Credit Analysis And Loan Management In Commercial Banks In Nigeria (A Case Study Of First Bank Of Nigeria Plc And Fidelity Bank)
This study was focused on Credit analysis and loan management in Commercial Banks profitability using First Bank of Nigeria Plc and Fidelity bank as case study.
The quasi – experimental design was used which is often used by management scientists and social scientist. The population happens to be the whole commercial banks in Nigeria but for convince sake First Bank and United Bank were selected.
In using a non – conventional sampling method, a sample size of 100 banks staffs that made up of the managers and credit officers were selected.
Interesting the three hypothesis posed, the chi – square statistical tool was used and at 0.05 level of significance the null hypothesis for hypothesis I and 3 were rejected, thus accepting the alternative while the null hypothesis for hypothesis 2 was accepted.
The following conclusions were made: –
- That banks techniques for assessing the borrowers and management of the loans are satisfactory
- Borrowers are not affected by economic conditions hence they pay all or at the required time;
- Borrowers are able to repay the credit to given them because they divert it to areas known to the banks;
Finally recommendations were made based on the findings of the study;
- Any borrowers who default should not be given credit any longer by the bank, and this information should be passed to other bank so that they don’t make the mistake. The bank by doing so are saving themselves and at the same time being their brothers keepers, realizing the fact that all banks are partners in progress;
- Considering directly from (1) above, all the banks should meet and develops means by which they can know who and who have defaulted the banks. The research is asking them to write the names of such people in a book, “called credit defaulter book” the book should contain in defaulters names as well as the type of business they are in, date, why and the amount as well as the bank that was defaulted.
- The banks should keep a close watch at the officers often sent on inspection. The officer to be sent should not be the same per always with the report of the last person, any other officer can be sent. And the managers should ensure that they don’t make known in advance who has to go next. This method will cancel the plan of any borrowers and officer concerned. Thus enabling the banks to understand where, funds are diverted to unproductive uses, where possible professional in such areas can be called to do the job for a fee. And the cases where borrowers used bank loans to prosecute court cases and campaign for chieftaincy will stop because their influence on management or credit officers will stop.
- Banks should rely on borrowers feasibility studies especially designed forms of the banks is encouraged. It should be such that by the time the prospective borrowers finishes filling it, he must have disclosed more than what a feasibility report would make available.
- The capital department should make a proper documentation of any information relating to credit approved. Some should made available to the legal department or the banks so hector so that it will be possible for them to persecute offenders no entry should be left undone.
- Professional should be made credit managers. This makes it possible for scientific technical methods of assessing credit to be applied.
Table Of Contents
- Title page
- Certification page
- List of Table
- Table of Contents
- 1.1 General Overview of the Study
- 1.2 Statement of the Problems
- 1.3 Objectives of the Study
- 1.4 Scope of the Study
- 1.5 Statement of Hypothesis
- 1.6 Significance of the Research
- 1.7 Limitation of the Study
- 1.8 Definition of Terms
2.0 Literature Review
- 2.1 Theoretical Frame Work
- 2.2 History of Credit
- 2.3 Credit Concept and Loan Theory
- 2.4 Principle and Practical of Lending
- 2.5 Credit Analysis
- 2.6 The CS of Credit Analysis
- 2.7 Credit Risk Managements and Control
- 3.1 Introduction
- 3.2 The Research Design
- 3.3 Sampling Procedure
- 3.4 Data Connection Method
- 3.5 Data Analysis Techniques
4.0 Presentation and Analysis of Data
- 4.1 Data Presentation
- 4.2 Data Analysis
- 4.3 Testing of Hypothesis
5.0 Summary, Conclusion and Recommendations
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendations
1.1 General Overview Of The Study
Credit as generally understood would wide refers to the act of one person lending his/her own, money to another in return for a promise of the later to repay at some future date. The credit in banking refers to the transaction between a bank on one hand, and another party in which the bank supplies actual resources goods and services, securities or money. In turn for a promised future repayment by the others, debtors or borrowers (Encyclopedia Britannica, Vol. 6, 1969:713) “credit” has been defined also to be a “term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date” (New Encyclopedia, vol. 7, 1972:128).
