CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OFSTUDY

Greaterprominence have been said to be associated with banking industry in Nigeriabecause of the role it plays in her economic environment. The banking industryplays 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 orcredit facilities by borrowers which is regarded as credit risks are most oftenfaced by banking institutions in the financial sector (Muhammad & Shahid,2012).

Thebank’s credit function enables investor’s exploits ventures that are consideredprofitable (Kargi, 2011). This function however, exposes the banks to the riskof credit default. Credit risk as defined in 2001 by the Banking Supervision ofthe Basel Committee as the possibility of an outstanding credit goingabsolutely or partially lost due to default effect (credit risk). Defaulteffect or credit risk is assumed an internal measurement factor of theperformance of banks. The higher the level of bank’s exposure to credit risk,the higher the possibility of the bank to likely experience financial crisisand so on. Credit risk is the most formidable amongst the numerous risks facedby banks and the profitability of the banks is highly affected since a greateraspect of banks’ income accrues from granting credit facilities from whichinterest is generated. However, credit risk is found to be linked with interestrate risk by implying that interest rate increment enhances loan defaultpossibilities.