Credit Management, Credit Policy And The Performing Of Bank In Akure, Ondo State Nigeria
This study was carried out with the purpose of analyzing Credit management, credit policy and the performing of Bank in Akure, ondo state Nigeria. Specifically, the study sought to establish whether there is a relationship between credit policy and performance, capital adequacy and performance and credit risk control and performance. In achieving the objectives assigned by the study, a causal research design was undertaken and that was facilitated by the use of secondary data which was obtained from published audited financial statements of commercial banks and the BOU annual supervision reports. The study used universal sampling techniques, where 7 banks licensed and operational in Akure, Ondo state, Nigeria were selected, multiple regression was used. The findings indicated a significant relationship (r = 0.639) between credit management and the financial performance of commercial banks in Akure, Ondo state, Nigeria. The coefficient of determination R² was 0;408 meaning that credit management indicators explain up to 40.8% of variations in the financial performance of commercial banks in Akure, Ondo state, Nigeria. The results from the coefficients summary in the regression model indicate that the significance of coefficients of credit policy (LR), capital adequacy (CAR) and Credit Risk Control (NPL/TL) are – 0.031, -0.555 and -1.005 respectively. It was therefore found that both the CAR and the NPL/TL are significant though have an impact at different significance i.e. capital adequacy and Credit Risk control have a greater impact compared to Credit policy (LR) on the financial performance of commercial banks in Akure, Ondo state, Nigeria. It was established that there is no significant relationship between credit policy and performance of banks in Akure, Ondo state, Nigeria, however, a significant relationship between the credit risk control, capital adequacy and the performance of commercial banks was established. It was recommended that should use a moderate credit policy as a stringent credit will undermine the financial performance. Moreover, banks should seek to adequately control their credit risk by keeping lower their ratio of nonperforming loans which is the major determinant of commercial banks’ financial performance as shown in the study. The Central Bank of Nigeria should encourage banks in Akure, Ondo state, Nigeria to use credit metrics model in controlling its risks
KEYWORDS: credit management, credit policy, financial performance, commercial banks, Nigeria
1.1 Background of the Study
Credit is one of the many factors that can be used by a firm to influence demand for its products. According to Horne & Wachowicz (1998), firms can only benefit from credit if the profitability generated from increased sales exceeds the added costs of receivables. Myers & Brealey (2003) define credit as a process whereby possession of goods or services is allowed without spot payment upon a contractual agreement for later payment.
Timely identification of potential credit default is important as high default rates lead to decreased cash flows, lower liquidity levels and financial distress. In contrast, lower credit exposure means an optimal debtors’ level with reduced chances of bad debts and therefore financial health. According to Scheufler (2002), in today’s business environment risk management and improvement of cash flows are very challenging.
With the rise in bankruptcy rates, the probability of incurring losses has risen. Economic pressures and business practices are forcing organizations to slow payments while on the other hand resources for credit management are reduced despite the higher expectations. Therefore it is a necessity for credit professionals to search for opportunities to implement proven best practices. By upgrading your practices five common pitfalls can be avoided. Scheufler (2002) summarizes these pitfalls as failure to recognize potential frauds, underestimation of the contribution of current customers to bad debts, getting caught off guard by bankruptcies, failure to take full advantage of technology, and spending too much time and resources on credit evaluations that are not related to reduction of credit defaults.
Credit management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in credit irrespective of its business nature. It is the process to ensure that customers will pay for the products delivered or the services rendered. Myers & Brealey (2003) describe credit management as methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its effective management. It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting. Nelson (2002) views credit management as simply the means by which an entity manages its credit sales. It is a prerequisite for any entity dealing with credit transactions since it is impossible to have a zero credit or default risk.
The higher the amount of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are not collectible on time and urgent cash needs arise, a firm may result to borrowing and the opportunity cost is the interest expense paid. Nzotta (2004) opined that credit management greatly influences the success or failure of commercial banks and other financial institutions. This is because the failure of deposit banks is influenced to a large extent by the quality of credit decisions and thus the quality of the risky assets. He further notes that, credit management provides a leading indicator of the quality of deposit banks credit portfolio.
