Credit Risks Management and Financial Ratios in the Economy: An Empirical Overview of the Performance and Sustainability of Nigerian Microfinance Banks – NMFBS (2005 – 2014)
ABDULLAHI TAFIDA
Department of Economics
Kaduna State University, Kaduna, Nigeria
Email: maikantiboba@yahoo.com
ABSTRACT
Credit risk refers to certainty of loss due to beneficiary’s inability to make payments on any type of debt, while credit risk management is practice of mitigating the loss by understanding the adequacy of both a bank’s capital and loan loss reserves at any given time. Financial ratios are mathematical comparisons of financial statement in the balance sheet (BS) in question, helping the stakeholders to know the situation bank’s situation for improvement. Microfinance Banks (MFBs) are financial institutions licensed to provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner that would enable them to undertake, finance and develop long-term, sustainable entrepreneurial activities, established in December, 2005 in Nigeria, when it was obvious that with an overall data of over 140 million, only about 35 percentage of Nigeria have access to financial services and that the remaining 65 percentage relied on the informal sector. There are many types of financial ratios, but this paper will only concentrate on seven (7). The main objective of this paper is to assess the performance and sustainability of the Nigerian Microfinance Banks (NMFBs) in relation to credit risks and financial ratios positions. The specific objectives are to assess whether the seven calculated ratios of: Current; Quick; Debt-Equity; Total Assets to Total Debts; Proprietary; Inventory Turnover and Gross Profit conform to their standard ratios. The Balance Sheet (BS) of the selected NMFBs as at 31st December, 2014 as indicated in Table 2 as one of the secondary data as well as interviews conducted with the operators and borrowers of NMFBs through the questionnaires as primary data were used. The CAMEL approach analysis was used to arrive at the financial ratios positions of the NMFBs. This paper, therefore, recommends regular and continuous credit risk identification, assessment of performance and sustainability as well as sound corporate governance. If NMFBs are to survive and grow in order to achieve the developmental objectives to the economy, the calculated ratios must conform to their standards ratios as one of the findings.