The primary objective of this paper is to demonstrate the negative impact of poor and/or lack of cost control on an enterprise’s profitability and especially to highlight the effect of risk-related costs like loan losses arising out of inefficient credit appraisal and lending on the profitability of banks. The outcome of this paper is intended to assist banks re-appraise their cost control measures as well as their credit appraisal and control policy.
Primary among the factors that impact on banks’ profitability is cost. Many studies have found out that cost efficiency translates to higher profits and that the average institution incurs high cost and generates low profits relative to institutions on the ‘best practice’ efficient frontier. This work discovered that many banks in recent times have incurred large losses and shareholders’ funds eroded as a result of risk-related costs arising from poor credit appraisal and inefficient lending. The paper concludes by calling on banks to re-assess and refine their corporate culture, the integrity, professional skill and judgment of the banks’ management as a first step towards enthroning cost efficiency in their operations.