Credit Risk and Commercial Banks Performances

Topics: Bank, Debt, Credit risk Pages: 4 (967 words) Published: March 11, 2013
1.2 Background
The banking industry has achieved great prominence in the Zambian economic environment and its influence plays a predominant role in granting credit facilities. The probability of incurring losses resulting from non-payment of loans or other forms of credit by debtors, known as credit risks, are mostly encountered in the financial sector particularly by institutions such as banks. The biggest credit risk facing banking and financial intermediaries is the risk of customers or counter party default. During the 1990s, as the number of players in banking sector increased substantially in the Zambian economy and banks witnessed rising non-performing credit portfolios there was significant increase to financial distress in the banking sector. Also identified was the existence of predatory debtor in the banking system whose modus operandi involved the abandonment of their debt obligations in some banks only to contract new debts in other banks. Credit creation is the main income generating activity for the banks. But this activity involves huge risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or her obligation as per the contract on due date or anytime thereafter can greatly jeopardize the smooth functioning of bank’s business. On the other hand, a bank with high credit risk has high bankruptcy risk that puts the depositors in jeopardy. In a bid to survive and maintain adequate profit level in this highly competitive environment, banks have tended to take excessive risks. But then the increasing tendency for greater risk taking has resulted in insolvency and failure of a large number of banks. The major causes of serious banking problems continue to be directly related to low credit standards for borrowers and counterparties, poor portfolio management, and lack of attention to changes in economic or other circumstances that can lead to deterioration in the credit standing of bank’s counter...
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