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
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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
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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?
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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.
16. 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.
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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.
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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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