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1.0                                           INTRODUCTION

1.1     Background to the Study

Realizing a good quality product in the market (whether it is a physical or service product) gives benefits to both organization as well as their customers. “Quality means a process through which a business seeks to ensure that product or service quality is maintained or improved and errors are reduced or eliminated. Quality requires the business to create an environment in which both management and employees strive for perfection. This is done by training personnel, creating benchmarks for quality, and testing products or services to check for statistically significant variations (Adewale 2013)

Bank is a financial institution that undertakes the banking activity i.e., it accepts deposits and then lends the same to earn profit. Lending or extending credit to needy persons is a major bank product.

Quality lending’ and ‘Credit Risk’ is interrelated. Credit Risk is inversely proportionate to Quality lending.  Credit Risk will decrease, if Quality lending increases and vice versa.  Due to poor quality lending, banking industry is suffering with huge Non-performing Assets (NPAs). Thereby higher provisions for NPAs, lower profits, additional capital to maintain CRAR and decrease in rating of the bank etc are the side effects of poor quality of credit or lending.

Agier and Assuncao (2009) contend that financial relations all over the world, have been deeply transformed in the last two decades. This has been characterized by new products, new markets and new regulatory systems which have radically altered the environment in which financial institutions operate, opening new profit opportunities but also creating new risks. Today’s modern and competitive financial atmosphere influence banks to improve their service quality and follow new technologies all over the world. Nigeria is no exception to these effects and almost all industries including the banking sector. Commercial banks private are providing varied services to attract the customers’ community since it is treated as assets of banks (Moya 2009). Shatto & Singer (1996) points out that for retail bankers to meet the changing preferences of the customers and to stay ahead of competitors they are bound to provide quality and efficient services. In the lending business banking has to be distinguished from transaction based on lending in particular? Both variants are reflected in the underlying credit processes. The distinguishing feature of banks with a relationship approach is the ability to gain and to use qualitative information for customer evaluations. In contrast, the granting of credit in transaction-based lending occurs based only on “hard,” quantitative information (Berger, 2002). The theory of financial intermediation suggests that lending has a bright side and a dark side (Boot 2000). Strong bank-borrower relationships help reduces asymmetric information between lenders and borrowers, the bright side. But, at the same time, these relationships can create hold-up problems whereby the lender captures the borrower to extract rents, the dark side. Hence, the overall effect of quality banking relationships is a trade-off in costs and benefits between lenders and borrowers through interactions across time, space, and financial products.

Different empirical evidences suggested that profitability of financial institutions specifically banks are affected by internal and external factors. Andreas and Gabrielle (2009) stated that Bank profitability is usually measured by the return on average assets and is expressed as a function of internal and external determinants. The internal determinants include bank-specific variables. The external variables reflect environmental variables that are expect to affect the profitability of banks. Internal factors such as capital adequacy ratio, asset size, asset quality, net-worth, liquidity, earnings quality, loan performance, business risk, management quality, people, technology and operating environment are major determinant that are used to analyzed the determinants of bank profitability. An external macroeconomic and industry-specific factor includes Effective tax rate, Real GDP growth, inflation, and regulation and Bank concentration. Banks profitability is given due attention after the great economic depression is experienced in the United States of America in 1940s. Due to United State sub-prime mortgage crisis that happened recently in 2007-2009, the banking sectors of many countries suffer huge losses, especially United State of America and European Union countries. The poor performance of the banking industry has slowed down the United State of America economy and also the growth of global economy until current period. In Asia, although the losses in banking sectors are not as serious as U.S., it is also hurting the economy. If the banking industry does not perform well, the effect to the economy could be huge and broad. Because, banks are the critical part of financial system, play a pivotal role in contributing to a country`s economic development (Rasidah and Mohd 2011).

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