The simple macroeconomics of bank capital, liquidity, and credit risk in Nigerian SME portfolios

Justification for the Research

The Simple Macroeconomic of Bank capital, liquidity and application of credit risk model in SME portfolio management in Nigeria

The improvement of risk management in SME portfolio is noted by UNCTAD (2002) to be of utmost importance for the profitability of SME banking to be realized.SMEs play an important role in the development of the Nigerian economy as outlined in the work of Ogechukwu (2011). In this paper, we investigate the concept of Simple Macroeconomic of Bank capital, liquidity and application of credit risk model in SME portfolio management in Nigeria.

The aim of this paper is to investigate the Simple Macroeconomic of Bank capital, liquidity and application of credit risk model in SME portfolio management in Nigeria

Objectives

The objectives of this paper are as follows:

To investigate how the concept bank capital macroeconomics apply to concept of SME portfolio management in Nigeria

To investigate how the concept of liquidity macroeconomics apply to concept of SME portfolio management in Nigeria

3. To investigate the nature of application of credit risk model in SME portfolio management in Nigeria

4. To propose a suitable model to be used in the prediction SME performance in the future Nigerian economy

5. To explore the existing macroeconomic models of SME portfolio management.

6. To investigate the various shortcomings that can be encountered in the management of SME portfolio.

Justification for the research

A review of the current Nigerian SME banking scenario as well as the extant literature indicates that most of the literature is focussed on the credit risk management of the large corporate credit market (Claessens,2005). Research on SME risk management as well as capital modelling for the retail credits is largely underdeveloped. A review of literature further points out on the need for coming up with a specific failure prediction system for SMEs, distinct from the one used for other corporate positions (Leeth & Scott 1989; Jacobson et al. 2005; et al. 2005).It is for this reason that we come up with a failure prediction/risk management model for use in SMEs.

Literature review

Extant literature has been dedicated to the concept of SME credit worthiness. Most of these systems are implemented on the-Based II standardized credit evaluation processes. The standardization is a sure indicator of a change in the SME evaluation systems. The systems are not to experience a general change from a subjective assessment of the lending relationship, which is primarily based on the historical credit data as well as acquaintances with the investors/entrepreneur (Berger & Udell 1995) to one which is more objective in terms of the way in which the firm is evaluated on the basis of financial statement data (Berry & Robertson, 2006)

Hypothesis

On the basis of this statement, we formulate the following hypotheses

H1: Increasing levels of capitalization effectively improve the rating of an SME.

If the leverage ratios play an important role in rating systems, then the corresponding weight of the borrowing cost influences the given default score as noted by Altman & Sabato 2005).

H2: An increase in a give SME's weight of borrowing cost can effectively worsens its rating.

Under the concept of Basel II, the specific focus of rating systems on financial statement data does not in any way diminish the importance of credit historical data. Various empirical studies indicates the prevalence of this data in the evaluation of creditworthiness of a SME (Petersen & Rajan 1994).

H3: Credit historical data is prevalent in the available IRB systems for SMEs.

Additionally, we find that the primary concern for banks is the trend of SME's short-term lines of credit.

H4: Among the SME credit history, the usage level of their short-term lines of credit represents their main determinant.

The financial structure as well as its effects is never the only determinants of the default probability as measured by rating systems. The profitability performances plays a relevant role in the credit evaluation process of a given (Edmister, 1972, Pagliacci,2006). This statement is then verified by the 5th hypothesis:

H5: An increase in profitability of an SME improves its rating.

The variables that plays a role in the failure prediction

The failure prediction models are based on a standard set of variables/indicators. Extant literature indicates that these variables can be divided into there main categories (Altman,1968; Caouette et al., 1998; Beaver, 1967; Edminster 1972; Chen & Shimerda, 1981;Pompe & Bilderbeek, 2005).