AN ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING
INDUSTRY
(A CASE STUDY FIRST BANK OF
NIGERIA PLC ENUGU)
ABSTRACT
Credit extension is an essential
function of banks and bank management strive to satisfy the legitimate credit
needs of the community it tends to serve. This study is aimed at analyzing the
credit management in the banking industry in Nigeria with particular reference
to first Bank of Nigeria PLC. The importance of credit in the economic growth
and development of a country cannot be overemphasized. Despite the important
role played by credit in the economy, it is associated with a catalogue of
risks. The Nigeria banking industry witnessed some failures prior to the
consolidation era due to imprudent lending that finally led to bad debt and
some ethical facts. The issue of non- performance of asset and declaring of fictitious
project has become the order of the day in our banking system as a result of
poor credit management leading to bank distress in the industry. Three
hypotheses were formulated and tested through use of chi-square on
questionnaires administered to various respondents. From the data collected and
the tested hypothesis, results showed that: (i) Inadequate feasibility study
affects loan repayment in the banking industry, (ii) The diversion of bank loan
to unprofitable ventures affects loan repayment and (iii) The problem of poor
attention given to distribution of loan has negative effect on banks
performance. Amongst several recommendations were the following: (a) Banks
should establish sound and competent credit management unit and recruit well
motivated staffs (b) Banks should ensure that the chief executive avoid
approval in principle in the credit management, and (c) Banks should have a
monitoring and control unit or department to carry out a sort of post- modern
exercise by way of controlling and monitoring credit facilities and also ensuring
completeness of all conditions precedent to draw down.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Credit
management in our banking sector today has taken a different dimension from
what it used to be. The banking industry has adopted a lot of strategies in
checking credit management in order to stay in business. Thu the banking
industry in Nigeria has lost large amount of money as a result of the turning
source of credit exposure and taken interest rate position. Nigerian banks are
being required in the market because of their competence to provide transaction
efficiency, market knowledge and funding capability. To perform these roles,
the banks act as the most important participants in their transaction process
of which they use their own balance sheet to make it easier and making sure
that their associated risk is absorbed.
Credit extension
is essential function of banks and the bank management strive to satisfy the
legitimate credit needs of the community it tends to serve. This credit
advances by banks as a debtor to the depositor requires exercising prudence in
handling the funds of depositors. The Central Bank of Nigeria established a
credit act in 1990 which empowered banks to render returns to the credit risk
management system in respect to its entire customers with aggregate outstanding
debit balance of one million naira and above (Ijaiya G.T and Abdulraheem A
(2000). This made Nigerian banks to universally embark on upgrading their
control system and risk management because this coincidental activity is
recognized as the industry physiological weakness to financial risk. The
researcher, a New yolk-based, said that 40% of Nigerian banks that made up
exchange rate value in west Africa, has reduced the operating lending as a
result of bad debts which hit more than $10 billion in 2009 and this has led to
a tied-up questioning asset that is holding almost half of Nigerian banks. The
central bank of Nigeria fired eight chief executive officers and set aside $
4.1 billion in order to bail out almost 10 of the
country‟swhichwasintroducedlendersbyCentralBank. ofThe ref
Nigeria (CBN) in 2010 has made Nigerian
banks resume lending supporting assets management companies and set up the
requirement which will allow Nigerian banks make full provision for bad debts
that will boost the market.
The banks identify the existence of
destructive debtors in the banking system whose method involved responding to
their debt obligations in some banks and tried to have contract of new debts in
other banks. Banks are trying to make the database of credit risk management
system more open for them to be more functional and recognized as to enable
banks to enquire or render statutory returns on borrowers. There are some
banking practices which increase the risks in the bank and cannot be easily
changed. This result still leads to the question: what are the possible ways
that will help make Nigerian banks manage their credit risks?
