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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.
TABLE OF CONTENTS
Title Page
Approval Page
Certification
Dedication
Acknowledgement
Abstract
CHAPTER ONE
1.0 Introduction
1.1 Background Of The Study
1.2 Statement Of The Problem
1:3 Objectives Of The Study
1.4 Research Questions
1.5 Statement Of Hypotheses
16. Scope Of The Study
1.7 Significance Of The Study
1.8 Definition Of Terms
CHAPTER TWO
2.0 Review Of Related Literature
2.1 Introduction
2.2 Theoretical Review
2.3 Emperical Reviews
CHAPTER THREE
3.0 Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Sources And Techniques Of Data Collection
3.4 Descripti0n Of Population And Sample Procedure
3.5 Method Of Data Analysis
3:6 Determinations Of Critical Values
CHAPTER FOUR
4.0 Data Presentation, Analysis And Interpretation
4.1 Introduction
4.2 Presentation Of Data
4.3 Analysis And Interpretation Of Data
CHAPTER FIVE
5.0 Summary, Conclusion And Recommendation
5.1 Introduction
5.2 Summary Of Findings
5.2 Conclusion
5.4 Recommendation
Questionnaire
Appendix
Biblography
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.
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