ABSTRACT
Commercial bank are profit-making
venture and as such they share with other business the same set of expectation
concerning the health of the economy.
It is in the light of this that they
make loans available to borrowers on interest, which is a source of profit to
them. Along side the growth of the credit sector is the growth of the bad debt
among other to poor credit management.
The hallmark bank limited like most other
bank has recorded a high inadence of bad debt and has one of the years declared
loss in 1994. The bank purpose is to find out the cause of the bad debt and
suggest the possible solution to the bank poor credit management.
In order to archive the objective, the
writer set out some hypothesis which were tested with the following; statistical
techniques, sample percentage, chi-square, (Yates’s correction method) and
candells coefficient of concordance . The information requirements for this
research were generated from the secondary data and primary source through the
use of questionnaire.
The hallmark bank limited, which is
essentially a private bank, has been confronted by a lot of problem, which is
responsible for his poor credit management as revealed by the writer’s
analysis. It is shown that the bank has inadequate credit assessment and
control mechanism. The analysis shows that there is a significant relationship
between the level of loan granted by the bank and the profit made. The bank
granted considerable amount of unsecured loans, which pared way for high level
of default, which characterized it. Giving this problem that are face by the
bank, the writer made some recommendation amongst others
- That the bank
be changed to a public liability company
- The bank
should adopt a planning strategy to forecast and predict their business
and behavioral element, which causes bad debt.
- Men of
integrity should be offered job in the bank
- The board of
directors should reduce to minimum, there interference I the process of
loan administration.
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement
Abstract
Able of content
List of tables
CHAPTER ONE:
1.0 Introduction
1.1
Statement of problem
1.2
Purpose of study
1.3
Research questions
1.4
Hypotheses
1.5
Limitation of study
1.6
Definition of terms
CHAPTER TWO:
2.1 Literature review
2.2 Introduction
2.3 historical background of commercial banking
in Nigeria, operations/ banking lending
2.4
History of
commercial banks in Nigeria
2.5
The history of lending /concept of lending.
2.6
Lending principles and practice.
2.7
Constraint to commercial bank lending.
2.8
The economic importance of credit
2.9
Management of lending.
2.10
Bad debt and credit management.
2.11
Credit management.
2.12
The confrontational measures.
CHAPTER THREE:
Methodology:
3.1 Introduction.
3.2 Area
of coverage.
3.3 Sample
plan.
3.4 Data
analysis techniques
3.5 Limitation
of the study.
CHAPTER FOUR:
4.1 Data
presentation, analysis and interpretation.
4.2
Introduction.
4.3
Analysis of data.
4.4
Testing of hypothesis
4.5
Interpretation.
CHAPTER FIVE:
5.1 Summary of findings, conclusion and recommendations
5.2
Findings.
5.3
Conclusion.
5.4
Recommendations
Bibliography
Appendix: questionnaire.
LIST
OF TABLES
4.1 Response to question 3 in the questionnaire
4.2 Response to question 5 in the questionnaire
4.3 Response to question 7 in the questionnaire
4.4 Response to question 8 in the questionnaire
4.5 Response to question 9 in the questionnaire
4.6 Response to question 10 in the questionnaire
4.7 Response to question 11 in the questionnaire
4.8 Response to question 12 in the questionnaire
4.9 Response to question 14 in the questionnaire
4.10 Response to question 15 in the questionnaire
4.11 testing of hypothesis I
4.11 testing of hypothesis II
4.11 testing of hypothesis III
4.11 testing of hypothesis IV
CHAPTER ONE
1.0 INTRODUCTION
Financial are procedure for preparing according to and
reporting reliable information concerning transaction.
Financial resource in any economy should be adequately be mobilized,
taking into consideration the crucial role of finance in the economic
development.
Nwankwo (1993:p.2) stated that finance resourced have
been considered a very important factor in the economy development.
