CREDIT ADMINISTRATIONS IN COMMERCIAL BANKS: PROBLEMS AND PROSPECTS
(A CASE STUDY OF FIRST BANK OF NIGERIA PLC)
CHAPTER ONE
INTRODUCTION
- Background to the Study
The Bank is a financial Institution established to provide financial services of accepting deposit from customers, providing credit facilities and other auxiliary functions aimed at meeting the financial service needs of the people and of facilitating the development and expansion of the real sector of the economy (Ahmad, 2007). Bank credit constitute an important source of providing finances to investors for the purpose of carrying out businesses and the creation of new investment to promote economic growth and wealth maximization both at the micro and macroeconomic sector. However the challenges of inaccessibility to loans and credit still persist in a larger dimension due to high interest rate, tight requirement for loan applications, non-conformity with the credit policies and sharp practices of some bank official (Ahmed,1998).
Banks and other financial intermediaries play the important role of channelling funds from savers to borrowers (Gieseche, 2004). The traditional role of a bank is lending and loans make up the bulk of their assets. The various areas of financial management have been studied in relation to bank performance and growth usually depicted by profitability. Financial institutions (particularly deposit money banks) have faced difficulties over the years for a multitude of reasons and the major cause of serious banking problems continues to be directly related to credit management, poor portfolio risk management, or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties (Gieseche, 2004).
The credit function of banks enhances the ability of investors to exploit desired profitable ventures. Credit creation is the main income generating activity of banks (Kargi, 2011). However, it exposes the banks to credit risk. The Basel Committee on Banking Supervision (2001) defined credit risk as the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Credit risk is an internal determinant of bank performance. The higher the exposure of a bank to credit risk, the higher the tendency of the banks to experience financial crisis and vice-versa. Among other risks faced by banks, credit risk plays an important role on banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. However, interest rate risk is directly linked to credit risk implying that high or increment in interest rate increases the chances of loan default. Credit risk and interest rate risk are intrinsically related to each other and not separable (Drehman, Sorensen, and Stringa, 2008).Increasing amount of non-performing loans in the credit portfolio is inimical to banks in achieving their objectives. Non-performing loan is the percentage of loan values that are not serviced for three months and above (Ahmad and Ariff, 2007).
The Nigerian banking industry has been strained by the deteriorating quality of its credit assets as a result of the significant dip in equity market indices, global oil prices and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks’ loan assets hindered banks to extend more credit to the domestic economy, thereby adversely affecting economic performance. This prompted the Federal Government of Nigeria through the instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of non-performing loans that bedeviled Nigerian banks.
Therefore this study is interested in studying the problems and prospects of credit and loans administration in Nigerian banks.
1.2 Statement of the Problem
Bank credit constitute an important source of providing finances to investors for the purpose of carrying out businesses and the creation of new investment to promote economic growth and wealth maximization both at the micro and macroeconomic sector. However the challenges of inaccessibility to loans and credit still persist in a larger dimension due to high interest rate, tight requirement for loan applications, non-conformity with the credit policies and sharp practices of some bank officials (Kargi, 2011). According to Ahmad and Ariff (2007), most banks in economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high non-performing loans and significant increase in credit risk during financial and banking crises, which resulted in the closing down of several banks in Indonesia and Thailand. Credits and loans administration is the most difficult task of the bank and it is uninteresting, this is because the bankers now deal with unfriendly customer. The customer who appeared very friendly at the time of advancing the loan suddenly becomes very hostile and problem to the bank when paying loan. Therefore it is against this background that this project seeks to examine the credit and loan administrations in commercial banks: problems and prospects with a particular interest in First Bank of Nigeria Plc.
1.3 Objectives of the study
The objective of this project is to evaluate the credit and loans administration of the First Bank of Nigeria Plc, with the intent to identifying the problems and prospects.
To achieve this, the following specific objectives shall be pursued:
- To examine the quantum of credits granted by First Bank of Nigeria Plc.
- To examine the different categories of loans and credits of First Bank of Nigeria Plc.
- To assess the performance of the loans and credits granted by First Bank of Nigeria Plc.
- To identify the problems and prospects of credit and loans administration in First Bank of Nigeria Plc.
- And to make recommendations.
1.4 Research Questions
The following questions are formulated in line with the objectives of the study to guide the researcher:
- What is the quantum of credits granted by First Bank of Nigeria Plc.
- What are the different categories of loans and credits of First Bank of Nigeria Plc?
- How has the loans and credits granted by the First Bank of Nigeria Plc performed?
- What are the problems and prospects of credit and loans administration in First Bank of Nigeria Plc?
- What are the remedies for the associated problems?
1.5 Statement of Research Hypothesis
HO: Bank credits do not have a significant impact on the profitability of banks
HI: Bank credit have significant impact on the profitability of banks.
1.6 Significance of the study
The findings of this study, credit and loan administrations in commercial banks: problems and prospects will be of great benefits to the banking sector which comprise the management of the banks and its customers as it will enlighten them of the importance of good credit and loan management in the banking industry.
The results of this research work will also be of use to the regulatory agencies as it will guide them in making relevant laws and policies that will enhance proper credit and loan administration that will provide enabling ground for the banks and customers to comply easily with the guiding principles of credit and loan administration and management thereby ensuring the profitability of the banks without necessarily overburden the customers high interest and arbitrary charges which may lead to high credit risk.
Finally, this study contribute to the wealth of knowledge, academia including authors, researchers and students will find this study relevant as it will serve as a resource material for literature review in future studies.
1.7 Scope of the study
The scope of the study is to evaluate the credit and loans administration of First Bank of Nigeria Plc, with the purposes of identifying the problems and prospects between the periods of 2006-2016.
1.8 Limitations of the study
The limitations faced by the researcher in the course of this study include the following:
FINANCE: Lack of adequate funds tends to diminish the vital information that is supposed to obtain, which will thoroughly enhance the findings of this research work.
DATA: The shortage of comprehensive information is another constraint of struggle by the research, since most of the banks employees especially the executives are reluctant to deliver relevant information of the bank that is useful to the research work.
TIME FACTOR: Insufficient time to undertake the research was also identified as the constraint of the research work and the task of combining lectures and writing of assignments and presentations of term papers in the lecture hall was very cumbersome. Since most of the time, have to forfeit some of my lectures in other to meet up with my research work.
1.9 Definition of Terms
- LOANS: According to shekhark (1961) the term ‘’loan” is popularly used to denote the granting of an advance in hump sum, generally on the basic of securities acceptable by the bank. The distinguished feature of loans is that interest on it is payable on the entire amount borrowed.
- ADVANCE: These are credit that is payable in future time, e.g. loans, overdraft and discounting of bill e.t.c.
- BANK: This is a financial institution set up purposely for safe keeping of money, valuable item and document like wills, gold and jewelries.
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