REPUBLIC OF CAMEROON REPUBLIQUE DU CAMEROUN

PEACE-WORK-FATHERLAND PAIX-TRAVAIL-PATRIE TABLE OF CONTENT

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MINISTRY OF HIGHERE MINISTRE DE L’ENSEIGMENT
EDUCATION SUPERIEUR

CREDIT RISK AND FINANCIAL

CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL
PERFORMANCE OF COMMERCAIL BANK
BANKS IN CAMEROON: CASE OF SELECTED COMMERCIAL BANKS
CASE OF BICEC NDOKOTTI DOUALA-BASSA

Specialty:
BANKING AND FINANCE

Written and Presented by:

POUTCHEU FREDDY

MATRICULES: IUC18E0033641

UNDER THE SUPERVISION OF:

Mrs. GLORY MARY / RITA ACHA

2020-2021 : academic year

CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

1.2 PROBLEM STATEMENT...........................................................................................................4

1.3 RESEARCH QUESTIN...............................................................................................................4
1.3.1 MAIN RESEARCH QUESTION..........................................................................................4
1.3.1 SPECIFIC RESEARCH QUESTION....................................................................................4
1.4 Objective of the study...................................................................................................................5
1.4.1 MAIN OBJECTIVE..............................................................................................................5
1.4.2 SPECIFIC OBJECTIVES......................................................................................................5
1.5 HYPOTHESIS OF THE STUDY.................................................................................................5
1.6 SIGNIFICANT OF THE STUDY................................................................................................5
1.6 SCOPE OF THE STUDY.............................................................................................................6
1.8 ORGANIZATION OF THE STUDY...........................................................................................6
1.9 DEFINITION OF TERMS...........................................................................................................6
2.1 LITERATURE REVIEW.................................................................................................................8
2.1.1 CONCEPTUAL REVIEW........................................................................................................8
2.1.1.1 WHAT IS RISK.................................................................................................................8
2.1.1.2 CREDIT RISK....................................................................................................................8
2.2 CREDIT MANAGEMENT..........................................................................................................9
2.2.1Business reviewing...................................................................................................................11
Figure 1: Perform business report.........................................................................................................11
Figure 2: Process determine the cause of borrowing need....................................................................12
2.2.2 Management review................................................................................................................12
Figure 3: managerial review.................................................................................................................12
2.2.3Financial data.......................................................................................................................13
Figure 4: walk through financial statement..........................................................................................13
2.4Theoretical review.......................................................................................................................13
2.4.1 Probability of default...........................................................................................................13
2.4.2 Loss Given Default and Expected losses.............................................................................14
2.4.3 Economic Capital and Value at Risk...................................................................................15
2.5 Empirical review of the study.....................................................................................................15

