Analysis of the Stochastic Approach to Debt Management in the Banking Sector in Nigeria

This research focuses on stochastic approach to debt management in the banking sector in Nigeria. The aim was to identify the methods adopted by banks in managing debt and to ascertain the adequacy of these methods in debt management as well as investigate the superiority of the Markov chain approach over other methods. Convenience sampling was adopted to select one of the twenty four banking institutions in Nigeria. Secondary data were collected and analysed using the prudential guidelines and the Markov chain for comparison purpose. The results revealed that the banks do not entirely follow the parameters in the cannons of lending in their credit creation process. Banks rely solely on prudential guideline in managing debt. This has not drastically reduced the proportion of non-performing loans in the sector. The study demonstrated the superiority of the stochastic method of debt management over the prudential guideline or the traditional method of debt management. This is shown by the drastic reduction in the proportion of non-performing loans written off, a situation that has the capacity of leading to a higher profit margin when compared with reliance on the prudential guidelines method of debt management.