ABSTRACT
In a volatile economy as we have in
this country where things change quite often and with banking education and
business experience yet to become well entrenched, a bank should not be caught
off guard because of poor administration and control of its loan portfolio.
Credit management becomes a backbone for either preventing bad debt or
recovering bad debt. For this reason, the present study investigated the
effectiveness of credit management in the banking sector. In carrying out the
study, four research questions were formed with three hypotheses. The study employed a survey research design
which enables the researcher to elicit the opinions of the respondents
regarding the effectiveness of credit management in Nigerian banking sector in
relation to the variables under study. A sample size of sixty (60) respondents was purposively selected to constitute the sample
size. A structured questionnaire was used as instrument for data collection
whereas descriptive statistics such as means, frequencies, and percentages were
used to analyze the data collected. Also, Chi- square was used at 0.05 levels
of significance for hypotheses testing. Findings from revealed that: the credit policy put in place by the
Nigerian banking sector is effective in curbing bad debt in Nigerian banking
sector; the credit
administration in the Nigerian banking sector is effective in meeting
customers’ demand in Nigerian banking sector; and Finally, the procedures put in
place by the Nigerian banking sector are effective for the recovery of bad debt.
In view of these findings, the researcher recommended that Nigerian banking
sector should strictly adhere to the established credit policy to avoid bad
debt; the credit policy should be update
regularly in line with the changing nature of the nation’s economy; the credit
administration should be made in such a way that it meets the customers’
satisfaction since customers are the key for every business development; Finally,
the study recommends that the procedures put in place should be renewable to
meet the changing nature of business.
TABLE
OF CONTENTS
Pages
Title page i
Approval page ii
Dedication ii
Acknowledgments iv
Abstract v
Chapter
One
Introduction
1.1 Introduction 1
1.2 Background 2
1.3 Statement of problem 5
1.4 Research question 7
1.5 Objectives of the study 7
1.6 Significance of the study 8
1.7 Statement of the Hypotheses 9
1.8 Justification of the study 9
1.9 Scope of the
study 10
1.10 Definition of terms 10
Reference 13
CHAPTER
TWO: LITERATURE REVIEW
2.0 Introduction 16
2.1 Conceptual framework 17
2.2 Theoretical framework 30
2.3 Literature on the subject matter 31
References 44
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0 Area of study 47
3.1 Research Design and sources of Data 47
3.2 Study Population and determination of Sample
Size 47
3.3 instrumentation 48
3.4 Procedure for Data Collection 48
3.5
Limitation of the study 49
References 50
CHAPTER
FOUR: DATA ANALYSIS, FINDINGS, AND DISCUSSION
4.0 Data analysis, findings, and discussion 52
4.1 Findings of the study 52
4.2 Discussion of the findings 60
References 65
CHAPTER
FIVE: CONCLUSION AND RECOMMENDATIONS
5.0 Summary of findings 67
5.1 conclusions 68
5.2 recommendation 68
5.3 Proposal for further studies 70
References 71
Bibliography 72
Appendix 72
CHAPTER ONE
INTRODUCTION
1.1Introduction
Finance is the bedrock for every business organization whereas the
growth of businesses precipitates the general growth and development of a
nation. As a result, the banking sector has become the central interest of the
entire populace, both individual and corporate body as banks are the custodian
of finance (money) - the most sought after commodity on earth. According to Agu
(2010), availability of financial capital is obviously a condition for the
rapid development and transformation of any national economy. Because the
provision and efficient management of finance is best facilitated by the
existence and appropriate functioning of financial institutions of the nation,
the state and activities of the bank is of public interest. Banks play this
unique role through granting of loans which constitute a vital function in
banking operation, and has direct effect on economic growth and business
development. As financial intermediaries, banks assist in channeling funds from
surplus economic units to deficit ones so as to facilitate business
transactions and economic development generally.
1.2 Background
to the Study
Loans are the most important asset held by banks; but loan has its
own cost and risk. In other words, the granting of credit, though beneficial
for business as a whole, is not without cost, either to the supplier or to the
buyer, or to both. It follows therefore that the process of granting credit to
customers, and the tasks of risk assessment and risk analysis, amount to no
more than weighing the benefits of granting credit against the cost to the
supplier of doing so. Furthermore, that cost element is not restricted to
non-payment, or bad debt losses, but applies to cost of the credit period
itself and the cost incurred in late payment. Therefore, although, lending
which is a primary function of commercial banks, and the single most important
source of gross income
for commercial banks as well as contributes to the larger
part of a bank's profits; it has its own risks if not well managed. In other
words, the degree of risk associated with lending is proportionate to its
contribution to profit. Since these funds are owned by third parties called
depositors, prudence demands that such funds should be efficiently managed to
sustain the confidence of depositors in the banking system and ensure the
continued soundness of the system itself and to minimizing risk of banks
failure. This is necessary because bad debts destroy part
of the earning assets of banks such as loans and advances which have been
described as the main source of earning and also determines the liquidity and
solvency which generate two major problems (Institute
of Credit Management - ICM, 2012). That is profitability and liquidity,
has to earn sufficient income to meet its operating costs and to have adequate
return on its investments.