Consequently, the mobilization of resource has been defining a criteria
in the achievement of rapid econ0mic growth in any economy. The first step for
resources mobilization for the development purpose if the mobilization of
financial resources, which will lead to the capital formation. Capital
formation required the release for domestic goods and service for real
investment or the import of resources form outside or both.
Ojo and Adewumi (1989:P.10) . They emphasized the role
of financial resources and pointing out that the finical institution offers an
efficient institutional mechanism through which resource can be mobilized and
directed to less essential use for more productive alternatives. The writer
contention here is that the efficiency of any financial system particularly in
a developing economy like Nigeria depends on the extent of which the financial
information role is effectively and efficiently discharge with reference to the
economic good of the country and the objective of the institution itself.
According to Racheal 91984:p.478) , the primary function of the commercial
bank is the extension of credit to worthy borrowers . it has been noted that
commercial bank is the most important institution n the mobilization of funds.
That further more Khat Khate and Racheal (1984:p.516)
, while enacting the importance of resource mobilization stated that commercial
bank are the most relevant institution in the developing countries to encourage
and mobilize savings and also to charnel such saving into a productive
investment . First because of their network of office , second because
commercial bank through normal credit operation often activate savings which
are lying idle elsewhere and third because the bank are highly liquid and thus
attract savers.
Oji (1984: P9), projected at Nigerian case opined
that, the commercial banking system be used as a representative since it
constitute the largest single component of about 85% of all the institutional
savings in the system. Mayor (1982:P 13) further stressed that there are two
main reasons why the commercial banking system is the most important financial
intermediary.
Firstly the total amount of deposit
in the commercial banking system has the capacity to create deposit demand
resulting from lending activities.
Since demand deposit constitutes a large sum of the money supplied, the
banking system is able to expand the nation supply of money. The consent that
commercial bank need liquid asset especially the short term asset that an be
converted into cash loan accordant to him constitute the largest amount of
asset
Good bank lending ensure high profit level, ensure greater return and
have underscore of meeting the social responsibility to he benefit of the
society while in the other way bank lending can affect the bank negatively in
various way for instance, it might take a great chance of their annual profit
which the bank need to stay in business with . This and the indiscriminate
extension of loan although within the credit guideline without proper
supervision of such loan and account have led to an increasing tend in the
existence of bad dept.
The bank has failed in the
implementation of various checks against bad debt and has tended to forget
every loan committed the moment the contract has been concluded. The author
contention here is that the cause of bad debt is due to improper supervision
and management of loan granted. Thus study is been carried with the Hallmark
bank limited as the case of study
1.2 THE BRIEF REVIEW OF THE BANK
Eco bank limited was incorporated on the 29th
of October 2005 and was granted license to operate as a commercial bank on the
second of January 2006 after it was emerged with hallmark bank and other banks
to answer Eco bank. The bank opened for business on the 2nd of April
2006 with and authorized and fully paid up capital of 25 Billion Naira (#) . The equity based was latter increased to #
100 billion and by March 2007 it has reached 200 Billion Naira. It has as its
headquarter and registered office in Lagos and have branches in all states of
the federation, both in south Africa and Ghana, London, Norway and United state
of America
1.3 STATEMENT OF PROBLEM
The commercial banking system shares very important
characteristics with other members of the financial sector and the rest of the
business community. It desired to maximize profit. Clem (1994: P.4) ,
commercial bank are profit seeking enterprise as such it share with other
business the same set of expectation concerning the health of the economy . it
is on this light that it made loan available to borrowers on interest which is
a source of profit to the bank. Alongside, the growth the credit sector is the
increasing high incidence of bad debt due amongst others, to poor management.