CHAPTER 1
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

1 INTRODUCTION
1.1 background of the study
Banking is the lifeblood of any economy, primarily because they reallocate money and credit
from saver who has a temporary surplus of it, to borrower who can make better use of it
(Mishkin,2006) and secondly, because they are the pivot of the clearing system thereby,
enabling the firms and individuals to fulfil their transactions by collaborating to clear
payments (Bain and Howells,2002).
Lending has always been the primary function of banking and accurately assessing a
borrower’s creditworthiness has always been the only method of lending successfully. Since
the main function of a commercial bank is to collect savings and distribute them to its
customer in the form of credit. In a general context of information asymmetry, the risk is the
main concern of the bank, which has imperfect readability of its customers. Thus, risk is the
most studied factor in the banking sector. Among the diversified form of risks, credit risk is
the most important for a bank. The lower the equity capital of a bank compared to its
receivables from customers, the greater the credit risk and the probability that a bank will not
be over-liquid or efficient (H., V., Greuning, S., B., Bratanovic 2004) in so far as the own
funds would not be able to support any unpaid debts. According to the Basel Ⅱ agreements, in
addition to equity, credit risk is linked to the risk profile of each borrower (P., N., vothi,2005).
Now the question is to know how credit risk came into existence and how the lending
activities evolve through history. Credit is much older than writing. Hammurabi’s Code,
which codified legal thinking from 4,000 years ago in Mesopotamia, didn’t outline the basic
rules of borrowing but did not address concepts such as interest, collateral and default. These
concepts appear to have been too well known to have required explanation. However, the
Code did emphasize that failure to pay a debt is a crime that should be treated identically to
theft and fraud. The Code also set some limits to penalties. For example, a defaulter could be
seized by his creditors and sold into slavery, but his wife and children could only be sold for a
three-year term. For most of history, credit default was a crime. At various places and times, it
was punishable by death, mutilation, torture, imprisonment or enslavement punishments that
could be visited upon debtors and their dependents. Unpaid debts could sometimes be
transferred to relatives or political entities. But that does not mean the law was creditor
friendly. Moreover, moralists and lawmakers favoured equity financing over credit. Under an
equity financing arrangement, both successful and unsuccessful outcomes could be resolved
without expensive legal proceedings. Documentation and oversight were also much simpler.
Even the equity financing language was and remains biased with words like “equity” (which
means “fair”) as opposed to negative words like “debt” and “liability. “The birth of financial
theory is generally associated with the seminal work of Louis Bachelier in 1900. He was the
first to use the Brownian motion to analyse fluctuations in a financial asset. Between the 1950
and 1960s researchers such as (Markowitz, linter, Treynor, Sharpe and Mossin) undertook
fundamental studies of portfolio choice based on the CAPM. Commitantly, new statistical
tools were put in place in bank and rating agencies to select the clientele (e.g., credit scoring)
and manage credit risk. These tools facilitated the assessment of default/credit risk and risk
pricing. The Basel Accord of 1988 imposed a new regulatory vision of risk in the late 1980s.
The high market volatility spurred large US investment banks to put in place risk management
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
departments (Field,2003).JP Morgan developed the two best known internal risk management
models, Risk Metrics for Market risk and Credit Metrics for credit risk. In 1994 and 1997
respectively. These two models highlighted the idea of measuring risks in portfolio form by
considering their dependencies and using Value at Risk to quantify portfolio risk. The VaR is
a tool that does only determine the credit risk exposure but also determines the optimal
amount that will be used to anticipate the risk. The adequate capital reserve became a major
concern in the early 2000s following major defaults in the late and the Enron Bankruptcy in
2001. Basel Ⅱ introduced a more rigorous rule for banks. In addition to modifying the credit
risk rule management, the Accord introduce new rules for operational risk. However, the
legislators have said little about managing the risks of various management and hedge funds
especially pension funds.

1.2 PROBLEM STATEMENT

Despite all efforts put in place by commercial banks in Cameroon. Their credit risk in the
form of non -performing loans still exist on their bank’s loan portfolio. In addition, the credit
expert of these banks sometimes has overlapping functions which result in them being a mix
up with the type of risk to focus on since other types of risks such as interest rate risk, market
risk, liquidity risk, currency risk and operational risk also exist. Also, with the information
asymmetry that exists between borrowers and lenders.it had led to credit experts being more
likely to select projects that are dubious than those that will succeed to grant financing.
In Cameroon, the banking industry is facing fierce competition among themselves in certain
business segments such as business loans. Companies have no other financing options than
bank credit for their activities given the embryonic state of the national and regional stock
exchange as a result the intermediary margin constitutes a non-negligible component for the
profitability of the banks.

1.3 RESEARCH QUESTION

Given the various problem that was stated above our main research question and specific
research question will be focused on the following area.
1.3.1 MAIN RESEARCH QUESTION
The main research question will be to evaluate those successful credit management factors
that are used by commercial banks in Cameroon.
1.3.1 SPECIFIC RESEARCH QUESTION
The specific research questions will be to find out how the sample commercial bank which I
will take for my research are managing credit risk. That is, what are some of the tools that
they used to mitigate credit risk.
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

1.4 Objective of the study

Similarly, as to our research question, our objective will not change that is it will be divided
into main objectives and specific objectives.
1.4.1 MAIN OBJECTIVE
The main objective will assessed the effectiveness of the different tools used by the bank
to mitigate credit on their financial.
1.4.2 SPECIFIC OBJECTIVES
The specific ojective will to compare and give similarities of the different tool used by the
sample bank .
Sort out some of the best practices from our study.
To make a supportive recommendation based on the findings.

