ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING INDUSTRY
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ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING INDUSTRY
ABSTRACT
Credit extension is an important function of banks, and bank management works hard to meet the legitimate credit needs of the communities they serve. The purpose of this research is to examine credit management in the Nigerian banking industry, with a focus on First Bank of Nigeria PLC.
Credit’s importance in a country’s economic growth and development cannot be overstated. Despite its importance in the economy, credit is accompanied with a number of hazards.
Prior to the consolidation era, the Nigerian banking system saw some failures as a result of unwise lending, which eventually resulted in bad debt and some ethical facts.
As a result of bad credit management, which has led to bank hardship in the industry, the issue of non-performance of assets and declaring of fictitious projects has become the order of the day in our banking system. Three hypotheses were developed and tested using chi-square on questionnaires distributed to varied respondents.
The collected data and tested hypothesis revealed that: (i) insufficient feasibility study affects loan repayment in the banking industry, (ii) diversion of bank loan to unprofitable ventures affects loan repayment, and (iii) the problem of poor attention given to loan distribution has a negative effect on bank performance.
Among the many suggestions were the following: (a) Banks should build a solid and skilled credit management unit and hire highly motivated employees.
(b) Banks should ensure that the chief executive avoids in principle approval in credit management, and (c) Banks should have a monitoring and control unit or department to carry out a sort of postmodern exercise by controlling and monitoring credit facilities and also ensuring the completeness of all conditions precedent to draw down.
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Credit management in our banking sector has evolved from its previous incarnation. To stay in business, the banking industry has implemented a variety of credit management measures.
However, the Nigerian banking system has suffered significant losses as a result of the changing source of loan exposure and interest rate situation.
Nigerian banks are in high demand in the market due to their ability to provide transaction efficiency, market expertise, and funding capacity. To fulfil these duties, banks operate as the most essential actors in their transaction process, which they facilitate by using their own balance sheet and ensuring that their associated risk is absorbed.
Credit extension is an important function of banks, and bank management strives to meet the legitimate credit needs of the communities they serve. Credit advances by banks as a debtor to depositors need taking caution when handling depositor cash.
In 1990, the Central Bank of Nigeria enacted a credit legislation that authorised banks to make refunds to the credit risk management system on behalf of all clients with an aggregate outstanding debit amount of one million naira or more (Ijaiya G.T and Abdulraheem A (2000).
This prompted Nigerian banks to upgrade their control systems and risk management across the board, as this coincidental activity is recognised as the industry’s physiological vulnerability to financial risk.
According to the researcher, a New York-based firm, 40% of Nigerian banks that make up the exchange rate value in West Africa have reduced operating lending as a result of bad debts that totaled more than $10 billion in 2009, resulting in a tied-up questioning asset that holds nearly half of Nigerian banks.
The Nigerian central bank sacked eight top executives and put aside $4.1 billion to bail out nearly ten of the country’s lenders. The Central Bank of Nigeria (CBN) launched a reform in 2010 that required Nigerian banks to begin lending to asset management businesses and set up a requirement that will allow Nigerian banks to make full provision for bad debts, which will strengthen the market.
Banks identify destructive borrowers in the banking system whose technique included responding to debt obligations in certain banks while attempting to contract new debts in others. Banks are attempting to make the credit risk management system database more available in order for it to be more functional and recognised,
allowing banks to inquire about or render statutory returns on borrowers. Some banking practises enhance the risks in the bank and are difficult to change. This outcome begs the question, “What are the possible ways to help Nigerian banks manage their credit risks?”
Credit risk management enables credit experts to determine when to accept a credit applicant in order to prevent tarnishing the bank’s reputation and to make decisions in order to explore inevitable credit risks that provide greater profit.
Controlling a risk leads in encouraging rewards such as additional technical support and customised training for internal audit in banks or financial institutions. This study is offered to outline, locate, examine, and report on various risk management approaches in the banking industry.