A key requirement for effective credit management is the ability to intelligently and efficiently manage customer credit lines. In order to minimize exposure to bad debt, over- reserving and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing payment patterns. Credit management starts with the sale and does not stop until the full and final payment has been received. It is as important as part of the deal as closing the sale. In fact, a sale is technically not a sale until the money has been collected. It follows that principles of goods lending shall be concerned with ensuring, so far as possible that the borrower will be able to make scheduled payments with interest in full and within the required time period otherwise, the profit from an interest earned is reduced or even wiped out by the bad debt when the customer eventually defaults. Credit management is concerned primarily with managing debtors and financing debts. The objectives of credit management can be stated as safe guarding the companies‟ investments in debtors and optimizing operational cash flows. Policies and procedures must be applied for granting credit to customers, collecting payment and limiting the risk of non-payments.
According to the business dictionary financial performance involves measuring the results of a firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added. Stoner (2003) as cited in Turyahebya (2013), defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In agreement with this, Sollenberg & Anderson (1995) assert that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. Hitt et al., (1996) believes that many firms’ low performance is the result of poorly performing assets.
Commercial banks earn financial revenue from loans and other financial services in the form of interest fees, penalties, and commissions. Financial revenue also includes income from other financial assets, such as investment income. Bank financial activities also generate various expenses, from general operating expenses and the cost of borrowing to provisioning for the potential loss from defaulted loans.
1.2 Statement of the Problem
Sound credit management is a prerequisite for a financial institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts increases as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective .Such delays on collecting cash from debtors as they fall due has serious financial problems, increased bad debts and affects customer relations. If payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put credit management at the ‘front end’ by managing it strategically.
JoEtta (2007) also conduct research on bank performance and credit risk management found that there is a significant relationship between financial institutions performance (in terms of profitability) and credit risk management (in terms of loan performance).
Lending or credit creation seek to maximize profitable objective of bank, the rate at which commercial banks borrow from the central bank has gone down to 7% from 7.5%. This is expected to facilitate commercial banks to borrow cheaply so that they also lend cheaply in an attempt to continue supporting Nigeria’s economy. The purpose of this study was to understand credit management, credit policy and the performing of Bank in Akure, ondo state Nigeria.
1.3 Objectives of the Study
The main objective of this study is to examine credit management, credit policy and the performing of Bank in Akure, ondo state Nigeria. Precisely, this study seeks:
- To determine whether there is any significant relationship between the credit policy and the financial performance of banks in Akure, ondo state Nigeria.
- To determine whether there is any significant influence of the credit risk control on the financial performance of banks in Akure, ondo state Nigeria.
- To determine whether there is any significant relationship between capital adequacy ratio and financial soundness of banks in Akure, ondo state Nigeria.
1.4 Research Hypotheses
The following null hypotheses will be used to validate this study:
- H01: There is no significant relationship between the credit policy and the financial performance of banks in Akure, Ondo state Nigeria.
- H02. There is no a significant influence of the credit risk control on the financial performance of banks in Akure, Ondo state Nigeria.
- H03. There is no significant relationship between capital adequacy ratio and financial soundness of banks in Akure, Ondo state Nigeria.
1.5 Significance of the Study
This study will be useful to all banks in Nigeria, and also to the central bank of Nigeria, as it will help enlighten them on credit management, credit policy and how beneficial it is to banks. It will also enlighten the banking sector on the relationship between credit management, credit policy and the performance of banks.
For students and researchers, this study will serve as a source of information for them when conducting research on related topics.
1.6 Scope of the Study
This study is focused on credit management, credit policy and the performing of Bank in Akure, Ondo state Nigeria. Precisely, this study is focused on determining whether there is any significant relationship between the credit policy and the financial performance of banks in Akure, ondo state Nigeria, determining whether there is any significant influence of the credit risk control on the financial performance of banks in Akure, ondo state Nigeria, and determining determine whether there is any significant relationship between capital adequacy ratio and financial soundness of banks in Akure, ondo state Nigeria.
Selected banks in Akure, Ondo state, Nigeria will be the respondents of this study.
1.7 Limitations of the Study
This study confined to the use of secondary data which raises reliability issues of the data used. Relying on the secondary data means that any error in the source will also be reflected in the research, that is, errors and assumptions not disclosed in the source documents will also reoccur in the research.
