Credit risk is the most formidable amongst the numerous risks faced
by banks and the profitability of the banks is highly affected since a greater
aspect of banks’ income accrues from granting credit facilities from which
interest is generated. However, credit risk is found to be linked with interest
rate risk by implying that interest rate increment enhances loan default
possibilities.

Interest
rate risk and credit risk are related intrinsically to one another and not
separately (Drehman, Sorensen &Stringa, 2008). According to Ahmad and Ariff
(2007), the credit portfolio with greater non- performing assets limits the
banks’ ability in achieving its stated objectives. Therefore, loans that are
non-performing are expressed as the percentage of loan values which has not
been service for 90 days and above. Consequence upon the huge rate of non-
performing loans, credit risk management practices is highly emphasized by
Basel II Accord Working in tune with the recommendations of the Accord is a
sure approach to handling the risk of credit and generally the enhancement of
bank performance. Through the effective management of the exposure of credit
risk by banks, they end up facilitating the viability and profitability of
their businesses and ultimately enhancing the systemic stability and smooth
allocation of capital in the economy (Psillaki, Tsolas & Margaritis, 2010).
Banks have adopted various strategies of recovering their money, some orthodox,
some unorthodox. It has been found that most borrowers are always willing to
pay, but certain situation like economic recession, inflation, political
instability, poor investment makes them not able to pay. According to Ojiegbe
(2002), there are also the existences of bad borrowers in the banking industry
whose primary assignment is to abandon their loan obligations in most banks and
enter into new loan contracts with another bank. This low credit standard of
borrowers along with poor management of portfolio and changes insensitivity in
the economic environment by the bankers led to the banks witnessing rising
non-performing credit portfolio. This ultimately causes many banks to fail and
become insolvent. It is quite unfortunate that in spite the degree of
carefulness, skillful, experience or tact of a loan officer, most of the loan
facilities granted to borrowers sometimes go bad. The introduction of the
Prudential Guideline in 1990 for banks licensed in Nigeria enable banks to
properly classify bad and doubtful debt. These guidelines made it compulsory
for licensed banks to at least in a quarter, have their credit portfolios
reviewed and credit classified (into non-performing loans and performing loans)
appropriately (Mora, 2011).The introduction of these guidelines has assisted
the banks to promptly identify the deterioration of loans held by banks. For a
credit facility to be considered as non- performing, both the principal and
accrued interest is unpaid for three months and more; or this interest payment
must have been interest of 90 days or more may have been rescheduled,
rolled-over or capitalized into a new credit facility (unless these facilities
have reclassified and the borrower have made cash payment to the effect that
interest payment outstanding does not exceed three months). Over the years,
bank loans and advances to the Nigerian economy has been on the increase.
According to the CBN annual report in 2007, commercial banks’ credit to the
core private sector grew by 98 per cent which has been the highest ever.
However, this incremental trend could not be sustained due to the prevailing
harsh economic situation and its effects on the business sector thus leading to
increased default on loan repayment. Furthermore, some bank customers misconstrue
the loans and advances received from banks as national cake, hence, they
deliberately shy away from repayment.

1.2 STATEMENT OF THE
PROBLEM