For this reason, the present study examined the effectiveness of
credit management in Nigerian banking sector. Credit management is defined as
the process of controlling and collecting payments from customers. This is the
function within a bank or company to control credit policies that will improve
revenues and reduce financial risks ICM, (2012). The function of Credit
Management is the protection of the investment in the debtors of the company as
well as maintaining the lowest levels of receivables, balancing risks inherent
in achieving sales objectives. The main
objectives of credit management according to ICM (2012) include ensuring that -
credit terms are used to maximize sales with the minimum of risk; high risk or
marginal accounts, especially those likely to get into financial difficulties,
are identified and to take whatever action is necessary to safeguard sales to
those customers; all amounts due are collected according to the agreed payment
terms; monthly cash collection targets are achieved; a high quality of accounts
receivable is maintained; an accurate and responsible database of customers is
operated and maintained. Achieving these objectives lies on the effectiveness
of the financial institutions that manage the credit. The reason being that
credit management is associated with risk. If not properly management may
result to great loss.
Brown and Moles (2012) define credit risk as the potential that a
bank borrower or counterparty will fail to meet its obligations in accordance
with agreed terms. Therefore, the goal of credit risk management is to maximize
a bank’s risk-adjusted rate of return by maintaining credit risk exposure
within acceptable parameters. Banks need to manage the credit risk inherent in
the entire portfolio as well as the risk in individual credits or transactions.
Banks should also consider the relationships between credit risk and other
risks. The effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-term success
of any banking organisation.
According to Brown and Moles (2012), for most banks, loans are the
largest and most obvious source of credit risk; however, other sources of
credit risk exist throughout the activities of a bank, including in the banking
book and in the trading book, and both on and off the balance sheet. Banks are
increasingly facing credit risk (or counterparty risk) in various financial
instruments other than loans, including acceptances, interbank transactions,
trade financing, foreign exchange transactions, financial futures, swaps,
bonds, equities, options, and in the extension of commitments and guarantees,
and the settlement of transactions. Drawing from the premise of Adeniyi (2002),
who stated that effective supervision and monitoring of loans ensure that these
loans do not turn bad forms, this study investigates the effectiveness of
credit management in Nigerian banking sector. This study is working on the
assumption that when banks managed their credit effectively, they overcome credit
risk associated in credit management. In other words, banks, may through proper
credit management, have a keen awareness of the need to identify, measure,
monitor and control credit risk as well as to determine that they hold adequate
capital against these risks and that they are adequately compensated for risks
incurred. The question therefore is: how effective are the Nigerian banking
sector is in credit management?
1.3 Statement of problems
One of the ways to totally avoid bad debts is to refuse to lend
money at all. If banks should then refuse to lend at all, then issue of
profitability is cancelled and hence the main purpose of carrying on a business
which is to maximize profit, is then defeated. Credit must be adequately
managed so that banks could remain in business and prudent lending could do
this. Egwuatu (2004) has pointed out that many banks in Nigeria experienced a
lot of bad debts. He explained that when a new government abandoned the project
awarded to their predecessor, the credit loan borrowed from the bank by either
the government or the contractor who manages the project is at stake. This is
because most contractors borrowed to execute the project awarded to them but
could not repay the loan, due to government action. Furness (2005) also
illustrated that during the time of draught or poor rainfall and pest which led
to low harvest, farmers who took loans from the bank may delay the repayment.
Again, experience may arise in respect of lapses on the part of
the banks’ credit officers. For instance, there may be excesses over approved
facility, unformatted facilities and expired facilities not renewed on time. In
each of these cases the customer may easily deny even owing the bank all or
part of the amount. Money deposit banks have always borne the burden alone, but
this may not continue in future as the banks may be unable to take the risk of
lending more which may result to loses to both the bank (whose part of its
profit is from the interest from loans) as well as the borrower (whose business
may collapse as a result of insufficient finance to run the business).
Consequently, there may be stagnation or drop in the nation’s economy. For this
reason, this study investigates the effectiveness of credit management in
Nigerian banking sectors.