1.5 HYPOTHESIS OF THE STUDY

To finalize this research project the following hypothesis I will pose throughout the work
will be as follows.
Ho: bank’s credit policy has an impact on its financial performance.
H1: bank’s credit policy does not have an impact on its financial performance.

1.6 SIGNIFICANCE OF THE STUDY

The recommendation and conclusion made in this project will be of great significance to
BICEC and other banks like UBA, ECO-BANK, SGC, to the customer, student and
researcher
a) BICEC and other banks: this research projected will help the loan officers of these
banks to update their credit management tools to make the institution more efficient
and effective in terms of the banking environment.
b) To the customer: the customer will benefit from this research project in that the
customer will have a clear knowledge of the different steps used in the credit analysis
procedure and what is required by him from the bank.
c) To the researcher: this work will be of great importance to the researcher because it
will add more ideas or knowledge to pre-existing knowledge of other Cameroon
researchers thereby updating the idea in the subject in question.
d) To the student: This will guide the student to do further study in banking and finance.

1.6 SCOPE OF THE STUDY

This study will be seen in two dimensions (theme and geographical location).
a) Thematical delimitation
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
This study is thematically delimited to credit risk successful factors in credit risk management
in commercial banks in Cameroon.
b) Geographical delimitation
The scope of this study covers the territorial area of Douala as it will work on information
gotten from the commercial bank of UBA, BICEC, ECO-BANK concerning their credit
management.
1.8 ORGANIZATION OF THE STUDY
This paperwork will be organized in the following way as stated below:
Chapter 1: General introduction.
Chapter 2: A literature review.
Chapter 3: Methodology of the study.
Chapter 4: Presentation and discussion of result.
Chapter 5: General, discussion, conclusion and documentation

1.9 DEFINITION OF TERMS

Credit risk
Credit risk is defined as the potential loss from refusal or inability of customers to pay what it
owes in full and time (Brain Coyl,2000). Credit risk is the probability of the loss (due to non-
recovery) emanating from the extending, as a result of the non-fulfilment of contractual
obligations arising from unwillingness or inability of the counterparty or for any other reason.

Credit
Credit is defined as a transaction between two parties in which one (the creditor or lender)
suppliers of money or monetary equivalent good, services etc in return for a promise of future
payment by the other (the debtor or borrower) which include the payment of interest to the
lender (ciby Joseph,2006).
Risk
Risk is defined as the probability that the actual outcome of an event is different from the
expected outcome.
Commercial banks some banks perform all kinds of banking business and generally finance
trade and commerce. A bank is defined as a bank that sells deposits and makes loans to
businesses and individuals (peter. s and Sylvia. c). A commercial bank is a profit-making
institution that received deposits from the public, safeguard them and make them available
on-demand and make loans or creat credit (Tegui,2010).
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
Credit risk management
This is a set of sound practices such as establishing an appropriate credit risk environment,
operating under a sound credit-granting process, maintaining an appropriate credit risk
management and monitoring process and ensuring adequate controls over credit risk. credit
risk management is a structured approach to managing uncertainties through risk assessment,
developing strategies to manage them and mitigation of risk using managerial resources. The
strategies include transferring to another party, avoiding the risk, reducing the negative effects
of the risk and accepting some or all of the consequences of a particular risk (Basel
Committee on Banking Supervision,2009).

CHAPTER 2
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

2.1 LITERATURE REVIEW

2.1.1 CONCEPTUAL REVIEW

2.1.1.1 WHAT IS RISK

Risk is “the variability of the actual return from the expected returns associated with a
given asset or investment” (Khan and Jain,2004). Ehrhardt and Brigham (2011) also defined
risk as “the chance that some unfavourable event (both financial and physical) will occur” two
types of risk exist the pure risk and the speculative risk .it should be noted that taking risk is
one of the essences of management but it should be taken unnecessarily and foolishly. There
are many (Fabric Tchakounte Kegninkeu,2018). There is interest rate risk, market risk,
liquidity risk, currency risk, operational risk, off-balance-sheet risk, legal and compliance
risk, reputation risk, strategic risk, capital risk, credit risk and much more. However, in this
work, more emphasis will be placed on credit risk and how is being managed?

