Analysis Of Credit Management In The Banking Industry
(A Case Study First Bank Of Nigeria plc. Enugu)
Credit management is a critical function in the banking industry that involves assessing, monitoring, and controlling the credit risk associated with lending activities. Banks employ various tools and techniques to evaluate the creditworthiness of borrowers, such as analyzing financial statements, credit scores, and past repayment behavior. Effective credit management helps banks make informed lending decisions, set appropriate interest rates, and establish prudent credit limits. Continuous monitoring of borrowers’ financial health and market conditions allows banks to proactively identify and mitigate potential risks. The use of credit scoring models and advanced risk analytics has become increasingly prevalent in the banking sector, enabling institutions to optimize their credit portfolios and maintain a balanced risk-return profile. Successful credit management is essential for ensuring the stability and profitability of banks while safeguarding the interests of depositors and other stakeholders.
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 industry 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 industry 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 industry, (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.
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 Emperical Reviews 51
Chapter three
Research Methodology 54
3.1 Introduction 54
3.2 Research Design 54
3.3 Sources And Techniques Of Data Collection 55
3.4 Descripti0n 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 69
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
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
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?
1.5 STATEMENT OF HYPOTHESES
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.
1.7 SIGNIFICANCE OF THE STUDY
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 DEFINITION 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.
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.
Analysis Of Credit Management In The Banking Industry:
Credit management is a critical function in the banking industry. It involves assessing the creditworthiness of borrowers, granting credit or loans, and managing the repayment process to minimize the risk of default. Effective credit management is essential for a bank’s profitability and overall financial stability. Here are the key aspects of credit management in the banking industry:
- Credit Evaluation and Risk Assessment: Banks assess the creditworthiness of potential borrowers by analyzing their financial statements, credit history, income stability, and other relevant factors. This evaluation helps determine the borrower’s ability to repay the loan and the associated credit risk.
- Credit Approval Process: Banks have specific procedures for approving credit applications. This process involves reviewing and approving or rejecting loan applications based on the risk assessment and the bank’s lending policies.
- Credit Scoring Models: Many banks use credit scoring models to automate the decision-making process. These models assign a credit score to applicants based on their credit history and other factors, helping banks make quick and consistent lending decisions.
- Credit Policies and Guidelines: Banks establish credit policies and guidelines to manage risk effectively. These policies define the types of loans the bank is willing to provide, the maximum loan amounts, interest rates, and repayment terms.
- Loan Documentation: Proper documentation is crucial in credit management. Banks create legally binding loan agreements that outline the terms and conditions, including interest rates, repayment schedules, collateral requirements, and any covenants.
- Collateral Management: In many cases, banks require borrowers to provide collateral to secure the loan. Banks must properly evaluate, record, and manage collateral assets to mitigate the risk of loss in case of default.
- Loan Monitoring: Banks continuously monitor the financial health of borrowers during the loan term. This involves regular financial statement reviews, performance assessments, and covenant compliance checks.
- Risk Mitigation: Banks use various risk mitigation strategies, such as diversifying their loan portfolios across different industries and geographic regions, to reduce concentration risk. They may also use credit derivatives, loan insurance, or loan sales to transfer risk.
- Default Management: When borrowers fail to repay their loans, banks initiate default management procedures, which may include restructuring the loan, foreclosure on collateral, or legal actions to recover the outstanding debt.
- Regulatory Compliance: Banks must adhere to strict regulatory guidelines and reporting requirements related to credit management. These regulations are designed to ensure the safety and soundness of the banking industry.
- Credit Loss Provisioning: Banks set aside funds for expected credit losses based on their risk assessment. These provisions are recorded on the balance sheet to account for potential loan defaults.
- Credit Risk Modeling: Advanced analytics and models are used to predict and manage credit risk. These models help banks make informed decisions and allocate capital more efficiently.
- Credit Portfolio Management: Banks actively manage their credit portfolios to optimize risk-return trade-offs. This includes assessing the overall risk exposure, diversifying the portfolio, and adjusting lending strategies as economic conditions change.
Effective credit management is crucial for the banking industry’s stability and profitability. Banks must strike a balance between providing credit to stimulate economic growth and managing credit risk to protect their financial health. Failure to do so can lead to financial crises and instability in the banking sector.