1.4 Research Question
The following are research questions formulated to guide the study
i. How effective is the credit policy in
curbing bad debt in Nigerian banking sector?
ii. How effective is the credit
administration in meeting customers’ demand in Nigerian banking sector?
iii. How effective is the procedures put in
place by the Nigerian banking sector for the recovery of bad debt?
iv. What are the constraints associated with
loan management in Nigerian banking sector?
1.5 Objective of Study
The primary objective of this study is to investigate the
effectiveness of credit management in Nigerian banking sector. Specifically,
this study seeks to:
i. examine the effectiveness of credit
policy in curbing bad debt in Nigerian banking sector
ii. examine the effectiveness of credit
administration in meeting customers’ demand in Nigerian banking sector.
iii. examine the effectiveness of the
procedures put in place by the Nigerian banking sector for the recovery of bad
debt
iv. determine the constraints associated with
loan management in Nigerian banking sector.
1.6
Significance of the Study
The
significance of this study is that, it will enable banker to appreciate the
appraisal of their lending and control mechanism now that they are expected to
lend under tight monetary conditions. In essence, finding from the study will
assist management and regulatory authorities in ensuring a safe banking since
development of country’s economy is tired to performance of financial
institutions in Nigeria.It is hardly an exaggeration that the difference
between the success and the failure in the banking industry is in the effective
management of the banks loans and advance. Effectiveness of credit management
is vital to the protection of assets and the achievements of adequate returns
to investment. Though many works abound in the literature of the technique of
lending, the methods of securing such lending and the pitfalls that await the
unwary banker. By comparison it appears to be very little in point on the
subject of loan management and recovery.
A
study of this subject will therefore be a welcome addition to the existing
volume of banking literatures.
1.7 Statement of the
Hypothesis
i. H0: The credit policy will not be
effective in curbing bad debt in Nigerian banking sector
H1:
The credit policy will be effective in curbing bad debt in Nigerian
banking sector
ii. H0: The credit administration will not be
effective in meeting customers’ demand in Nigerian banking sector
H1: The credit administration will be effective
in meeting customer’s demand in the Nigerian banking sector
iii. H0:
The procedures put in place by the Nigerian banking sector will not be
effective for the recovery of bad debt
H1:
The procedures put in place by the Nigerian banking sector will be effective
for the recovery of bad debt
1.8 Justification of the study
Apart from the financial and time
constraints that justified the scope of the a bank selected some out of the
banks operating in the sector could not said to be good representation or sample
of bank required to generalize the lending policies and practices in the
Nigerian Banking Industry. Hence, it should be noted that the officers of some
the Banks were wary of disclosing certain information often tagged as
confidential because of the oath of secrecy sworn to by them. This equally
limited the extent to which useful data were available.
1.9 Scope of the study
The study covers three commercial banks within Surulere local
government area which have currently scaled through the twenty five billion
(N25, 000,000,000) capital base. Specifically, the bank under study include:
Fidelity Bank, Zenith Bank and First banks of Nigeria and
the frame of time to be considered shall be between 2008 and 2012. The effectiveness of credit management
in Nigerian banking sector in the area of credit policy in curbing bad debt;
credit administration in meeting customers’ demand; the procedures put in place
by the Nigerian banking sector for the recovery of bad debt; and the
constraints associated with loan management in Nigerian banking sector.
1.10 Definition of terms
Credit cards - This is a plastic
cards which provide a payment system and access to credit facilities apparently
dominate Banks customer spending.
Debit cards - The direct debiting
of cheque accounts with special ATM card point of sale terminal cards are
expected to become increasingly important when cost of providing equipment and
networks are finally agreed.
Credit Administration
This involves advising and monitoring of all aspect of credit on
day to day basis to ensure that it is fully repaid. It commences with the
approval of facility. The term and offer should be clearly documented in the
letter of commitment to the customer.
Credit Control
This involves monitoring of facilities to ensure that each credit
is and remains satisfactory. It encompasses disbursement according to
descendible schedule of repayment agreed with the customer within the approved
limit and monitoring of customer credit turnover.
Bad Debt: Debt is defined as
payment which must be paid but has not been paid. Therefore this obligation
becomes bad when the possibility of its recovery becomes remote. That is, when
it becomes difficult to recover such debt.
Long term loans - Long
term loans are those granted for periods of between 15 and 30 years.
NET - Payment due on delivery
C.N.D. - Cash next delivery
Weekly credit - Payment of all
supplies Monday to Sunday (unless otherwise stated) by specified day in the
next week.
Half month credit - Payment
of all supplies made in the period 1st to 15th of the
month by a specified date in the 2nd half month.
Liquidity - This can be defined
as the ease and speed by which a company's assets can be turned into cash
sufficient to meet its current liabilities.
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