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
Risk management practices are essential for maintaining the quality of a bank’s loan portfolio by minimizing defaults and ensuring proper credit evaluation. First City Monument Bank (FCMB) has developed a comprehensive risk management framework that encompasses credit risk assessment, stress testing, and continuous monitoring of loan performance (Adeyemi, 2023). These practices are designed to safeguard the bank’s financial health by ensuring that loans are granted only to creditworthy borrowers and that the overall risk exposure remains within acceptable limits. Digital transformation has further enhanced FCMB’s risk management capabilities, enabling real-time tracking of loan performance and predictive analytics for early warning signals (Ibrahim, 2024).
Effective risk management is closely tied to loan quality; a robust system not only reduces non-performing loans but also improves customer confidence and market reputation. However, challenges such as economic volatility, inconsistent implementation across departments, and limitations in data accuracy can undermine these efforts (Chinwe, 2025). This study will assess the impact of risk management practices on loan quality at FCMB by analyzing internal risk assessments, loan performance data, and regulatory compliance reports. The objective is to determine whether FCMB’s risk management strategies result in a healthier loan portfolio and to identify areas for further improvement to enhance overall credit quality.
Statement of the Problem
FCMB faces challenges in maintaining high loan quality despite advanced risk management practices. Fluctuations in economic conditions and variations in credit evaluation standards have led to periods of increased non-performing loans (Oluwatobi, 2023). Inconsistencies in risk assessment procedures across different departments further exacerbate the problem, resulting in a fragmented approach to credit risk management. These issues undermine the bank’s ability to maintain a robust loan portfolio, affecting profitability and customer trust. There is a clear need to identify the gaps between the theoretical framework of risk management and its practical application in ensuring loan quality. This study seeks to explore the factors contributing to loan quality deterioration and to propose strategic improvements to align risk management practices more closely with desired credit performance outcomes.
Objectives of the Study
– To assess the impact of risk management practices on loan quality at FCMB.
– To identify challenges in current risk assessment and monitoring processes.
– To recommend strategies for enhancing credit quality through improved risk management.
Research Questions
– How do risk management practices influence loan quality at FCMB?
– What challenges hinder effective credit risk assessment?
– What measures can enhance the quality of the loan portfolio?
Research Hypotheses
– H₁: Robust risk management practices are positively correlated with improved loan quality.
– H₂: Inconsistent risk assessment procedures negatively affect loan performance.
– H₃: Enhanced monitoring and data analytics lead to lower non-performing loan ratios.
Scope and Limitations of the Study
This study focuses on FCMB’s loan portfolio and risk management processes. Data will be sourced from internal loan performance records, risk management reports, and compliance audits. Limitations include external economic influences and variability in departmental practices.
Definitions of Terms
• Risk Management Practices: Strategies and processes to mitigate credit risk and monitor loan performance.
• Loan Quality: The overall health and performance of a bank’s loan portfolio.
• Non-Performing Loans: Loans on which borrowers are not meeting repayment obligations.
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