2.1.1.2 CREDIT RISK

Credit risk is the potential that a bank borrower or counterparty will fail to meet its
obligations following the agreed term (Donald et al). It is the potential that a bank borrower or
counterparty will fail to meet its obligations following the agreed term (Jackson,1999). Credit
risk is the risk of change in value associated with unexpected changes in credit quality(Duffin
and singleton,2003). This is the risk that an asset or a loan becomes irrevocable in the case of
outright default or the risk of delay in the services of the loan(Heffernan,2005). credit risk is
the potential for a loss due to the failure of a borrower to meet its obligations to repay a debt
following agreed terms. Faure (2013) define credit risk as to the risk that the borrower from a
bank will default on the loan and interest payable, that is it will not perform the conditions
under which the loan was granted. The above definition given by different authors highlights
two important components which are;
i) The risk that a borrower or counterparty will default
ii) The risk that a borrower or counterparty may not repay the promised cash flows in full
or in a timely fashion.
These two components make credit risk one of the most damaging risks to the bank not only
because of the actual loss eventually incurred, but also in terms of the time that management
and bank counsel expand on attempting to recover the loss or a portion of the loss. We also
have to note that credit risk is characterised by three characteristics which are as follows:
 Exposure (to a party that may default or suffer an adverse change in its default or
suffer an adverse change in its ability to perform).
 The like hood that this party will default on its obligations (the default probability)
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

 The recovery rate (that is how much can be retrieved if a default takes place)

Note that, the larger the first two elements, the greater the exposure. On the other hand, the
higher the amount that can be recovered, the lower the risk. Formally, we can express the risk
as:
Credit risk =Exposure x probability of default x (1-recovery rate).

