The Impact Of Effective Credit Management On The Profitability Of Commercial Banks (A Case Study Of First Bank Of Nigeria Plc)
This study is focused on the impact of effective credit management on the profitability of commercial banks. The study is divided into Five chapters.
Chapter one deals with introduction, background of the study, statement of the problem, objectives of the study research question, statement of hypothesis, limitation of the study, definition of terms etc.
chapter two consists of general introduction of research topic and of literature review.
Chapter three deals with research methodology, research design and sources of data, population and sample size and method of data.
Chapter four deals with the data presentation, analysis and test of hypothesis.
Chapter five consist of summary, conclusion and recommendation which reveals that credit managers deal with various credit appraisal, effective management should be adopted for the profitability of the banks.
Table Of Content
- Title page
- Approval page
- Table of content
- 1.1 Background of the study
- 1.2 Statement of the Problems
- 1.3 Objectives of the study
- 1.4 Research questions
- 1.5 Hypothesis
- 1.6 Significance of the study
- 1.7 Scope of study
- 1.8 Limitation of the study
- 1.9 Definition terms
2.0 Literature Review
- 2.1 Background of profitability to a commercial bank
- 2.2 Principles and consideration to good lending
- 2.3 Basis for credit formulation
- 2.4 Comparative analysis of different forms of credit administration
- 2.5 Problems to credit management and loan administration
- 3.1 Research design
- 3.2 Sources of data
- 3.3 Population and sample size
- 3.4 Administration of data collection instrument
- 3.5 Statistical data to be used in data analysis
4.0 Presentation and Analysis of Data
- 4.1 Introduction
- 4.2 Presentation of data
- 4.3 Analysis of data
- 4.4 Test of hypothesis
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background Of The Study
Granting of loans and advances of credit is one of the bank services of investment policies. Among the crucial growth process is the adequate supply of credit to the different economic units to carry on their activities efficiently and smoothly. There is therefore the need for transferring of funds from the surplus units to the deficit units of the economy. In the case commercial banks play a vital role in the allocation of financial resources of capital formation.
There are many opportunities for profit improvement since lending of money has been widely known and accepted as an important function of the banking industry (i.e commercial banks) a function which the industry is better placed to perform in view of its position as a finance intermediary.
It is generally accepted that lending is the most risky function perform by the commercial banks and it is therefore important that lending must be done effective and efficient.
In granting loans to customers, banks are expected to critically consider various factors which should enable them to assess the risk associated with the loan and the willingness and ability of the borrower to repay.
1.2 Statement Of The Problem
The following are problems associated with the study;
- Banks as financial intermediaries: Banks find it difficult to operate efficiently in the face of many borrowers.
- Banks as debtors: Banks owe the customers at any point in time, a duty to make funds available to depositors on demand.
- Banks as creditors: Banks find it difficult to properly assess and identify credit worthy customers which ensure repayment to guarantee equilibrium of funds flow.
- Commercial Banks as commercial Outlets: Banks owe as a duty to the shareholders to maximize profit.
1.3 Objectives Of The Study
Commercial hanks are general all purpose retail banks. They mobilize deposits of all sizes, both from the depositor and shareholders.
They lend these mobilized fund to willing customers for investment purpose as stated earlier, loans are the most important, most profitable and most risky asset of the banks; banks may be unable to meet their obligations to depositors and public confidence will be lost due to problems of loans. These problems of loan affect the liquidity of banks, reduce their ability to create deposit restrict further lending to prospective borrowers, which affects the profitability of the bank.
Therefore the objectives of the study are;
- To find out the best ways to manage loans which adversely affect the depositors’ bank.
- To find out the usefulness of the central bank credit guideline giving to commercial banks.
- To recommend possible ways of making credit policy guideline more effective and beneficial to both commercial banks and their customers.
1.4 Research Question
- Are there regulatory requirement for granting loan?
- Should the bank investigate the kind of business their customers are into before granting loans to them?
- Are customers classified based on their credit worthiness?
- To what extent can bank ensure that the borrowers’ funds are granted?
1.5 Statement Of Hypothesis
The following hypothesis are stated
- Hi: Banks have adequately finance project in our economy.
- Hi: Low interests have favored the borrowing customers.
- Hi: Proper training of credit officers leads to better relationship between commercial banks and their credit customers.
1.6 Significance Of The Study
- Loans are important as well as the lucrative assets of commercial banks credit.