Credit risk management helps credit
expert to know when to accept a credit applicant as to avoid destroying the
banks reputation and making decision in order to explore unavoidable credit
risk which gives more profit. Controlling a risk results in encouraging rewards
that give internal audit more technical support service and customized training
in banks or financial institutions. This research is presented to outline,
find, investigate and report different state of techniques in risk management
in the banking industry
1.2
STATEMENT
OF THE PROBLEM
In the history of development of the
Nigerian banking industry, it can be seen that most of the failures experienced
in the industry prior to the consolidation era were results of imprudent
lending that finally led to bad loans and some other unethical factors (Job,
A.A Ogundepo A and Olanirul (2008)). Also the problem of poor attention given
to distribution of loans has its effect on the bank‟s performance. Most of the
people collected loan from the banks and diverted the money to unprofitable
ventures. Some bankers are not actually considering the necessary criteria for
disbursement of loans to the customer. This work therefore intends to outline,
explain these problems identify the causes and suggests lasting solutions to
the problems associated with credit management and consequently banks debts.
1:3 OBJECTIVES
OF THE STUDY
The
objectives of this study is as follows
1. To examine how feasibility study affect
loan repayment in the banking industry.
2. To highlight the extent in which
diversion of bank loans to unprofitable ventures affect loan repayment.
3. To examine how distribution of loans
affect banks performance if banks give proper attention.
1.4
RESEARCH
QUESTIONS
Bank lending
is said to
be effective if it maximum liquidity to the depositors.
The questions here are
1.
To
what extent does feasibility study affect loan repayment in the banking
industry?
- To what extent does diversion of bank loans to unprofitable venture affect loan repayment?
- Does distribution of
loans have effect
on banks performance if
given proper attention?
1.5
STATEMENT OF HYPOTHESES
A
reputable credit management system enhances good control on lending and proper
keeping of credit account.
HYPOTHESES
1
Ho.
Inadequate feasibility study does not affect loan repayment in banking
industry.
Hi.
Inadequate feasibility study affects loan repayment in banking industry.
HYPOTHESES
2
Ho.
The diversion of bank loans to unprofitably ventures does not affect loan
repayment.
Hi.
The diversion of bank loans to unprofitably ventures affects loan repayment.
HYPOTHESES
3
Ho.
The problem of poor attention given to distribution of loans does not have
effect on banks performance.
Hi.
The problem of poor attention given to distribution of loans has effect on
banks performance.
16.
SCOPE OF THE STUDY
This
study is aimed at analysing the credit management in the banking industry in
Nigeria with a particular reference to First Bank of Nigeria plc. The study
intends to analyse the credit facilities in banking industry. It also reviews
the various concepts procedures for efficient and effective credit management.
It examines the success and failure (if any) as well as recommending corrective
measure.
1.7
SIGNIFICANCE
OF THE STUDY
This study will be useful to the
executive and managers in the banking industry and other financial
institutions. This is because it provides guidance which will enhance effect
and efficient credit management aimed at attaining and boosting maximum profitability
and liquidity in their banks. The depositor (public) on the other hand will be
more enlightened on the need to be honest and fulfil the responsibilities in
credit transaction with the banks so that they can look up to improve service
from the banks. Finally to the researcher, this is an eye opener because as a
potential manager it will guide one in future on how to manage credit
facilities.
1.8
DEFINATION
OF TERMS
Below
are the major terms used in the course of this research work.
1)
BANKRUPTCY:
A state where a person or firm is unable to meet their financial obligations.
2)
MANAGEMENT:
management is the study of decision-makers from the supervisor and line
managers at lower levels to the Board of Directors.
3)
LOANS
AND ADVANCES: These are credit facilities granted by banks to their customers.
They could be short, medium or long term depending on the length of period of
repayment
4)
OVERDRAFT:
A credit facility (usually short term) granted by banks to current account
holders and it carries interest charges on daily basis
5)
BANK:
Section 61 of BOFIA 1991 Act defines a banking business as business of
receiving deposits on current account or other similar account paying or
collecting cheques drawn by or paid in by customers.
6)
CUSTOMER:
A person is a customer if he or she has account with the bank.
7)
FINANCIAL
RATIO: These are ratios usually expressed in mathematical terms to test the
financial obligations.
8)
FINANACIAL
STATEMENT: They are firm balance sheets, profit and loss account and classified
statement which show the financial state of affairs of the firm.
9)
GUARANTOR:
A person or group of persons who stand for bank customers for credit
facilities.
10)
COLLATERAL/
SECURITIES: is an asset presented by a customer to his bank to secure a credit
facility granted to him by the bank.
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