The resources banks given out as credit are the income caring assets, which they get from customer. In this study, the word “BANKS” is used in the general sense to encompass commercial and merchant banks. But this study is particular on commercial banks as a result of the formal introduction of universal banking by the Central Bank of Nigeria (CBN) in January 2000, which among others abolishes the dichotomy between Merchant and Commercial banks, enabling every bank to uniform lience to undertake conventional banking functions.
Commercial bank as financial institution, which accepts demand and time deposits from businesses, institution, and individuals, who engages in both business and consumers lending. A commercial bank in the words of Samuelson (1999, Reneuced, P, 292) is the only organizations able to provide “bank money, it checkable demand deposit that are conveniently usable as a medium of exchange. According to (Akpakpan 2003: p.233). That commercial banks are the closet types of banks to the general public, and the main sources of finance for publics.
They accept different forms of deposits from members of the public, example, savings deposits, demands and time deposits. Also, they perform agency and credit services for customers, lend money to consumers and undertake investments. The are guided in all they do by the desire to make profit, by accepting deposits from the general public on which interest is paid normally, commercial banks, encourages the saving habit of the public. And by lending especially to small business operators, these classes of banks contribute substantially to the stimulation of the economy.
Individuals as well as business organization go for credits from commercial banks. (I. M. Pandy, 1998: p 376) in his analysis described trade credit to be the most important force in modern businesses. He say it is an essential marketing tool acting as bridge for the movement of goods through the production and distribution states to customer thus business firms, borrow to buy raw materials or expand factory building in order to increase income most individual demand credits to buy houses, accessories and cars etc.
The banks offers credit to individuals and business which are to be paid back, at since the bank is not a chartable organization but profit oriented as to continue their business activities. Therefore, in order for the banks to get back their resources from borrowers and even to ensure in the first place, that these credit are not being giving to wrong people and investments, the banks has to undertakes certain procedures. Hence the need for credit analysis and loans management.
Credit analysis involves the determination of the ability and willingness of a borrower to repay a requested loan in accordance with the term of the loan contract. Credit analysis therefore seeks to find answers to these two questions: –
- Can the borrower repay the loan?
- Will he or she repay the loan?
Therefore, credit analysis states the evaluation of the applicant financial condition. And in order to achieve this, different types of techniques are used by bank, for different types of customers, depending on the type of loan (short, medium or long – term) and the sector demanding it.
Commercial banks provided various types of credit as follows: –
Discounting of bills, overdraft, factoring, hire purchase/ Installment finance, mortgage finance, letter of credit, leasing, export and overseas finance and equity finance etc.
This study seeks to identify the variable responsible for the facilitation of credit to some sector and individuals that needs it and also to identify the problems of bad and doubtful debts amongst commercial banks and its publics. In order to achieve this, the study is focused on the First Bank of Nigeria Plc and United Bank for Africa Plc (UBA))
1.2 Statement Of The Problems
One of the banks greatest problems is of ensuring that bad debts are avoided. This is because, bad debt eats deep in to their profit and so making it impossible for them to meet whatever target they set for themselves. For examples, banks aggregated scattered monetary resources from the surplus economic, units through customer deposit and desegregate the already pooled resources to the deficit economic unit by way of loans to borrowers who undertakes to repay with interest at an agreed data, so as to enable the banks to pay – back to depositors on demand and to remain liquid for further transactions, it will result to insolvency of such bank. This is one of the major causes of bank distress in Nigeria.
Banks have not been finding it easy in this direction, especially as most of them are ignorant of the sources of loan default. This has consequently eroded the profit level and overall management of banks.
This research, therefore, is poised to finding out what problems commercial banks, encounter in analyzing their credits and managing their loan portfolio.
1.3 Objectives Of The Study
The objective of the study is credit in an economy cannot be over – emphasized. As credit contribute to increase in production of goods and services to the ultimate users and the purchase of these goods and services by the said users. In an economy where the use or availability of credit is conspicuously absent, the economic life of the people will be greatly affected. Since money is a scarce resources.
This is why those who do banks among the financial institution provide most of the credits. Therefore, the need for this research is to guide prospective borrowers as to what the banks expect them to satisfy before any credit is given them.
