Effect of Credit Risk Management on the Financial Performance of Commercial Financial Institution - Research Paper Example

The effect of credit risk management on the financial performance of commercial financial institution in England Contents The effect of credit risk management on the financial performance of commercial financial institution in England 1 Contents 2 Theoretical basis and literature study 3 Data collection 4 Introduction 4 Research design 4 Population and Sample 5 Data Collection 5 Data Analysis 6 Data analysis 6 Introduction 6 Gender 7 Credit Risk Management 9 Whether the Credit Risk Management affect Financial Performance of Financial institution 9 Extent to which commercial Financial institution consider Credit Scoring Mechanism process in risk management 10 Extent to which commercial Bank consider Credit Analysis and Assessment process 11 Discussion 11 CONCLUSION AND RECOMMENDATIONS 12 Introduction 12 Summary 12 Conclusion 13 Policy Recommendation 14 References 16 Apendices 17 Theoretical basis and literature study Introduction 1.1 background of the study The strength of financial institution is the growths in the income, which is of great significance in the business operations. Financial institution is the leading financial intermediaries in the economy and they are the leading providers of credit. The financial institution deals with retail as well as appropriate clients, they have a diversified portfolio deposits as well as lending book and primarily providers a while assortment of financial services for economic developments at comparatively steady growth rates. Specifically, financial institution makes profits by selling debts with one set of traits and with the use of proceeds to purchase assets with diverse set of traits like the asset transformation. The latest financial management defines the business of banking as appraising, controlling, as well as acknowledging the risk. Under such definitions. the very significant as well as uncertainty that financial institution should appraise., control as well as supervise its credit risks, this threat also known as the default risk is the threat that the counter party will default or underperforming. with the growth in the pressure on financial institution to enhances shareholders wealth maximization, financial institution have had to assume high risk and also, control this risk to get rid of losses, current transformation in the financial sector which h[might have serious effect on the performance of the financial institution . The objective of the risk management is not just to minimize or get rid of the risk as normally depicted but is considered as the procedure of recognizing, appraising, as well as controlling the risk that investors will face (Greener, 2009). This might not be likely in many situation of evaluating risk as well as the constraints of the instrument for managing risk (Brennen, 2009). The risk management should be a constant procedure that the composition of investors’ portfolio as well as the risk of asset therein. In addition, the aim and limitation of an investors change as time goes by. Nevertheless, the need for risk control has grown drastically in the past years. the risk control depict the aim and the scope of making sure that the risk control guarantees that risk taking of venturing is being undertaken in a managed as well as comprehend approach. It is constant procedure change of the composition in the investor portfolio, the risk of the assets in the portfolio as well as the aims and limitation of an investor. Data collection Introduction This part deals with the approach of collecting data and the research design undertaken in our study. it provides the research designs, the population and the sample selection, the sampling technique as well as the research instruments, data analysis methodology, data collection as well as contr9ants encountered during the research process. Research design This implies the approach the study was designed, it is an approach employed to undertake the research. The research design is the plan and the layout of the study so envisaged in to get answers to the research questions. the plan is the entire program of the study and entails the outline of what an examiner will undertaken from writing the research assumptions and their implication for the financial assessment of the data,. The importance of the research design is an activity as well as time-based plan. Normally on the basis of the research questions, guide the selection of source and kind of information, the framework that specifies the association amongst variables as well as an outline of the process for each research activity. The research design depicts an outline that is employed in generating soluation to the research question. It primarily the layout and plan for research. The examiner will employ a descriptive research design, which seeks to determine factors linked to some existence, the result, situation if kind of attitude (Joseph, 2006). This is considered relevant since the research will engage comprehensive examination of credit risk control and its implications on the financial performance of the bank, which will be important in describing the situation of the real current condition of financial institution. A descriptive research will be preformed to be specific and be in a position of describing the traits of the variables of interest in the study undertaken. Population and Sample The population of interest of the study is in commercial bank registered in the central bank of England. The target population of the research is deem 11 commercial financial institutions as they comply with the trait and lawfully accepted by the bank of England. Data Collection The data for the study was collected with the use of primary and secondary data. The primary data uses the structured questionnaires to depict an assortment of business with regards to credit risk control paradigm in financial institution of England. The considered respondent is the credit managers of every credit divisions. The aim of this is wide inclusion that seeks comprehension of the appropriate factors. The questionnaires will be dived into two parts. Part One will focus on collecting background information with regards to respondent and part two will focus on credit risk controls system and its controls methodologies of every financial institution. The secondary data normally engage past work from relevant article inclusive of the published financial reports from the financial institution as well as data linked to those financial institution existing Data Analysis The data analysis focuses on fulfilling the research objective and provides solution to the research question. For the data collected to be comprehended by the local person easily, it requires an analysis. The research employed the qualitative as well s quantitative methodology in