Hallmark bank limited like most commercial bank ahs recorded high incidence of
bad debt and have one on the year declared losses. For instance in 1994, he
bank sustained a net loss of 112, 153 Million , resulting from the fact that
the bank net portfolio is [predominantly not performing ( chairman annual
report 1996: P.28)
In 1995, the bank made a profit of # 87, 879,000, after the amount of #
1, 836,645 has been deducted as the provision for the bad debt. Added to
130.481, 720 revised provision in 1994 at the instance for the central bank of
Nigerian and those for the proceeding years the bank provision for the bad debt
rose to a staggering amount of # 134, 318, 380 (chairman report 1996, P 20 –
21)
Giving the phenomenon of bad debt and the consequent loss been declared
by the bank, there is therefore a need to study the credit management of the
bank with a view to attained an insight into how best to reduce the incidence
of bad debt. There has been a conferrable concern showed by the management of
the bank on this because the affect on the profitability of the bank and also
affect and limits its expansion.
1.4 THE PURPOSE OF THE STUDY
As the bank sector expands with the growing complexity of the Nigerian
Economy, it has been observed that the amount of bad and doubtful debt of the
bank, which has contributed, to distress nature of some of the bank has been
risen. The question that borders the mind is giving the management expertise of
the bank the various guideline as regard to lending, why did such lending be
regarded as bad debt..
In the light of the forgoing, the purpose specifically which are to be
find out include
(i)
The bank has definite loan policies
(ii)
Who are held responsible for making loan policies for
the bank
(iii)
If there is actual a significant relationship between
the bank loan and profitability
(iv)
To suggest likely solution to the bank poor performance
(v)
What are the cause of bad debt in the bank
1.5 RESEARCH QUESTION
In order to
carry out this study, the following question are raised
- Does the bank have definite loan policies
- Who are held responsible for making loan policies
for the bank
3. If there is actual a significant relationship between the bank loan
and profitability
4. To suggest likely solution to the bank poor
performance
- What is the cause of bad debt in the bank?
1.6
HYPOTHESIS
In order to find
answers to the various question rose above, the author formulated four
hypotheses which would be put to test
They include amongst others:
Ho: there is a significant relationship
between the profit of the bank and total loan and advance granted by it
Hi: there
is no a significant relationship between the profit of the bank and total loan
and advance granted by it
Ho; this
is a significant relationship between the level of bank deposit and the manner
of loan
Hi: this
is no a significant relationship between the level of bank deposit and the
manner of loan
Ho: this
is a significant relationship between the level of risk in loan proposal and
the loan that is granted buys the bank
Hi: this
is no a significant relationship between the level of risk in loan proposal and
the loan that is granted buy the bank
Ho: there
is a significant relationship between the banks perception of different type of
security and the amount loan granted
Hi: there
is no a significant relationship between the banks perception of different type
of security and the amount loan granted
1.7 LIMITATION OF THE STUDY
This is studying the entirely the
credit management and causes of bad debt in the bank and how it affect the
performance of the bank as it only
restricted to Eco Bank of Nigerian as the case of study. Some difficult and
constrain were encountered by the researcher in the cause for obtaining
necessary information. For instance in some occasion, it was impossible to get
in touch with the bank officers, who should supply the information needed
1.8
DEFINITION OF TERMS
For a proper
understanding of the study been carried out, the author gave the operational
definition of the following terms in the study;
Debt: it
can simply be said that debt is what is owned to another. It can be also
describe as an obligation to make future payment. It can be define as money
goods or service owning to another by nature of an agreement expressed or
implied which gave rise to a capital duty to pay. Capitally put; debt is credit
recovered by a borrower from a lender
Bad debt:
this is the case where the debtor or the borrower fails to meet up with his
matured obligation and all effort by the borrower to rescue the debt proves
abortive. This give rise to bad debt
Credit:
this could be said to be what is owned to another by virtue of an agreement
expressed on implied, which gave rise to a legal duty to pay. Techniquecal
credit is debt relieved by a borrower from a pure lender.
1.8.1
TYPE OF CREDIT
The type of
facility a bank grant to its customers depends on the purpose for which the
facility is going to be utilized even though they could belong to one sectoral
entity or the other. Apart from the purpose of the loan. The length of time
before repayment is due. it also lead to classification of finance not long,
short and medium term . The type of lending done by hallmark bank limited and
indeed most commercial bank include. Overdraft, loan advance, discounting,
documentary letter of credit facility, trusts receipt, bands and guarantee.