Also, the profit position of the banks will be increased because bad – debts will be a thing of history. Since the bank managers and credit officer who are yet to understand the concept and the need for credit analysis and loan management will now come to know it.
The objectives of these researches include: –
- To know banks requirement for credit
- To known the method used by banks in loan management
- To know what problem banks encounter in analyzing credit and managing loan;
- To give recommendation that will serve as solution to those problems
1.4 Scope Of The Study
This study focuses attention on First Bank of Nigeria Plc and United Bank for Africa Plc in Owerri. The study covers the period of 7 years on each of the banks. That is 1999 – 2003 for First Bank and 1998 – 2004 for United Bank for Africa (UBA). These periods are necessitated for the fact that bank distresses are limited. It is also observed that the period under study shows improvement on the line banking than earlier years.
1.5 Statement Of Hypothesis
- The Banks techniques of assessing the borrowers and management of the loans are satisfactory;
- The borrowers are affected by economy conditions, hence they pay all or at the required time;
- The borrowers are able to repay the credits give to them because they divert the resources to areas known to the banks
1.6 Significance Of The Research
The Important of the research will enable the commercial banks and the publics (ie the banks customer) to known the importance of credit to the growth of businesses in an economy). The study focuses on how commercial; banks analyze their credits and manage their loan portfolio, because lending decisions are characters with risk.
Therefore, banks must of necessity investigate and evaluate the factors that may give occasion to default in the repayment of a loan. This is also a feasibility study for banks, highlighting how if loan are properly managed and directed to profitable investment, there will be no record of bad debt but the tendency to engage more labour, which will bring forth an increase in aggregate demand, thus culminating in to increase in national income
To the student important of the research to the student is that it will enable them to known the methods used by banks in loans management and to give recommendation that will serve as solution to those problems.
To the borrowers, the importance of the research to the borrowers is to guide prospective borrowers as to what the banks expect them to satisfy before any credit is given to them.
1.7 Limitation Of The Study
(Baridam, 2002; 195), every study has certain limitations, which fall – short of the ideas which the researcher has established or recognized. Thus, this study is not an exemption and it is limited to insufficient data, fiancé and time.
This is one great problem of this research, the raw date was requested for, but it was turned down in place of the banks annual report for the period under study (1999 – 2003). The 1999 Annual report of First Bank of Nigeria is not available; it is therefore replace with that of 1998. Also, the years 2000 /2001 reports of United Bank for Africa UBA is not available at the bank, which is replaced with those of 1998 respectively.
Finance And Time
As a result of finance, this research limited its study to two banks. This is because most of the banks are not helping researchers in providing data. And there was no enough finance to travel to other places to get data, which would have enhanced more figures and tables in the illustrations of credits and advances made by banks over the years under study.
1.8 Definition Of Terms
Anything owned by a business or an individual, which has commercial or exclusive value.
Debts, which are not recoverable
Banker Unit Fund
This is a money market instrument in which banks as well as other financial institutions can invest part of their excess liquid resources
Certificates Of Deposits (CD)
Evidence of deposits with a bank repayable on a fixed date. It is a fully negotiable bearer document transferable by delivery
A banking cooperation which accepts demand deposit subject to cheques and makes short – term loans, regardless of the scope of its other services
The instructions used in the monetary policy of a Central Bank to banks and other financial institutions stating areas to channel funds and interest rate chargeable.
A deposit in which the customer had the right to withdraw money by cheque any day he wishes to do so without prior notice to the bank and interest as charged on the account
An acknowledgement of indebtedness, usually given by an incorporated company often under seal and frequently including a charge on the asset of the company
Discounting Of Bill
Acceptance of promissory notes or bills exchange by the banks for amounts less than the face value of the bills
Banking operation carried out within a country
The acquisition of money for capital or operating purposes in exchange for a share
Euro Dollar Market
Is a market or deposit of reserve currencies (Dollar, Pound sterling, duchtmart etc) in countries other than those of the countries owing them.
A means of advancing credit whereby the factor (eg, bank) purchases at a discount and without recourse to the accounts receivable of a firm. The factor assumes complete responsibility for credit investigation and collection.
Hire – Purchase Or Installment Finance
A form of credit where goods are supplied after payment of a deposit with an agreement to pay regular installment over a period of time.