examining the data. Subsequent to acknowledging questionnaires from the resident, the response were edited, classified, coed as well as tabulated to examine the quantitative data with the use of statistical package for social science (SPSS). The tables and ah carts were employed for further depiction for simplicity in comprehension and analysis. The data collected will be examined comprehensibly for wholeness and understandability. The data was afterwards summarized, coded and tabulated, the findings was used to contrast then with the financial information from the annual report of the bank. The financial information was changed to percentage with the use of profitability ratio methodologies. The tables a well as charts depiction was used to illustrate a clear financial overview. Eventually, subsequent to contrast from all findings, the conclusion was reached by depicting the implication of the credit risk control on financial performance of commercial financial institution in England. Data analysis Introduction This part presents an analysis as well as discussion of the collected data from the respondent. The aim of the study was to determine if there is an effect of credit risk on bank financial performance in England. The target population was 11 credit managers of commercial financial institution (Fowler, 2009). In this Assessment, all the respondent were the top credit managers of commercial banks, the research requested the respondent to state the period that they ha re been working with the banks to ensure that the information provided is appropriate. From the finding, it was evident that our respondent had a working experience of 18 years, 11 years, 8 years, 7 years, 5 years, and 2 years. Gender The analysis of gender is as follows I it is evident in the graph above that 63% of the gender is males while 35% are females. This depict that many of the respondent for our research are males. Level of Education In the study, the respondent depicts diverse level of education in the financial institutions. The research of their experience has aided us in analyzing the implication of the credit risk control on the financial performance. The following graph depicts the level of education of the respondent. The graph above depicts that majority of the respondent are with the degree level of education followed by the masters level diploma levels. Credit Risk Management Whether the Credit Risk Management affect Financial Performance of Financial institution The respondent was required to point out the extent to which credit risk control affect the financial performance of the financial institution. From the graph above, it was evident that many of the respondents (60%) strongly agree that the financial performance of financial institution is strongly impacted by the credit risk controls. Whilst 30% of the respondent agrees and 10% strongly disagrees (Jones, 2014). The permits that the financial institution requires to control efficiently the credit risk for the aim of improving the financial performance of the bank. Whether is important to manage Credit Risks into your Bank The growth above e depicts the extent, which the respondent considers the importance of managing credit risk by the financial institution. It was evident that many of the respondents (67%) consider that is very important to management credit risk while 33% considers that it is that very important (Brennen, 2009). With regards to the importance of managing credit risk, the research pointed out that these will minimize the cash flow loses and make sure that banks performance will, growing the return on equity. It was evident that it aids the financial institution to operate more effectively. Extent to which commercial Financial institution consider Credit Scoring Mechanism process in risk management Frequency percentage Very Great Extent 8.0 0.7 Great Extent 2.0 9.2 Moderate Extent 2.0 9.2 Little Extent 3.0 19.2 Not all 1.0 1.1 Total 16.0 39.4 The respondent was required to point out the extent to which the financial institution deems credit risk scoring model process in risk management (Joseph, 2006). The research findings depict that many of the respondent (65%) pointed out that financial institution in England consider credit scoring model in their process at a great extent and average extent. 17% of the responding pointed out that the risk scoring model is only applicable to a certain extent. Extent to which commercial Bank consider Credit Analysis and Assessment process Frequency percentage Very Great Extent 7 55 Great Extent 3 18.2 Moderate Extent 2 9.1 Little Extent 3 18.18 Not all 1 0 Total 16 99.45 The respondent were required to point out te extent to which the financial institution deem credit assessment procedure I risk control, the findings depicts that many of the respondent (55%) pointed out that risk control to be of a great extent. 18.2% pointed out that financial institution deem credit analysis and evaluation process a great extent while 18.2% consider a little extent Discussion The finding depicts that the financial institution must ensure that the credit risk control is managed effectively to ensure that the high level of financial performance of the bank is guaranteed. The research found that it was important to control the credit risk as pointed out by 80% of the respondent to ensure that financial performance is realized. with regards to significance of controlling the credit risk, the research found provided that these reduces the cash loses and guarantees the organization performance improved by growing the return on assets and it aids the bank in operating more effectively. The study found that the credit risk analysis and evaluation, credit identification, supervision as well as credit scoring mechanism were the sign of that appraised the credit risk control. More than 71% of the response approved that the credit risk identification is important measure of credit risk control to guarantee improved financial performance. Similar to credit scoring mechanism and credit assessment both depict a key signal of credit risk control at a superior proportion of 63% and 645 concurrently (Kara, 2015). CONCLUSION AND RECOMMENDATIONS Introduction From the investigation and information gathered the prior dialogs, conclusions, and proposals were made. The reaction depended on the goals of the study. Summary The target of this study was to set up the impact of credit risk management and Financial Performance of England commercial bank. The study had four particular destinations of setting up how a Credit Risk investigation and appraisal, Credit Risk Identification, Credit observing, Credit scoring system influence financial institution performance of commercial bank in England. The study distributed a questionnaire, which helped to inspect the impact of credit risk management on financial performance of commercial financial institution