Analysis of Credit Management in the Banking Industry

An analysis of credit management in the banking industry  (A CASE STUDY OF FIRST BANK OF NIGRIA PLC.  ENUGU. Download the full project materials with reference.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Banks are profit-making organizations performing as intermediaries connecting borrowers and lenders in bringing temporarily available resources from business and individual customers as well as providing loans for those in need of financial support (Uwuigbe, 2013; Drigă, 2012). Commercial Banks play a vital role in developing economies like Nigeria, Ghana, Egypt and Algeria. Bank lending is very crucial for it make possible the financing of agricultural, industrial and commercial activities of the country.  Commercial Banks are entrusted with the funds of depositors. These funds are generally used by banks for their business. The fund belongs to the customers so a programme must exist for management of these funds. The programme must constantly address three basic objectives: liquidity, safety and income. Successful management calls for proper balancing of all these three. Liquidity enables the banks to meet loan demands of their valuable and long established customers who enjoy good credit standing.

The second objective being safety is to avoid undue risk since banks meet responsibility of protecting the deposit entrusted to them. Proper and prudent management of banks create and hence customer confidence. The third being income/profitability which is aimed at growth and expansion to meet repayment of interest charges on debt, to achieve the objective of maximizing wealth of shareholders and to survive competition in the banking industry (Okwoli, 1996; Uwuigbe, 2011).

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

The term debt is frequently used in reference to debtor’s obligation to make payment. Debt and credit are therefore similar terms. Management of credit is simply the application of four management principles which are planning, organizing directing and controlling to credit concept. Commercial banks are major players in the financial sector of every country’s economy. The failure or success of these banks will to a large extent affect the financial sector and the economy at large.

In recent times some commercial banks have been wound up leaving customers to their fate. It is important to note that the major cause of the winding up of some of these banks is their poor management of their finance and credit. Many of them were writing off huge amounts of debt yearly and also reflected some going concern issues that related to their management of credit and finance. The reason for the failure of these banks has sparked the interest of the researcher in conducting further studies into the management of finance and credit in Nigerian banks.

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              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?

Other headings in chapter one include the followings. 1.4            Objectives of the Study 1.5          Hypotheses of the Study

1.6          Significance of the Study

1.7           Scope of the Study 1.8           Limitation of the Study 1.9          Definition of Terms