PERCEIVED LOAN RISK AND EX POST DEFAULT OUTCOME: ARE THE BANKS’ LOAN SCREENING CRITERIA EFFICIENT?
Journal Title: Asian Economic and Financial Review - Year 2013, Vol 3, Issue 8
Abstract
Prospective borrowers from commercial banks are usually made to pass through stringent lending procedure. The screening procedure is intended to forestall likely default intents and reduce credit risks. Banks, through the analysis are able to predict the inherent risk level in the loans they administer and avoid risky borrowers. The recent rise in defaults rates and the size of non-performing loans among the Nigerian commercial banks therefore puts to question the efficiency of the banking system screening criteria. An efficient screening technique is expected to approximate the estimated and the ex post default risk outcome. Disparities between the two reflect the extent by which the assessment of risks by banks was inefficient. This paper provides evidence that bank screening criteria do not effectively foreclose total default risk, and affirm that perceived and ex-post default risks differ. Using data obtained from a survey of investment loans made to 210 borrowers between 2000 and 2012 among 15 commercial banks in Nigeria, this study observed that the banks’ screening criteria was limited by the presence of information asymmetry. Adverse selection and moral hazard were observed to persist in the loan markets irrespective of the stringency of the banks’ screening measures. The observed difference between estimated and ex-post default risk incidence arise because of the presence of information asymmetry.
Authors and Affiliations
C. Chris Ofonyelu| Economics Department, Adekunle Ajasin University, Akungba-Akoko, Nigeria, R. Santos Alimi| Economics Department, Adekunle Ajasin University, Akungba-Akoko, Nigeria
Keywords
Related Articles
- EP ID EP1940
- DOI -
- Views 2131
- Downloads 262
THE RELATIONSHIP BETWEEN GROWTH AND EMPLOYMENT INTENSITY: EVIDENCE FOR DEVELOPING COUNTRIES
The main objective of this paper is to contribute to the literature on employment-GDP elasticities by assessing the determinants of cross-country variations in employment elasticities, focusing particularly on the role o...
EVALUATION IN DYNAMIC PROCESS SPILLOVER EFFECT: ELEVEN MAJOR EXCHANGE RATE MARKETS
This paper analyzes the dynamic process of the spillover effects among major eleven exchange rate markets. The period spanning from 2000 to 2014 includes several financial crises and Chinese monetary reforms. By the vect...
HOT AND COLD CYCLES FOR AFRICAN EMERGING SHARE IPO MARKET EVIDENCE FROM TUNISIA
This paper seeks to detect hot and cold IPO cycles in the Tunisian share market using a Markov regime switching model. Using a set of IPO activity measures (number of IPOs, level of underpricing, market conditions and du...
GLOBALIZATION AND ECONOMIC GROWTH: THE CASE STUDY OF DEVELOPING COUNTRIES
The aim of this study is to investigate the effect of dimensions of globalization on economic growth in 100 developing countries using panel data. The globalization index used is KOF and period of study is 1970-2014.The...
THE STUDY OF SUPERVISION AND CONTROL IN ISLAMIC FINANCIAL MANAGEMENT
The purpose of this research is studying the supervision and control of juristic views in Islamic financial. In Islam, evaluation, audit and other terms used to describe the monitoring and control has been discussed wide...