CREDIT MANAGEMENT IN NIGERIA COMMERCIAL BANKS
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CREDIT MANAGEMENT IN NIGERIA COMMERCIAL BANKS
ABSTRACT
Granting credit is risky, and it should be revised as the most significant risk that Nigerian banks face. This is the risk that could result in a loss for a bank owing to a customer’s failure to pay their obligations.
Credit management incorporates credit analysis to analyse and protect against the risk involved in the issue of credit to bankers’ customers in order to organise this. This led to the topic credit management in Nigerian commercial banks;
this study effort would have chapters one through five, with the goal of introducing credit management in Nigerian commercial banks in each chapter. It will state the purpose and relevance of the study, as well as the presentation of the difficulties that state as such.
Credit must be properly managed in order for banks to continue in business, which can be accomplished through responsible lending. It will explain why customers cannot obtain loans from commercial banks. The statement will demonstrate that no matter how cautious a bank is in its lending, it must account for bad and dubious debts.
The scope and limitations of the study, as well as the test of hypothesis, will be reviewed in chapter two, which will define bank credits such as overdraft, loan, and letter of credit.
This chapter will explain why banks should issue credit, the sources of repayment, and the characteristics of borrowers, because customer characteristics should be completely changed and studied before extending credit to such a client.
Because the study for this project will rely on primary and secondary sources of data, chapter three will demonstrate how research design and methods will be obtained. Primary data sources will include direct oral interviews with some loans and advanced management/offers, as well as some strategic management staff in commercial banks;
secondary sources will include information from banks’ annual reports, journals, news papers, and other text books from libraries. The fourth chapter will demonstrate how the data obtained will be presented and analysed, and the fifth chapter will be a summary and conclusion with a bibliography.
INTRODUCTION
1.9 BACKGROUND OF THE STUDY
The banking business has long been known for acting as an intermediary in the provision of financial assistance (credit) to the economy. This role of financial intermediation is played out in a variety of ways. The first point to mention is the provision of loans and advances to consumers, which accounts for the majority of banking lending. Aside from loans and advances, bank credits such as bonds are issued by banks for and on behalf of their customers.
Banks should take all necessary precautions to ensure that advances are issued to customers who can and will make prudent use of loans so that repayment does not become a problem when issuing credits or for business ventures.
As a result, credit should only be given to persons who are capable of using it wisely and repaying the loan at the maturity date. Bank operations can be explained by pointing out that “loans and advances are the largest single item in the asset structure of Nigerian commercial banks; it also constitutes the major source of operating income at banks and the most profitable asses for the use of bank funds.”
“Credit (Loan and advances) are crucial to the bank balance, accounting for a major amount of the bank’s income; such operating income earned from smart investment and competent administration of such funds in credits enables the bank to:
(i) Provide depositors with interest.
(ii) Dividend payments to investors
(iii) Pay taxes to the government
(iv) Make additional investments and
(v) Keep sufficient reserves on hand.
The actual work in connection with the management and conversion of such funds into various types of credit facilities in an operating function is performed by the credit department of a commercial bank, with compliance by the “Board of Director” at the bank,
lie annual credit policy guidelines and prudential guidelines (1990) of the Central Bank of Nigeria (CBN), and other monetary and fiscal policy issued by the government of Nigeria. The credit department is often led by a loan officer manager with extensive credit administration knowledge and personal assessment standards.
Long-term and medium-term loans, as well as overdraft possibilities.
1.10 STATEMENT OF THE PROBLEM:
The best way to avoid bad debt is to never lend money. However, if banks refuse to lend money at all, the basic goal of doing business, which is to maximise profit, will be defeated. Credit must be properly managed in order for banks to continue in business, which can be accomplished through responsible lending.
Regardless of how cautious a bank’s lending is, the fact remains that every year, provision for bad and doubtful debts should be made. Not every loan should be approved. A profitable but risky loan should not be granted. The attitude of most borrowers towards loans and advances should not be overlooked. They see such credit facilities as their own slice of the national pie.