Renting houses, land, equipment etc for a specified period of time, hiring of asset for the duration of its economic life
Short – Term Loan
Is a loan repayable within one year or less from the date of insurance
The proportion of interest in the capital of a company which a share holder has
A borrower who goes country to the terms of the loan agreement
Real Bills Of Exchange
These are bills supported by good in transit
5.0 Summary Of Findings, Conclusion And Recommendations
5.1 Summary Of Findings
To determine the above relationship, we computed ratios using commercial banks capital funds to total loans management and credit analysis to total deposit. It is believed that these are the most important induces for analyzing loan and credit analysis of an organization and are the ratios for assets (Loans and Advance) and liabilities (deposit) of the banks.
Commercial banks are credit analysis techniques for assessing the borrowers and management of the loans are satisfactory.
Our result we confirmed that after granting a loan, the banker must ensure that repayment of their advances does not fail by applying the afore mentioned techniques by making regular communication with the borrowers regular personal visits, regular review of accounts operations, regular analysis and revaluation of financial performance and control through draw downs or take downs
The theme that transpired all through the writing is one of finding the impact of credit analysis and loan management in commercial banks profitability. The impacts have been identified and adequate recommendations that will take care of them given the banks are therefore advised that in the interest of their banks objectives and economic development of this country, they should repay the solutions when any of the problems answers.
The banker and the borrowers after reading this report must have known that there is need for mutual cooperation so as to contribute immensely to the development of the economic. Borrowers should understand as well that banks are willing to lend money to them when their requirements are met. Through this, report borrowers would encounter minimum obstacles in obtaining suitable loan and an era of rapid development in various sectors of our economy will be witnessed in this country.
In as much as the above stated facts are important the Central Bank should realize that banks are bearing the brune of our inefficient businessmen, particularly those operating in small scale. This can be seen that the bank defaults most times and are prepared to face the penalty. Since most business that approach the banks for loan are small ones who find it difficult to get loan from the bank.
The impacts credit analysis and loan management have been identified and needs to be tackled by the managers and loan officers if they have to make the contribution require of them towards the attainment of their objectives in this direction to help them out, thus saving them the extra trouble of searching for the solutions: the following recommendation have been gives: –
- Any borrowers who default should not be given loan any longer by the bank, and this information should be passed to other banks so that they do not make the mistake. The bank by doing so are saving themselves and at the same time being their brothers keepers realizing the face that all banks are partners in progress;
- Considering directly from (1) above, all the banks should meet and develop a means by which they can know who and who have defaulted the banks. The research is asking them to write the names of such people in a book, “called loan defaulters book” the book should contain the defaulters names as well as the types of business(s) they are in, date, why and the amount as well as the bank that was defaulted. This will enable loan officers or bank manager to know at a glance a prospective borrowers who has defaulted any bank earlier;
- The bank should keep a close watch at the officers often sent on inspection, the officer to be sent should not be the same person always with the report of the last person, any other officer can be sent. And the managers should ensure that they don’t make known in advance who has to go with next this method will cancel the plan of any borrowers and officer stand when funds are diverted to unproductive uses, where possible professional in such areas can be called into do the job for a fee. And the cases where borrowers use bank loans to prosecute court cases and campaign for chieftaincy will stop because their influence on manager or loan officers will stop.
- Banks should reply on borrowers feasibility studies, specially designed forms of the bank is encouraged. It should be such that by the time the prospective borrowers finishes filling it, he must have disclosed more than what a feasibility report would make available.
- The loan department should make a proper documentation of any information relating to loan approved. Some should be made available to the legal department or the banks solicitor, so that it will be possible for them to prosecute offenders. No entry should be left undone;
- Professional should be made loan managers this make it possible for scientific / technical methods of assessing loan s to be applied;
- Professionals’ advice should be given alongside with the loan. The borrowers should be monitored closely. This should be done as to remedy the borrowers deficiency with the banks professional advice, thus emphasizing the need to employ professionals to handle loan methods.
- The bank should not waste time in disbursing the loan to the borrowers when found capable. This will enable the borrower to use the money at the right time, so that the borrowers envisaged conditions, will not escape or meet him thus making it impossible for him to meet his target. And it is known that if he does not make his target, paying back the loan becomes a problem.
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