in England. The specimen size was the same as the number of inhabitants in the study (Joseph, 2006). The reaction rate was a 100 percent, which included eleven commercial financial institutions. Information was accumulated by investigating the appropriate responses from the credit administrators of commercial financial institution. The information was examined utilizing SPSS. The study found that the vast majority of the respondents concurred that customer default credit installment in the wake of utilizing supervision-balanced premise. The study found the methodologies that are utilized by the financial institution in screening and risk examination before granting credit to customers. From the discoveries, a large portion of the respondents uncovered that limit/rivalry and conditions are the methodologies for the most part utilized as a part of screening and risk investigation. They are two different methodologies specified which were character of the borrower and guarantee or security these were two other critical methodologies utilized by bank to honor credit to a customer. The investigation of change uncovered that there is a high impact of credit risk management on financial institution performance of commercial financial institution in England. Relapse comes about has demonstrated that Credit Risk investigation and evaluation, Credit Risk Identification, Credit Scoring system are decidedly and fundamentally identified with the Financial Performance of commercial financial institution in England. Conclusion From the discoveries, the study reasons that commercial financial institution in England needs to oversee adequately the credit risk with a specific end goal to guarantee the financial performance and meeting its destinations, Minimize money misfortune, and guarantees the association performs better by expanding the arrival on resources and helps the association in achieving greatest financial returns. From the discoveries the study infer that credit risk recognizable proof, credit scoring instrument and credit investigation and evaluation are great indicators of the model therefore those three pointers utilized of credit risk management have demonstrated a positive association with the financial institution performance of commercial financial institution in England (Skinner, 2014). The study has likewise presumed that the customer has defaulted on credit installment after over 12 month late and subsequent to utilizing supervision on coordinated premise. The study found the methodologies that are utilized by the financial institution in screening and risk investigation before granting credit to customers. From the discoveries, the study has closed limit/rivalry and conditions are the methodologies for the most part utilized as a part of screening and risk investigation. At long last, the study reasons that there was a constructive outcome of credit risk management on financial institution performance of England commercial financial institution. Policy Recommendation Generally, financial institution has suffered after economic credit it was vital for the management of England to build up the approach that represented those financial institution organizations. The bank's arrangement suggestions are the key variable of achievement of financial organizations. Credit risk management is a key element for the achievement of financial establishment operations in England and by augmentation column to financial thriving and soundness. It is accordingly vital for the Government of England to create approach and lawful condition that is helpful for relationship of commercial financial institution. Financial institution authorities will have the capacity to value the difficulties that may impact financial performance of commercial financial institution in England (Kara, 2015). Numerous masters may expect that every financial establishment have uniform arrangement of variables that impact financial institution performance. This study offers alongside four markers of credit risk management an arrangement of components that can simply be tried which directing financial institution evaluation of commercial financial institution. References Brennen, B. (2009). Qualitative Research Methods. London : Cengage Learning . Fowler, F. (2009). Survey Research Methods. London : Pearson Education . Greener, S. (2009). Business Research Methods. London : Cengage Learning . Jones, I. (2014). Research Methods for Sports Studies: Third Edition - Page 50. London : John Wiley $ Son's. Joseph, C. (2006). Credit Risk Analysis: A Tryst with Strategic Prudence. New York: Cengage Learning . Kara, H. (2015). Creative Research Methods in the Social Sciences: A Practical Guide. New York: Pearson Education . Skinner, J. (2014). Research Methods for Sport Management. New York: John Wiley $ Son's. Apendices Part A: General information 1. Name of the Bank........................................................................................ 2. Years served in the bank.............................................................................. 3. Level of education........................................................................................ Part B; Credit risk Management Please Indicate by a tick [ ] to demonstrate your response to the expressed inquiries. 1. Do you think there is any impact between the Credit Risk Management and the Financial Performance of Banks? Yes [ ] No [ ] 2. Does Credit Risk Management influence the Performance of your Bank? Yes [ ] No [ ] 3. What is the significance of overseeing Credit Risks into your Bank? .................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 4. Among the accompanying practices that measure credit chance say by ticking which does your bank apply? Credit Risk Identification [ ] Credit Analysis and Assessment [ ] Credit Scoring Mechanism [ ] Risk checking [ ] 5. Whatever degree does your Bank consider Credit Risk Identification? To an exceptionally extraordinary degree [ ] to a little degree [ ] As it were, [ ] Not at all [ ] To a direct degree [ ] 6. What exactly degree does your Bank consider Credit Analysis and Assessment? To an exceptionally awesome degree [ ] to a little degree [ ] As it were, [ ] Not at all [ ] To a direct degree [ ] 7. What exactly degree does your Bank consider Credit Scoring Mechanism? To an extremely incredible degree [ ] to a little degree [ ] All things considered, [ ] Not at all [ ] To a direct degree [ ] 8. What exactly degree does your Bank consider Risk checking? To an exceptionally incredible degree [ ] to a little degree [ ] As it were, [ ] Not at all [ ] To a direct degree [ ] 9. At the point when does your Bank choose that a customer has defaulted on Loan/Credit reimbursement? Period Not at all Least Moderate Most used One month late payment         More than 12 months payments         Using supervision on one to one basis         Read More