Furthermore, failure of banks to use skilled, qualified, and experienced personnel in credit management is a problem that should be addressed.
Banks are just clients of the money that depositors deposit with them, therefore interest and dividends must be paid to depositors and dividends must be paid to investors. Credit management is an essential component of lending, and in its absence, excellent loans can turn poor.
It is vital to stress that the importance of credit management cannot be overstated, and proper credit management necessitated the implementation of solid and efficient government credit regulations.
To be successful, banks’ corporate credit policies must include sound systems for monitoring and repayment, as well as suitable safeguards for credit evaluation and distribution. However, past experience has demonstrated that insufficient credit investigation and sound loan application judgements have resulted in underperforming loans.
Provision of credits in the form of loans and advances is the total amount of money that a bank lends to its customers at any particular time. The bank often charges the borrower interest for the use of its funds. These loans and advances usually have a set maturity date.
Banks typically provide such credit facilities in the form of short-term loans.
THE FOLLOWING ARE THE OVERALL RESULTS OF THE ABOVE:
(i) It exposes the bank to a variety of debt collection issues.
(ii) As a result, expenses are incurred in the form of provisions provided.
1.11 AIMS AND OBJECTIVE OF THE STUDY
1. To conduct an investigation into bad and dubious debts in Nigerian commercial banks?
2. To investigate the implications of bad and doubtful debt on the profitability of Nigerian commercial banks.
3. To estimate the impact of bad debt on the banking industry and the economy in general.
4. To identify potential measures to prevent the occurrence of bad debt in Nigerian commercial banks.
1.12 RESEARCH QUESTIONS
(1) Does insufficient loan supervision result in bad questionable debts?
(2) What are the impacts of poor and questionable debt on your bank’s profitability?
(3) What is the incidence of bad debt on the banking industry and the economy as a whole?
(4) What are the most likely viable measures for preventing bad debt?
1.13 RESEARCH HYPOTHESIS
(1) Ho: Inadequate loan supervision and monitoring is not the najo.
cause of bad debt.
Hi: The primary cause is insufficient loan oversight and monitoring.
cause of bad debt.
Ho: Bad debt has no negative impact on a bank’s earnings.
Hi: A bank’s profitability suffers as a result of bad debt.
Ho: The prevalence of bad debt in the banking industry and its implications
The economy in general is not doing well.
Hi: The impact of bad debt on the banking industry and the economy as a whole is significant.
1.6 THE SIGNIFICANCE OF THE STUDY
The significance of this study is to contribute to the ongoing investigation of problem loans in Nigerian commercial banks. The research will also help us understand how Nigerian commercial banks make lending decisions.
This work is also important in educating readers about the fundamental and contradictory rudiments of Nigerian commercial banks’ credit operations, as well as the reasons of bad and questionable loans, as well as who stands to benefit from the study and how.
Beneficiaries of this research include:
(i) The bankers who work in the field.
(ii) The credit and loan officers,
(iii) The bank’s board of directors/managers
(iv) The investors, and so on.
Furthermore, this research could be extremely beneficial to students of banking and finance as they prepare to enter the field of the subject they are studying.
1.8 DEFINITION OF TERMS
(a) CREDIT: This is financial help provided by banks to their customers in the form of loans and advances.
(a) LOANS: Sums of money borrowed at an agreed-upon interest rate, usually for a set length of time and repayable in accordance with the conditions of the loan agreement.
(c) CBN: Central Bank of Nigeria; this is the financial system’s apex regulatory authority.
(d) CREDIT GUIDELINE: An yearly monitoring circular (Guiding Principles for Commercial and Merchant Bank Lending) released by the C.B.N.
(f) CREDIT POLICY: The laws and regulations that guide banks in their lending.
(f) BAD AND DOUBTFUL DEBTS: This offers to all non-performing credit facilities the inclusion of such specifications in the C.B.N prudential guidelines.
(g) OVER – DRAUGHT: This is a less formal credit facility in which a bank allows a current account customer to write cheques in excess of the existing balance in his/her account.
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