2.2 CREDIT MANAGEMENT

Risk management is not simply a tool; it is a management action. Risk management
materializes in a series of concrete daily actions, and it can’t be limited to risk modelling and
regularly compliance (Basel Ⅱ and Basel Ⅲ above all). Gestel and Baesens (2009) defined
credit risk management as a process that involves the identification of potential risks, the
appropriate treatment and the actual implementation of risk models.
Secondly, according to Basel Committee on Banking Supervision, (2009), credit risk
management is a set of sound practices such as establishing an appropriate credit risk
environment, operating under a sound credit-granting process, maintaining an appropriate
credit risk measurement and monitoring process and ensuring adequate controls over credit
risk.
Greuning and Iqbal (2007) defined credit risk management as a structured approach to
managing uncertainties through risk assessment, developing strategies to manage it, and
mitigation of risk using managerial resources. The strategies include transferring to another
party, avoiding the risk, reducing the negative effects of the risk, and accepting some or all of
the consequences of a particular risk.
The process of risk management is a two-step process. The first is to identify the source of the
risk, which is to identify the leading variables causing the risk. The second is to devise
methods to quantify the risk using mathematical models, to understand the risk profile of the
instrument. Once a general framework of risk identification and management is developed,
the techniques can be applied to different situations, products, instruments and institutions.
Banks must have a comprehensive risk management framework as there is a growing
realization that sustainable growth critically depends on the development of a comprehensive
risk management framework.
The key risk management does not end with the approval and granting of a loan to the client.
The overall credit process and the split of responsivities can be schematically illustrated. The
corporate clients should be obliged to submit regular financial reports, which need to be
monitored by the client relationship officials, as well as (depending on the size of the
exposure) by credit analysts. If the reports or other information indicate actions should be
taken. The action may be the stopping of any new withdrawals, negotiations with the clients
on the initiation of early repayments based on existing contractual covenants,
recommendations to change the current business plan. The last phase of the credit process
already belongs to the workout phase when the exposure turns bad. Since the client
relationship officials tend to underestimate the problem, the exposure should be transfer to a
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
different specialized unit that may be under the responsibility of the risk. The workout
activities could also be under the business side management, but at all events, there should be
a change of personal and organizational responsibility in the case of a bad client that is going
through bankruptcy or restructuring.
The monitoring of retail loans is more mechanical and usually based on the so-called
behaviour scoring. The process of collecting retail loans with delayed repayments normally
starts very early with the so-called soft collection method, where the clients are contacted by
phone.
This may end by the selling or outsourcing of the defaulted loans to specialized
collection companies that initiate possible legal steps, the sale of collateral, or executions.
Provisioning is a very important part of the monitoring process. Provisions reduce the
receivable net accounting value to reflect expected losses. The provisioning process is
governed by the IAS/IFRS standards but should be in principle, consistent with Basel Ⅱ / Ⅲ
or the economic valuation approach. Provisioning is usually connected to a classification
system classifying performing loans as standard and watch, while non-performing or impaired
are classed as substandard, doubtful, and loss-specific provisions are created on the impaired
loans. For example, the exposure of loans classified as a loss not covered by valuable
collateral is usually provisioned at 100%, early and correct provisioning which has an impact
on the P/L statement of the bank as well as on the responsible business unit is the best way to
initiate corrective action, as well as on the responsible business units is the best way to initiate
corrective action, as well as being a wake-up call. Many banks which tried to hide provisions
to improve financial result temporarily, eventually end up with huge losses. Therefore,
provisioning should be again primarily under the control of the credit management part of the
bank.
Last, but not least, we should mention the importance of data for good credit risk
management.
Firstly, of all, the bank should be able to filter out clients where there is serious negative
information, including the bank’s own experience from the past when applying for a client
engaged in a fraudulent activity hen applying for a consumer loan, his /her application should
be automatically rejected if the client applies for a small business loan and vice versa. This
may seem trivial, but required well organized and interconnected databases covering all
available sources of information. Banks often build large databases covering all variables
sources of information. Banks often build large data warehouses with different areas,
including a credit risk data mark. The information is used, not only as a blacklist but generally
to obtain a rating utilizing all available information. Moreover, there are external banking and
non-banking registers (credit bureaus) where the negative and positive credit information is
shared by banking and non-banking institutions. Thus, credit risk must closely cooperate with
the bank’s IT and Finance in the building and maintaining of those databases which form the
key foundation of sound credit risk management.
One thing you can certainly say about interviewing is that customers will vary greatly.
some will come fully prepared and effectively deliver all the information you need. The other
will be happy to answer any question you ask but won’t provide much elaboration or detail or
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
volunteer other information. And of course, you will run into potential borrowers who talk but
have difficulty staying to the point.
Just like their customers, bankers have different styles too. As you gain experience you will
develop your styles. As a starting point, let work at the main issues covering over
requirements for an effective, practical credit application interview, dealing with the technical
side of the interview.
2.2.1Business reviewing
After you have agreed with your customer and you are both comfortably settled, begin
with having the borrower describe his or her business there are several reasons for this firstly,
most people are a little nervous early in the interview even experienced ones. As a result, it’s
good to get them talking about something they know very well and there is no better topic
than their business. You as the manager should have a basic understanding of the business
early in the interview enabling you to ask better questions and recognize problems unique to
your borrower’s business.
You will find that the five questions under the heading “perform business review” are
often a good place to start. During the interview, ask whatever other questions that are
immediately relevant.

PERFORM BUSINESS
REVIEW  What are the characteristics of the
market?
 How is the product or services
designed to match market need?
 What is the production process that
is used?
 How is the sales and distribution
system designed to get the product
Figure 1: Perform business report to the market?
 What are the general risk factors?

After having a good understanding of the business, you should steer the conversation toward
the immediate situation of the credit request.
The first step is to determine what caused the need to borrow with this understanding you can
get a good idea of the likely purpose and term. Start by asking the borrower how much will be
required and what the credit facility will be used for. Sometimes these questions alone will
provide you with the information you need. With less sophisticated borrowers you will need
to probe a little deeper.

 Is the business seasonal?

 Do fixed assets required
replacement?
PROCESS DETERMINE  Has cash been well managed
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

Figure 2: Process determine the cause of borrowing need

2.2.2 Management review

With a solid understanding of the business and knowledge of the borrowing cost, you can
now focus on the management of the business here the objective is to determine who are the
principal managers of the business are and their backgrounds and experience. You will often
find that you have already determined much of this information earlier in the interview, or
from past dealings with the client.
A good way to begin is to ask the client to prepare a rough organization chart. As this
being done, ask about each manager. Review their responsibilities, experience and education.

 Who are the principal

PROCESS PERFORM managers?
MANAGEMENT REVIEW  What are their
responsibilities.
 What is their experience
 {professional and
experience}.
 What management
information is used.

