AN ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING INDUSTRY

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 analysing 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 ficticious 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
  1.0 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‟s lenders. The reform which was introduced by Central Bank of 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 successfully achieves the banker‟s obligation of maximum liquidity to the depositors. The questions here are

1. To what extent does feasibility study affect loan repayment in the banking industry?

2. To what extent does diversion of bank loans to unprofitable venture affect loan repayment?

3. 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.

1.6 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.

CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.0 INTRODUCTION
The purpose of this chapter is to present a view of literature relating to credit management in banks on both theoretical and empirical grounds. Review of some of the studies carried out and suggestions extended by eminent authors on the subject have helped in formulating the theme meaningfully and to carry out the study in line with the objective and scope

2.1 THEORETICAL REVIEW
2.1.1 ORIGIN OF BANK CREDIT
The origin of bank credit could be traced to the medieval times, long before the advent of goldsmiths in the western civilization. As far back as 1850 BC, lending activities were recorded in the temple Samas in sipper of Babylon. The actual existence of the temple covered a century or two previously. During this period, lending was primarily for consumption and the imposition of interest was termed as exploitation. One of the earliest enactments on bank lending is Hebrew Law. Hebrew Law recognized lending but prohibited the taking of interest. Enrichment through lending with interest was frowned at and severe punishments were prescribed for such acts. This was later incorporated into Mosaic laws which prescribed thus, “You shall not lend upon interest to your brother”. About 1545, the mosaic laws were abolished and the taking of interest on loans was made legal. The Arabic civilization also recognized lending activities, but usury……

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