AN ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING INDUSTRY (A CASE STUDY OF FIRST BANK OF NIGRIA PLC. ENUGU.
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AN ANALYSIS OF CREDIT
MANAGEMENT IN THE BANKING INDUSTRY (A
CASE STUDY OF FIRST BANK OF NIGRIA PLC.
ENUGU.
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
To what extent does feasibility study affect loan repayment
in the banking industry?
To what extent does diversion of bank loans to unprofitable
venture affect loan repayment?
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
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