A salient limitation of this paper is the period for which the data is sampled. The sample horizon for this research is short compared to other related studies in the literature. To address this limitation, future research can increase the sample size and also examine the effect of other credit management variables on the financial performance of banks.
Moreover, no moderation or mediation effects were measured in studying the relationship between credit management indicators with the performance of banks in Akure, Ondo state Nigeria; moderators or mediators should be included in future studies to come up with a model that can significantly explain the performance of banks.
1.8 Definition of Terms
Are the various procedures put in place to prevent, minimize or mitigate the challenges associated with issuance of credit.
Is an institutional method for analyzing credit requests and its decision criteria for accepting or rejecting applications. A credit policy is important in the management of accounts receivables.
Summary Conclusion and Recommendation
Credit Management and Performance of Commercial Banks
The study found that that there is a correlation between the observed and predicted values of financial performance. Table 6 shows R-square representing the proportion of the variability in one series that can be explained by the variability of one or more series in a regression model; the regression model for the 6 years studied helped us explain almost half of variations in the financial performance based on credit management components.
The findings are in line with Oludhe (2011), who, in a similar study conducted in Kenya, he argues that credit risk management is related to financial performance as they influence earnings of banks. The study corroborates the findings of Okoth et al. (2013) indicating that there is a relationship between credit management and bank performance. It was established that poor asset quality or high non-performing loans to total asset are related to poor bank performance.
Credit Management Components and Banks Performance
Table 2 shows the correlation matrix of the credit management indicators t o financial performance. From table 2, capital adequacy ratio was negatively related to performance in a significant proportion; this is in line with the conventional argument that higher capital ratios encourage banks to invest in safer assets, such as lower-risk loans or securities, which may affect bank performance (Okoth et al. 2013). Credit risk Control (NPL/TL) had a weak relationship between asset quality and financial performance of commercial banks in Uganda, this is in accordance with a study conducted in Kenya by Jackson (2011). Credit policy (LR) had also a weak relationship with financial performance.
The objective of the study was to establish the effects of credit management on the financial performance of Banks in Akure, Ondo state, Nigeria. This was a descriptive and cross- sectional study. It adopted a universal sampling technique were all the commercial banks licensed and operational in Akure, Ondo state, Nigeria from 2012 was selected (24 banks).
The study used secondary data obtained from the audited financial statements of Banks in Uganda for the years 2012-2017. The variables of interest i.e. Credit Policy (LR), capital adequacy (CAR) and credit risk control were entered into statistical package for social sciences model and analyzed to examine their relationship and hence achieve the research objective.
The coefficients were put into a regression model to determine the relationship between independent and dependent variables in attaining the desired results on the study of interest. It is evident from our statistics that the coefficients of credit management are negative meaning that there is a negative relationship between credit management indicators and the performance. The findings reveal that all indicators used of the credit management explain a mere 41% of variation of the financial performances of banks in Akure, Ondo state, Nigeria. This suggests that other factors apart from the credit policy, capital adequacy and credit risk control affect the financial performance of Banks in Akure, Ondo state, Nigeria.
In the conclusion the study is beyond doubt and abundantly clear that credit management, credit policy affects the performance of banks in Nigeria. From results obtained and analyzed, the study reveals that:
- There is a relationship between credit policy and financial performance,
- The extent banks use client appraisal in credit management in Akure, ondo state Nigeria is very high
- The extent banks use credit risk control in credit management in Akure, ondo state Nigeria is very high.
- The banks use collection policy in credit management in credit management in Akure, ondo state Nigeria is very high.
Recommendation on the basis of findings. The researcher made the following recommendation with the belief that when studied and applied, would help to increase the performance of banks.
The researcher recommends that:
- The researcher recommends that commercial banks should organize effectively its credit risk control department as the asset quality depends heavily on how well credit risks are controlled in a banking institution. Banks in their quest to a higher financial performance should have to also concentrate on other factors affecting its operations.
- This study also recommends that commercial banks in Nigeria should use a moderate credit policy as a stringent credit will undermine the financial performance. Moreover, commercial banks should seek to adequately control their credit risk by keeping lower their ratio of nonperforming loans which is the major determinant of commercial banks’ financial performance as shown in the study. They should finally endeavor to holding adequate capital for the sake of liquidity and going concern even if it undermines to some extent their capital to maximize financial performance..
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