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 PROFITABILITY
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 profitability
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 profitability,
(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 i
Approval Page ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Chapter One
1.0 Introduction 1
1.1 Background of the Study
1
1.2 Statement of the
Problem 2
1.3 Objectives of the Study
3
1.4 Research Questions 3
1.5 Statement of Hypotheses 4
16. Scope of the Study 4
1.7 Significance of the
Study 5
1.8 Definition of
Terms 6
Chapter Two
Review of Related
Literature
2.0 Introduction 7
2.1 Theoretical Review 7
2.2 Empirical Reviews 51
CHAPTER THREE
Research Methodology
3.1 Introduction 54
3.2 Research Design 54
3.3 Sources and Techniques of Data Collection 55
3.4 Description of
Population and Sample Procedure 55
3.5 Method of Data Analysis
56
3:6 Determinations of
Critical Values 57
Chapter Four
Data Presentation,
Analysis and Interpretation.
4.1 Introduction 60
4.2 Presentation of Data 60
4.3 Analysis and Interpretation of Data 60
Chapter Five
Summary, Conclusion and
Recommendation
5.1 Introduction 64
5.2 Summary of
Findings 64
5.2 Conclusion 65
5.4 Recommendation 65
Questionnaire 72
Appendix 71
Bibliography
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Credit management is a critical function
within the banking industry, ensuring that financial institutions maintain
healthy cash flow while minimizing risk. Banks primarily operate by extending
credit, which is a significant source of income but also a potential risk. When
credit is not effectively managed, it can lead to financial crises, as seen in
global financial recessions. Thus, the ability of banks to manage credit
portfolios is crucial to their profitability and overall sustainability.
Credit management in our banking sector
today has taken a different dimension from what it used to be. The banking
profitability has adopted a lot of strategies in checking credit management in
order to stay in business. Thu the banking profitability 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 profitability
1.2 Statement of the Problem
In recent years, many banks have
experienced increasing levels of non-performing loans, which erode their profit
margins. Poor credit risk management is often blamed for this situation.
Despite advancements in financial systems and regulations, some banks still
face challenges in implementing effective credit management practices. The
ripple effect of poor credit management extends beyond individual banks to the
economy, potentially causing financial instability. The need to balance
risk-taking with profitability requires a comprehensive understanding of how
credit management impacts banking performance.
This study seeks to identify the gaps in
credit management practices that affect profitability and to explore ways in
which banks can strengthen their credit risk strategies to enhance financial
performance.
In the history of development of the
Nigerian banking profitability, 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 main objective of this study is to evaluate
the effect of credit management on banking profitability. The specific
objectives include:
- To assess the relationship between
credit management and loan performance.
- To examine the impact of
non-performing loans on banking profitability.
- To analyze the effectiveness of
credit policies in minimizing credit risk.
- To investigate how risk management
strategies contribute to profitability in banks.
1.4 Research Questions
- What is the relationship between
credit management and loan performance in banks?
- How do non-performing loans affect
the profitability of banks?
- How effective are current credit
policies in minimizing credit risk?
- In what ways do risk management
strategies impact banking profitability?
1.5 Research Hypotheses
Hypothesis 1:
There is a significant relationship between credit management and loan
performance in banks.
Hypothesis 2: Non-performing loans have a negative effect on banking
profitability.
Hypothesis 3: Effective credit policies significantly reduce credit risk
in banks.
Hypothesis 4: Robust risk management strategies positively affect
banking profitability.
1.6 Significance of the Study
The
findings of this study will benefit various stakeholders in the banking
profitability, including bank management, policymakers, and financial regulators.
For bank management, the study will provide insights into how improved credit
management can enhance profitability. Policymakers and regulators will find the
study useful for designing regulations aimed at reducing credit risk and
ensuring the stability of the banking sector. Additionally, the study will
contribute to academic literature on credit management and profitability in the
banking profitability.
1.7 Scope of the Study
This
study focuses on evaluating credit management practices and their impact on
banking profitability, with particular emphasis on commercial banks in Nigeria.
The period under review spans from 2018 to 2023, during which significant
developments in credit management practices and banking profitability have been
observed. The study will examine the credit policies, loan performance, and
risk management strategies of selected commercial banks.
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)
CREDIT MANAGEMENT: The strategies and practices
that banks use to ensure that loans are repaid on time and minimize credit
risk.
7)
PROFITABILITY: The financial gains achieved by
banks after all expenses, including loan losses, have been accounted for.
8)
NON-PERFORMING LOANS (NPLS): Loans in which the
borrower is unable to make interest payments or repay any principal.
9)
CUSTOMER: A person is a
customer if he or she has account with the bank.
10) FINANCIAL RATIO: These are
ratios usually expressed in mathematical terms to test the financial
obligations.
11) FINANACIAL STATEMENT: They are firm balance sheets, profit and loss
account and classified statement which show the financial state of affairs of
the firm.
12) GUARANTOR: A person or group of persons who stand for bank customers
for credit facilities.
13) 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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