An assessment of risk management practices on loan quality in banking: a case study of First City Monument Bank
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Background of the Study
Effective risk management is essential for maintaining loan quality and ensuring financial stability in the banking sector. First City Monument Bank (FCMB) has implemented comprehensive risk management practices aimed at assessing, monitoring, and mitigating credit risk within its loan portfolio. Between 2023 and 2025, the bank has enhanced its loan underwriting processes by integrating advanced risk assessment tools, data analytics, and continuous monitoring systems (Adeniyi, 2023; Okeke, 2024). These practices are designed to minimize non-performing loans and ensure that credit is extended to borrowers with strong repayment capacities.
By establishing rigorous internal controls and regularly reviewing credit policies, FCMB aims to protect its assets and build customer and investor confidence. Effective risk management not only reduces the incidence of defaults but also supports sustainable growth by ensuring a high-quality loan portfolio. The bank’s proactive approach includes stress testing, scenario analysis, and periodic audits to identify vulnerabilities and adjust credit criteria in response to market changes. However, challenges such as data integration issues, evolving economic conditions, and regulatory pressures can impact the consistency and effectiveness of these risk management practices (Ibrahim, 2025).
This study seeks to evaluate the impact of risk management practices on loan quality at FCMB by examining quantitative performance metrics—such as default rates and portfolio returns—and gathering qualitative insights from risk management teams. The objective is to identify areas for improvement in the risk management framework and propose strategies to further enhance loan quality, thereby reducing credit risk and supporting overall bank performance.
Statement of the Problem:
Despite robust risk management frameworks, FCMB continues to face challenges in maintaining high loan quality. Inconsistencies in risk assessment, delays in updating credit criteria, and integration issues between advanced analytical tools and legacy systems have resulted in higher-than-expected default rates (Okeke, 2024). These challenges compromise the quality of the loan portfolio and expose the bank to increased credit risk, which can negatively affect profitability and investor confidence. Moreover, external factors such as economic downturns and regulatory shifts further complicate the risk management environment, making it difficult for the bank to maintain consistent credit standards.
The lack of a cohesive communication channel between risk management and lending departments further exacerbates these issues, leading to suboptimal credit decisions. This study aims to identify the specific weaknesses in FCMB’s risk management practices and evaluate their impact on loan quality. By providing actionable recommendations, the study seeks to enhance the overall effectiveness of the bank’s risk management framework and ensure higher loan quality.
Objectives of the Study:
To evaluate the impact of risk management practices on loan quality at FCMB.
To identify factors contributing to non-performing loans.
To recommend strategies for optimizing credit risk management.
Research Questions:
How do risk management practices affect loan quality at FCMB?
What are the key challenges in maintaining high-quality loans?
What measures can improve risk management and reduce defaults?
Research Hypotheses:
H1: Effective risk management practices significantly enhance loan quality.
H2: Data integration issues negatively impact credit assessment accuracy.
H3: Improved communication between departments reduces non-performing loans.
Scope and Limitations of the Study:
The study focuses on FCMB’s risk management practices from 2023 to 2025. Limitations include external economic influences and potential data reliability issues.
Definitions of Terms:
Risk Management Practices: Systems and procedures to identify, assess, and mitigate credit risk.
Loan Quality: The overall performance and reliability of a bank’s loan portfolio.
Non-performing Loans: Loans that fail to generate expected repayments.
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