1.2 STATEMENT OF THE PROBLEM
The majority of the failures experienced in the Nigerian banking industry prior to the consolidation era were the result of imprudent lending, which eventually led to bad loans and other unethical factors (Job, A.A Ogundepo A, and Olanirul (2008)).
The issue of insufficient attention paid to loan distribution also has an impact on the bank’s performance. The majority of them obtained bank loans and redirected the funds to unsuccessful ventures.
Some bankers fail to evaluate the necessary parameters for loan issuance to customers. As a result, the purpose of this work is to outline and clarify these issues. Identify the reasons and provide long-term solutions to the challenges linked with credit management and, as a result, bank debts.
1:3 OBJECTIVES OF THE STUDY
The following are the study’s objectives:
1. To investigate the impact of feasibility studies on loan repayment in the banking industry.
2. To demonstrate how loan repayment is affected when bank loans are diverted to unprofitable ventures.
3. To investigate how loan distribution affects bank performance if banks pay close attention.
1.4 RESEARCH QUESTIONS
Bank lending is deemed to be effective if it meets the banker’s commitment to provide maximum liquidity to depositors.
1. To what extent does feasibility study influence loan repayment in the banking industry?
2. How does the redirection of bank loans to unproductive ventures influence loan repayment?
3. Does loan distribution affect bank performance if given adequate attention?
1.5 RESEARCH HYPOTHESES
A trustworthy credit management system improves lending control and credit account administration.
HYPOTHESES 1 Ho. In the banking industry, an insufficient feasibility study has no effect on loan payback.
Hi. In the banking industry, insufficient feasibility studies have an impact on loan repayment.
HYPOTHESES 2 Ho. Loan repayment is unaffected by the diversion of bank credit to unprofitable companies.
Hi. Loan repayment is affected when bank loans are diverted to unprofitable ventures.
HYPOTHESES 3 Ho. The issue of insufficient attention paid to loan distribution has no influence on bank performance.
Hi. The issue of insufficient attention paid to loan distribution has an impact on bank performance.
1.6 SCOPE OF THE STUDY
The purpose of this research is to examine credit management in the Nigerian banking industry, with a focus on First Bank of Nigeria plc. The study’s goal is to examine credit facilities in the banking industry.
It also goes over the various techniques and concepts for efficient and successful credit management. It analyses the success and failure (if any) and suggests corrective measures.
1.7 SIGNIFICANCE OF THE STUDY
This research will be beneficial to executives and managers in the banking industry as well as other financial institutions. This is because it provides suggestions that will improve the effectiveness and efficiency of credit management in order to achieve and promote maximum profitability and liquidity in their banks.
The depositor (public), on the other hand, will be more aware of the need to be honest and fulfil their responsibilities in credit transactions with banks so that they might seek for ways to improve bank service.
Finally, as a potential manager, this is an eye opener because it will instruct one in the future on how to manage credit facilities.
1.8 DEFINITION OF TERMS
The following are the key terms employed in this research.
1) BANKRUPTCY: The inability of a person or company to satisfy its financial obligations.
2) MANAGEMENT: management is the study of decision-makers at all levels, from supervisors and line managers to the Board of Directors.
3) LOANS AND ADVANCES: These are credit facilities made available to customers by banks. They could be short, medium, or long term, depending on the duration of the repayment period.
4) OVERDRAFT: A credit facility (often short-term) offered by banks to current account holders, with daily interest costs.
5) BANK: According to Section 61 of the BOFIA 1991 Act, a banking business is one that receives deposits on current accounts or other similar accounts and pays or collects cheques drawn on or paid in by customers.
6) CUSTOMER: A person is a customer if he or she has a bank account.
7) FINANCIAL RATIO: These are mathematical ratios used to evaluate financial responsibilities.
8) FINANCIAL STATEMENTS: These are firm balance sheets, profit and loss accounts, and classified statements that illustrate the firm’s financial situation.
9) GUARANTOR: A person or group of people who stand in for bank customers seeking loans.
10) COLLATERAL/ SECURITIES: A customer’s asset given to his bank to secure a credit facility issued by the bank.
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