Figure 3: managerial review

2.2.3Financial data
If you do not have the borrower’s financial data, requesting it at this point in the
interview.

Income statement: are

PROCESS
sales definite and expense
WALK THROUH reasonable?
FINANCIAL
STATEMENT Balance sheet: are debtors
collectible, stock saleable,
fixed assets in used,
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

Figure 4: walkthrough financial statement

An experienced borrower may bring in a cash budget or proforma projection for the period
of the facility. Review the assumptions the projections are based on.
If the client hasn’t prepared financial projections, you will have to collect the data
necessary to prepare them. The two most important assumptions will be sales growth and
profit. Ask the client what the rate for these two variables are likely to be. You can ask about
the change that might occur in the balance sheet. Ask about the collection period, stock level,
planned fixed asset purchases and bank debt obligations. This is the information you will most
often have to get from the borrower.
2.4Theoretical review
2.4.1 Probability of default
The probability of default measures the degree of likelihood that the borrower of a loan or
debt (the obligor) will be unable to make the necessary scheduled repayment on the debt,
thereby defaulting on the debt should the obligor be unable to pay, the debt is in default on the
lenders of the debt have legal avenues to attempt a recovery of the debtor at least partial
repayment of the entire debt. The higher the default probability a lender estimates a borrower
to have, the higher the interest rate the lender will charge the borrower as compensation for
bearing the higher default risk. The probability of default models is categorized as structural
or empirical. Structural models look at a borrower’s ability to pay base on market and book
value of asset and liabilities as well as the volatility of these variables and hence, are used
predominantly to estimate the probability of default of companies and countries, most
applicable within the areas of commercial and industrial banking. In contrast, empirical
models or credit scoring models are used to quantitively determine the probability that a loan
or loan holder will default where the loan holder is an individual by looking at the historical
portfolio of loans held, where individual characteristics are assessed (e.g., age, education,
level, debt to income ratio and so forth). Therefore, this second approach is more applicable to
the retail banking sector. The structural model of the probability of default is a category of
models that assess the likelihood of default by an obligor. They differ from regular credit
scoring models are usually applied to smaller credits individuals or small businesses whereas
default models are applied to large credits corporations or countries. Credit scoring models
are largely statistical, regressing instances of default against various risk indicators such as an
obligor’s income home renter or owner status year at a job, educational level, debt to income
ratio, and so forth. In contrast, structural default models directly model the default process and
are typically calibrated to market variables such as obligor’s stock price, asset value, the book
value of debt or credit spread on its bonds. Default models have many applications within
financial institutions they are used to support credit analysis and to fixed the probability that a
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
firm will default to value counterparty credit risk limits or to apply financial engineering
techniques in developing credit derivatives or other credit instruments.

2.4.2 Loss Given Default and Expected losses

As shown previously, the probability of default is a key parameter for computing the credit
risk of a portfolio. The Basel Ⅱ accord requires the probability of default, as well as other key
parameters such as the loss given default (LGD)and exposure at default (EAD), to be reported
as well. The reason is that a bank expected loss is equivalent to:
Expected losses = (probability of default) *(loss given default) *(exposure at default)
PD and LGD are both percentages, whereas EAD is a value. As we have shown how to
calculate PD in the previous section. We will now revert to some estimations of LGD. Again,
several methods can be used to estimated LGD. this is through a simple empirical where we
set LGD=1-Recovery rate that is whatever is not recovered at default is the loss at default.
Calculate as the charge off (net of recovery) divided by the outstanding balance:
LGD=1-recovery rate
Or
charge offs (Net of recovery)
LGD=
outstanding balance at default
Therefore, if market data or historical information is available, LGD can be segmented by
various market conditions, types of obligors and other pertinent segmentation.
A second approach to estimate LGD is more attractive in that if the bank has available
information it can attempt to run some econometric models to create the best fitting model
under this approach, in a single model can be determined and calibrated. This same model can
be applied under various conditions and no data mining is required. However, in most
econometric models, a normal transformation will have to be performed first. Supposed the
bank has some historical LGD data. The following is a partial list of independent variables
that might be significant for a bank, in terms of determining and forecasting the LGD value:

 Debt to capital ratio

 Profit margin
 Revenue
 Current asset to current liabilities
 Risk rating at default done a year before default
 Industry
 Authorized balance at default
 Collateral value
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS

 Facility type
 Tightness of covenant
 Seniority of debt
 Operating income to sales ratio (and other efficiency ratios)
 Total asset, total net worth, total liabilities.

