Assessment Of Credit Management And Bank Lending Practices In Commercial Banks In Nigeria

Introduction

1.1 Background of Study

Commercial banks and other financial organizations in Nigeria engage in lending as one of their primary activities. The size of the loans that make up banks” assets, as well as the annual significant increase in the amount of credit issued to borrowers in the country, demonstrate this. Naturally, a bank”s loan portfolio is its most valuable asset and source of revenue (Babalola, 2012 and Jahn, 2012). Commercial banks typically offer credit on a short-term basis, with a few exceptions where they will lend on a medium- or long-term basis if it does not jeopardize the bank”s liquidity. Loans from commercial banks must be backed up by collateral or securities in the event of default. Commercial bank lending is frequently governed by policies that must be followed before loans are authorized. In commercial bank lending procedures, the interest rate level has a significant effect (Adekanyi, 1983; Aburine, 2008).

Banking activities, according to Ugoani (2013), have continued to be a huge help to the economy”s growth, particularly through the credit facilities they provide to various industries. These credits are projected to boost investment and, as a result, boost economic growth. According to the Central Bank of Nigeria (2013), the various areas of bank lending to the Nigerian economy include the production sector, general commerce sector, services sector, and others. Banks provide a variety of services to the economy, the most important of which is the provision of finance, which has been referred to as a “lubricant for economic growth” (Greuning and Brajovic, 2004). A sufficient supply of credit to the various sectors of the economy to carry on their activities is a vital aspect of this growth process. Financial intermediation is the role of the banking system in this regard, which comprises shifting cash from the surplus to deficit units of the economy to enable trade and capital accumulation. One of the services that commercial banks typically provide to their customers is lending, which can be short-term, medium-term, or long-term. In other words, banks provide loans, overdrafts, and advances to individuals, businesses, and governments in order to enable them to engage in developmental activities, either to promote their own growth or to contribute to the overall economic development of a country. The consumer may require funds for a variety of reasons, including fresh capital, ventures, bridging loans, farming, contract jobs, and business expansion, to name a few (Nwanyanwu, 2010). Credit management can be defined as a set of written instructions that define the terms and circumstances for supplying items on credit, customer qualification criteria, collection procedures, and what to do if a customer defaults. Credit, according to Ugoani (2013), is a marketing technique for increasing sales. Credit sales to consumers, on the other hand, must be closely controlled since, regardless of an organization”s market share or demand for its products, if no controls are in place to restrict credit sales to customers, difficulties, particularly those connected to profitability, may arise. Even if a corporation has a lot of fixed assets, it may nevertheless be cash-strapped and have trouble meeting present obligations. Because the firm”s liquidity assesses its ability to pay those creditors, the profitability of a business firm is usually of special interest to its short-term creditors (Felix and Claudine, 2008).

1.2 Statement of Problem

Since commercial banks provide the majority of the capital needed for most development initiatives, it is widely agreed that lending as a service to commercial banks is critical to economic growth and development. Credit management is vital in many people”s lives and in practically every industry that involves monetary investment in some way. Banks are the primary providers of credit, as well as various other services such as deposit mobilization, local and international transfers, and currency exchange. As a result, credit management has far-reaching implications at both the micro and macro levels. When credit is allocated inefficiently, it raises costs for successful borrowers, erodes the fund, and limits the ability of banks to transfer funds to alternate uses. Furthermore, the bigger the loan limit, the greater the danger. Loan defaults, which occur as a result of poor credit management, diminish a bank”s lending capability. It also rejects loans to new applicants as the bank”s cash flow management issues worsen in direct proportion to the rising default rate. The issue of insufficient attention paid to loan distribution also has an impact on the bank”s performance. The majority of consumers took out bank loans and invested the money in unsuccessful ventures. Some bankers do not take the essential criteria into account while disbursing loans to customers. In other words, it may disrupt a bank”s routine input and outflow of funds, preventing it from remaining in a viable credit market. Therefore, the principal concern of this study is to assess credit management and bank lending practices in commercial banks in Nigeria.

1.3 Objective of Study

The following are primary objectives of this study

To examine how feasibility study affect loan repayment in the banking industry.

To highlight the extent in which diversion of bank loans to unprofitable ventures affect loan repayment.

To examine how distribution of loans affect banks performance if banks give proper attention.

1.4 Research Question

How does feasibility study affect loan repayment in the banking industry?

What is the extent in which diversion of bank loans to unprofitable ventures affect loan repayment?

How does distribution of loans affect banks performance if banks give proper attention?

1.5 Research Hypotheses

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 Significance of Study

This study will be significant for Bank”s management, share-holders, potential investors, and depositors, as well as for the economy as a whole. For bank management and managers, the study emphasizes the importance of this asset (loans and advances) to their organizations” overall success and growth. As the greatest component of a bank”s overall assets, it must be managed effectively and efficiently. Furthermore, loans and advances are the most profitable and dangerous assets, necessitating good administration to maximize profits while limiting risk.

1.7 Scope of Study

This study is aimed at analysing the credit management and bank lending procedures in Nigerian commercial banks 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.

1.9 Definition of Terms

Credit Management:

This is 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.

Lending Practices:

These are laid down principles which guide the lending practice of banks. These principles could be due to external or internal factors. These principles act as a blue print to measure the effectiveness of commercial banks lending activities.

1.10 Organization of the Studies

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.