An Analysis Of Credit Delinquency In Commercial Banking

Project and Seminar Material for Accountancy / Accounting

Abstract

This study was carried out to examine credit delinquency in commercial banking using Fidelity bank Kubwa, Abuja as a case study. The study was specifically carried out to ascertain the causes of credit delinquencies in our commercial bank, identify the challenges management of commercial banks encounters in recovery of delinquent credit, determine the impact of credit delinquency on the performance of commercial banks. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprise of selected staff of Fidelity bank Kubwa, Abuja. In determining the sample size, the researcher conveniently selected 57 respondents and 50 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables, and mean scores. While the hypotheses were tested using Chi-square statistical tool. The result of the findings reveals that the causes of credit delinquencies in our commercial bank includes: type of the loan; term of the loan; interest rate on the loan; poor credit history; borrowers’ income and transaction cost of the loans. The study also revealed that credit delinquency has a negative impact on the performance of commercial banks. Therefore, it is recommended that commercial banks should establish a system that will make the availability of data more ready and easily accessible especially. Also, they should endeavor to consider other macro-economic factors in the economy when deciding interest rates and repayment due dates for loan seeking applicants and clients. To mention but a few.

Table of Content

Title Page
Certification
Dedication
Acknowledgement
Table of Content
List of Tables
Abstract

Chapter One:

Introduction

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitation of the Study
1.9 Definition of Terms
1.10 Organisations of the Study

Chapter Two:

Review of Literature

2.1 Conceptual Framework
2.2 Theoretical Framework
2.3 Empirical Review

Chapter Three:

Research Methodology

3.1 Research Design
3.2 Population of the Study
3.3 Sample Size Determination
3.4 Sample Size Selection Technique and Procedure
3.5 Research Instrument and Administration
3.6 Method of Data Collection
3.7 Method of Data Analysis
3.8 Validity of the Study
3.9 Reliability of the Study
3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

4.1 Data Presentation
4.2 Analysis of Data
4.3 Answering Research Questions
4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
APPENDIX
QUESTIONNAIRE

Chapter One

Introduction

1.1 Background to the Study

Every financial institution be it bank or non bank institution aim at profit and wealth maximization, to achieve this objective, appropriate care should be exercise on their operations mainly on granting of loan and overdraft to the public through which bank fund the economy such as production general commerce services. The major role of bank in economic development is transferring savings in generating investment. The saving surplus units than earn income inform of interest while the saving deficit units earn profit from investment according to Orjih John investment Analysis (2003). Lend has become a vital function in banking operation because of its direct effect on economic growth and business development loan therefore constitute the major and crucial part of commercial bank assets and the interest of the loan avoid credit risk. Credit risk is the risk that the principal or the interest or the part whereby the credit extended to a customers will not repaid by him in accordance with the loan agreement. When this happens, the bank will end up classifying the credit, as bad debt and in due course it will be written off. According to Utomi, Pat of Lagos business school said that, bad debt is referred as debt due to creditor but which for some inherent weakness the full or partial recovery is considered not possible.

All business incurred bad debts but, bank whose stock in trade is money view them with dread, hence it could be regarded as occupational hazards in business and for that banks must kept reasonable margin of the total lending port folio of the bank. Hence a senior banker once told a young enthusiastic banker that the only way to avoid bad debts was to refuse to lend money out at all, by Utom.

Lemo said, the avoidance of lending by bankers is not possible because the greatest source of bankerâ€™s profitability is through lending. Thus, judgment of individual borrowers can be determine by three factor namely character, capacity and capital, the classic three Câ€™5 of credit and this will be followed with condition and collateral making all 5c,s of credit from the study, the researcher discover that commercial bank do not make amount of loan and advances granted and their customers (Borrowers). This being the case, there is need for provision for bad debt so as to reduce the growth rate of bad debt which could be attributed to poor feasibility study reports, credit management, inefficiency, political instability etc. so as to be enable the banks continue to effectively meet their obligation of profitability liquidity, solvency and provision of credit for the economic development of Nigeria. Said by Emerhor Otega chairman of First Atlantic Bank Plc. Credit delinquency refers to those activities that limit the development and growth of financial institution regarding to their business operation such as

Bad management
Inadequate capital base
Assets /liability management
Credit Administration
Board Room Crisis

1.2 Statement of the Problem

The huge amount of provision for bad and doubtful debt in Nigeria commercial banks financial report and rate of bank distress and liquidation as below connotes that there is credit delinquencies in the banking industries. Then, introduction of credit bureau by the CBN was calculated to save as Panacea to credit defaults, but the use of multiple registration of business has allowed borrowers to siding from one company to another.