2.4.3 Economic Capital and Value at Risk

Economic capital is critical to a bank as it links banks earnings and returns to risks that are
specific to a business line of business opportunity. In addition, these economic capital
measurements can be aggregated into a portfolio of holdings value at risk or (VaR) is used in
trying to understand how the entire organization is affected by the various risks of each holing
as aggregated into a portfolio, after accounting for their cross-correlations among various
holdings VaR measures the maximum possible loss given some pre-defined probability level
(e.g., 99.90%) over some holding period or time horizon (e.g., 10days). The selected
probability or confidence interval is typically a decision made by senior management at the
bank and reflects the bank’s desired probability of surviving per year. In addition, the holding
period is usually chosen so that it coincides with the period it takes to liquidate a loss position.
VaR can be calculated in several ways. Two main families of approaches exist structural
closed-form models and monte Carlo risk simulation approaches. The second and much more
powerful approach is the use of monte Carlo risk simulation. Instead of simply correlating
individual business lines or assets in the structural model’s entire probability distributions can
be correlated using more advanced mathematical couples and simulation algorithms in monte
Carlo simulation methods by using risk simulator. In addition, tens to hundreds of thousands
of scenarios can be generated using simulation, providing a very powerful stress testing
mechanism for valuing VaR distribution fitting methods are applied to reduce the thousands
of data points into their appropriate probability distributions allowing their modelling to be
handled with great ease.

2.5 Empirical review of the study

Marrison (2002) articulate that the main activity of bank management is not deposited
mobilization and giving credit. Effective credit risk management reduces the risk of customer
default. They add that the competitive advantage of a bank is dependent on its capability to
handle credit valuably. Bad loans cause bank failure as the failure of a bank is seen mainly as
the result of mismanagement because of bad lending decisions made with wrong appraisals of
credit status or the repayment of nonperforming loans and excessive focus on giving loans to
certain customers. Goodhart (1998) states that poor credit risk management which results in
undue credit risk causes bank failure.
Saunders and Cornett (2006) found that to address the credit risks, banks and other financial
intermediaries should focus on the probability of default of the borrowers. There are several
models available to analyse credit risks, some of which are qualitative models and some are
quantitative models. Qualitative models indicate borrower specific factors and market-specific
factors.
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
Musharraf, R.A. (2013) found that the credit risk grading technique is an important tool for
credit management as it helps a bank to understand various dimensions of risk involved in
different credit transactions.
Lahsasna et al. (2010) emphasized that credit risk decisions are key determinants for the
success of financial institutions because of huge losses that result from wrong decisions. Poor
evaluation of credit risk can cause money loss (Gouvea 2007).
Wu et al. (2010) stressed that credit risk assessment is the basis for credit risk
management in commercial banks and provides the basis for loan decision making.
Furthermore, Angelini et al. (2008) stressed that risks continue to provide a major threat to
successful lending despite advancements in credit evaluation techniques and portfolio
diversifications. Credit risk assessment is an integral part of the loan process in the banking
business. Both credit scores and credit ratings are credit risk assessment tools. Credit scoring
is a credit risk management technique that analyses the individual borrower’s risk and is
expressed in numerical form. On the other hand, credit rating is often expressed as a letter
grade, conveying the creditworthiness of a business or government. Without a thorough risk
assessment, banks have no way of knowing if capital reserves accurately reflect risks or if
loan loss reserves adequately cover potential short-term credit losses. Vulnerable banks are
targets for scrutiny by regulators and investors, as well as debilitating losses. The Basel
Committee has defined credit rating as a ‘summary indicator’ of the risk inherent in individual
credit, embodying an assessment of the risk of loss due to the default of a counterparty by
considering relevant quantitative and qualitative information. Bangladesh has started
preparations to implement the Basel-III framework for bank companies from 2014 in line with
the global standard. The global financial crisis and the credit crunch that followed put credit
risk management into the regulatory spotlight. As a result, regulators began to demand more
transparency. They wanted to know that a bank has a thorough knowledge of customers and
their associated credit risk. And new Basel III regulations will create an even bigger
regulatory burden for banks.
Treacy and Carey (2000) suggested that in designing a credit rating system, a bank should
consider numerous factors, including cost, the efficiency of information gathering,
consistency of rating produced, staff incentives, nature of a bank’s business, and uses to be
made of the internal ratings. Despite the advances in science and technology that allow the
development of expert systems or statistical classification models, human judgment is still an
important ingredient in the credit assessment process. Also, the rating process almost always
involves the exercise of human judgment because factors to be considered in assigning a
rating and the weights given to each factor differ significantly among borrowers.
Ernst and Young (2011) on behalf of the Institute of International Finance (IIF), surveyed
62 of the largest banks to assess banks' progress in the implementation of risk governance
principles and practices outlined in the 2008 IIF report. Across the board, banks have
embraced the IIF's principles to advance risk management, risk governance and risk appetite.
Among the 62 chief risk officers (CROs) and senior risk executives who participated in our
survey, the most common improvements cited included strengthened management, increased
control of liquidity risk and refined reporting systems.
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
Lawrence (2007) posits that lenders review the borrower’s business plan and financial
statements; they have a checklist (credit appraisal) of items to look at one of them being the
number of financial ratios that the financial statements reveal. These ratios are guidelines to
assist lenders to determine whether the borrower will be able to service current expenses plus
pay for the additional expense of a new loan.
Poudel (2012) appraised the impact of credit risk management on a bank’s financial
performance in Nepal using time series data from 2001 to 2011. The result of the study
indicates that credit risk management is an important predictor of a bank’s financial
performance.
Mureithi, A.W (2010) found that credit appraisal is carried out for various reasons, these
are; as a selection tool, to quantify risk, to aid in decision making, and to ensure good quality
business with excellent creditworthiness This makes the credit appraisal process an important
activity among the lending institutions. Causes of non-performing loans include;
unprofessional credit risk evaluation, moral hazard on part of management, lack of
supervision of projects, lengthy litigation process and intentional default incomplete, poor and
unprofessional credit risk assessment and valuation of credit appraisal model. An inefficient
credit appraisal process is one of the causes of non-performing loans of various lending
institutions.
Moti, H.O. et al. (2012) found that a key requirement for effective credit management is
the ability to intelligently and efficiently manage customer credit lines. To minimize exposure
to bad debt, over-reserving and bankruptcies, companies must have greater insight into
customer financial strength, credit score history and changing payment pattern