1.8.2
OVERDRAFT
Adekanye (1983:
P 10) opined that overdraft is the most widely use type of credit grant short
term finance usually use to tied over the population cycle and finance
occasional seasonal peaks. Its maturity is usually within one year but in
practice, most overdrafts are reversible. This finance is most suitable for
financing transaction which ahs self-liquidity over short period. Fund advance
on overdraft are in teory repayable on demand while interest is payable on the
outstanding balance on daily basis.
1.8.3
LOANS
Loans are
usually lent by borrowing, which are secured against he asset of the borrowing
company. It is duly use as part of a package of a financial facility. Repayment
may either be made on one lump sum or installmentally over a period of time.
The pattern of the repayment can e tailored to fit the earning capacity of the
asset usually acquired or usually to the estimated cash flow of the business.
Interest rate are determine by the general rate prevailing in the market, the
time of loan and the sector into which the business are classified
1.8.4
ADVANCE
Nwankwo C.C
(1993:P.25) stated that an advance is a type of loan that is giving to finance
a specific project. The most important distinction is that repayment is to come
in block or as agreed from the project financed. This type of finance is
particularly suitable for product that are licensed, buying and selling and
credit that are in the nature of seed time to harvesting period, though must be
comparatively of short duration usually not exceeding six months is made to the
exporter by which time the facility becomes explicit
1.8.5
TRUST RECEIPT
The facility is
usually granted in connection with letter of credit and in most cases as
supplement to document credit facility. Instead of debiting the customers
accost before document is collected, the trust receipt account could reverse
into account. The letter of credit needs to be of insurance type. Before
collecting the chipping document the costumer must be reassure to sign a trust
receipt or a promissory note or letter of hypothecation as the case may be,
holding the goods in trust for the bank and promising to pay the proceed
directly into the bank account. It bears the same rate of interest with
overdraft.
1.8.6
BONDS AND GUARANTEE
These are clear
and contingent liabilities, which will only be crystallized if the customer on
whose behalf the liability was undertaken defaults.
Customers
occasionally request for this type of non-cash facility contingent nature in
order to facilitate their business operation. several types of bonds are issued
depending on what purpose the bond is requested, this include performance bond
which is an undertaking by the bank that the customer will from to
specification , bid or tender bond assures the party to which they are issued
to the bond of custom and exercise assuring
Discount: by drawing a built up of exchange on his customers and ensured
that it is accepted on the latter behalf. The supplier has a negotiatible
instrument which can be discounted however or bill broker with a small money
deducted from the face value of the bill to cover the incident of risk,
administrative expertise and interest from the date of discount to the due
date.
Alternatively
where the bill bear good and acceptors. They may be accepted by the bank to
support additional bank finance usually of a bridging nature pending the
maturity of the bill
1.8.7
DOCUMENTARY LETTER OF CREDIT
Adenkenye N.C (1983:p15) stated that this is similar to a guarantee in
that banks undertake on the behalf of the customer to pay specific amount if
certain condition stipulated in its term are met. Letter of credit is issued
largely in an association with bill of exchange to which they gave added
security to the financing of foreign trade. The documentary credit facility is
a method of settling debt in international trade. The bank issue a letter of
credit undertakes to make payment on the behalf of the imposter. Payment is
made for the exporter against presentation of document specified in the credit.
If therefore a
bank is issuing document specified in the credit on the behalf of the customer
and have not collected the local currencies equivalent of the transaction pro
to the insurance of such credit, such a bank has pondered a contingent facility
to the customer up to the time when actual payment assuring the board that the
duty payable on the imported and locally manufactured goods will be paid by the
bank if the customers fails to pay.
A guarantee is a promise to ensure for the debt of another made to a
person or the financial institution to whom the borrower is already of about to
become. Guarantee must be in writing signed by the guarantor or his authorized
agent.
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