According to Tilije is Md, fortune Bank Plc (2003) Page is financial standard. The credit management in Nigeria commercial banks in an inherent problem in the banking industry and will continue to linger on as long transaction because of it dynamic nature.

1.3 Objective of the Study

The central objective of the study is to examine the impact of credit delinquency in commercial banking. The specific objectives are:

To ascertain the causes of credit delinquencies in our commercial bank
Identify the challenges management of commercial banks encounters in recovery of delinquent credit.
Determine the impact of credit delinquency on the performance of commercial banks.

1.4 Research Questions

In order to effectively investigate the problem of this research, the researcher formulated the following research questions:

What are the causes of credit delinquencies in our commercial bank?
What are the challenges management of commercial banks encounters in recovery of delinquent credit?
What is the impact of credit delinquency on the performance of commercial banks?

1.5 Research Hypothesis

Ho: Credit delinquency has no significant impact of commercial banks
Ha: Credit delinquency has a significant impact of commercial banks

1.6 Significance of the Study

The study will also be useful to policy makers especially CBN who will be ready to manage the credit portfolio of the bank. The study will help in partial fulfillment of requirement for the award of Higher National Diploma (HND) in Accountancy. proper evaluation of credit delinquency will enable the government to understand the need of the bank and the public which will form a yards stick for government monetary and fiscal policies. The result obtained from the study will be beneficial to the management, the shareholders financial institutions non- financial institutions, business entrepreneurs, students of Accountancy and those of other discipline. Also it will be of help for future researchers.

1.7 Scope of the Study

This study focuses on an analysis of credit delinquency in commercial banking. Hence, based on the nature of this study, it shall be limited to Fidelity bank Kubwa, Abuja.

1.8 Limitations of the Study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.

Moreover, the case study method utilized in the study posed some challenges to the investigator including the possibility of biases and poor judgment of issues. However, the investigator relied on respect for the general principles of procedures, justice, fairness, objectivity in observation and recording, and weighing of evidence to overcome the challenges.

1.9 Definition of Terms

Loan:

This is a sum of money that is expected to be paid back with interest.

Delinquency:

Delinquency means being behind on a payment which is due.

Commercial Bank:

The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people do their banking.

1.10 Organization of the Studies

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on credit delinquency in commercial banking using Fidelity bank Kubwa, Abuja as a case study. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary of the Study

In this study, our focus was to examine credit delinquency in commercial banking using Fidelity bank Kubwa, Abuja as a case study. The study was specifically carried out to ascertain the causes of credit delinquencies in our commercial bank, identify the challenges management of commercial banks encounters in recovery of delinquent credit, determine the impact of credit delinquency on the performance of commercial banks.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent were selected staff of Fidelity bank Kubwa, Abuja.

5.3 Conclusions

Based on the findings of this study, the researcher concluded that;

The causes of credit delinquencies in our commercial bank includes: type of the loan; term of the loan; interest rate on the loan; poor credit history; borrowers’ income and transaction cost of the loans.
The challenges management of commercial banks encounters in recovery of delinquent credit includes: unavailability of accurate and proper information about the loans, lack of payment visibility, and lack of flexible payment options
Credit delinquency has a negative impact on the performance of commercial banks.

5.4 Recommendations

Based on the findings of the study, the following recommendations are proffered.

Commercial banks should give more emphasis on factors like character, capacity and collateral plus condition as are responsible for one-fifth of its profitability.
The bank should endeavor to maintain a steady system to enable it to continue its screening and monitoring process which seriously affects its performance and loan activities.
Furthermore, Commercial banks should establish a system that will make the availability of data more ready and easily accessible especially. Also, they should endeavor to consider other macro-economic factors in the economy when deciding interest rates and repayment due dates for loan seeking applicants and clients.
Commercial banks should revise their interest rates and make them fairer to all clients; also, effective monitoring systems should be implemented to help in screening and monitoring procedures and activities.
New technologies are employed to help maintain efficient databases to help in monitoring the debt-income ratio of customers. This will make banking as a completely more pleasurable.
The banking industry in Nigeria should endeavor to adopt other services that can improve their profitability other than relying on loans alone for their sustainability in the industry and the world in general.
The government via the ministry of finance with the help of governing banking bodies should carry out periodic and ad-hoc reviews on banks in Nigeria to ensure that they are not exploiting customers and clients in their various industries.

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