CHAPTER 3

3.1 RESEARCH METHODOLOGY

3.1.1 Introduction
This chapter will be discussing on the methods that will be undertaken to carry our research
the different methods are the research design, sample population, sources of the data
collection methods and data analysis plan.

3.2 Research Design

The questionnaire will be made of quantitative analysis and qualitative analysis. The
quantitative analysis which will make up the first section will be mainly based on the question
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS
on how the bank carries out their credit appraisal especially before the granting of the loan
and section 2 will be made up of questions base on sex, age, occupation, income level, marital
status and job experienced. Furthermore, information from the financial statement will be
gotten to analyse the impact of each credit management on the bank performance.
3.3 Sample population
A population is a group of people or objects in which the researcher is interested in taking
a sample for statistical measurement (Mugenda and Mugenda,2003). The target sample
population will be done on a sample of three commercial banks which are. The qualitative and
financial statement analysis will be done for a period of five years which will be between
2017-2021.
3.4 Source of data

3.4.1 Primary Data:

The primary data as the source was mainly collected from the employees of BICEC with
the techniques of questionnaires. This first part of the information was mainly used to know
the credit policy of the different banks.
3.4.2 Secondary Data:
The secondary information was gotten through the internet. This secondary source of
information was base on the income statement and financial position of the three selected
banks for the period of 2017 to 2021.
3.5 Data collection
The authorization gotten from the school IUC and the help of connection in the different bank
granted the researcher a letter of authority to proceed to the field .He sought to get approval from
banks under study which made the research possible by availing audited financial report and
questionnaire.
CREDIT MANAGEMENT SUCCESS FACTORS IN COMMERCIAL BANK IN CAMEROON: CASE OF
SELECTED COMERCIAL BANKS