- It is therefore important that credit proposals be properly articulated and evaluated right from the on set.
- It is crucial to avoid and minimize bad debts.
- The collection of vital information for lending and the analysis of the proposal cannot therefore be over looked to be less important.
- It should be noted that the risk element in credit proposal are usually not easy to qualify.
- Many banks today are not of business because of poor and bad credit management.
- This study is therefore aimed at providing an avenue for efficient credit management.
1.7 Scope Of The Study
The study of the effective credit management on the profitability of commercial banks will review to an extent the level at which the bank is fairing.
This study will also review how positive and unable the bank is in finding project through lending and how lending and borrowing has affected the profitability and liquidity of commercial banks.
The choice of united bank being necessary is that it has passed through all the era of banking policies and regulations in the country.
1.8 Limitations Of The Study
The study is limited to time. Information used are not all product of primary research but are largely obtained from banks and books. One of the major limitations is the respondents to the questions asked to the bankers who were not ready to reveal or disclose certain information concerning their banks to outsiders.
1.9 Definition Of Terms
This include loans, overdraft, advances, commercial papers, lease, and guarantee etc. that is those form of credit connected with banks credit risk.
A credit facility extended by one party (lender) to another (borrower) subject to specific terms and condition agreed upon by both parties.
All types of credit facilities granted by banks to their customers for whom the customers are unable to repay within the agreed time and conditions.
Credit facility granted for a period normally more than one year.
Money of goods that can be sold or repay debts
A promise usually in writing by one person to pay in the present future debts of another, such a promise must be made to the person to whom the debt is or will be due or paid.
Collection of shares or investment.
Goods or property pledged against money borrowed.
5.0 Summary, Conclusion And Recommendation
Banks are financial houses established for the purpose of accepting deposit and lending out fund and other services (commercial banks). Granting of loans and advances of credit is one of the banks services of investment policies as banks (commercial banks) are not charitable organization, they are to maximize profit.
There are many opportunities for profit improvement or maximization through effective credit management since lending of money has been widely known and accepted as an important function of the banking industry i.e. commercial banks, a function which the industry is better placed to perform in view of its position as a financial intermediary.
Here it is discovered that effective credit management on the profitability of commercial banks is important in the banking industries. Because investigation is made on the types of customers that benefit most in terms of credit facilities of the commercial banks. Banks grant loans to credit worthy customers, they consider cannons of a good lending before giving out credit.
The researcher used relevant information on total loans; total classified debts, total secured and unsecured loans, performing sub standard, doubtful and lost loans.
An investigation is made on the types of customers that benefit most in terms of credit facilities of the commercial bank. The bank places much emphasis on secured lending rather than viability of the business, proper attention by the bank gives on Cannons of good lending in appraising loan request.
To manage loan or credit efficiency, effort should be made to obey and respect the Cannons of good lending and ensure accurate control and supervision of the facility extended within the framework of government regulations and guidelines. Sound lending requires a clear, well articulated and easily accessible policy document, which spells out the philosophy of lending.
In conclusion, therefore, the researcher believed that for efficiently and effective credit management, which enhances profitability ratio, banks should ensure the following;
- That they understand the environment
- Adhered relevant government policy
- Adhere to the cannons of good lending
- Make adequate provision for loans.
Having concluded the study, the researcher would not advocate that traditional methods of lending to which bankers have become accustomed to be jettisoned.
Rather the researcher holds the view that the traditional tolls be leaded with more modern and scientific techniques to minimize decision errors and ensure more effective credit management level, which increase profit level.
The following recommendation is therefore made;
- The credit department should be adequately staffed with qualified and resourceful officers capable of making resolvable decisions based on credit analysis.
- Staff should benefit from regular training programmes in lending appraisal.
- Bankers should lay more emphasis on the integrity of the borrower, the ability of the project to pay itself with previous experience.
- Commercial banks should try as much as possible to adhere to the prudential guidelines initiative and instructions since they are found to be enormously beneficial to credit management.
- Government should try to reduce the incidence of conflict policy pronouncement, which has an adverse effect on the business projections.
- Lastly, commercial banks should be very provident in reporting their project. It is hoped that these recommendations if strictly adhere to credit appraisal would be more precise and the incidence of bad debts would be drastically. This will lead to efficient credit management in commercial banks which will increase the profitability ratio of commercial banks.
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