Effect Of Credit Management In Banks Profitability And Growth In Nigeria Economy (A Case Study Of Central Bank Of Nigeria Ilorin Branch)
1.1 Background of the Study
Bank lending evolved from the beginning when the goldsmith discovered that only small proportion of the money kept with him to save was in fact required by the depositor at any point in time and that he could safely lend the rest to borrowers and charge interest thereon.
Commercial Banks hinged their consistent existence in the profession on profit making or profitability. Hence, it is chiefly regarded as aspect of financial operation system with a very high risk business. In definition, commercial banks are seen as a financial institution setup by individual(s) and even the government for keeping and lending money to their respective customers with the view of making profit from such transaction.
The place of commercial banking in the national polity is so peculiar such that the banks engaging in commercial activities are very important in the achievement of most governmental, economic and fiscal policies objectives. One of the major aspects of the business of commercial banks is that of extending credit to other sectors of the economy for their smooth operation. The process of extending their credit is however known as “LENDING”
However, undertaking the lending function exposes the commercial banks to several risks, particularly credit risk, which is the risk that bank will lose either the whole of the principal of part of it or the interest thereof.
Lending services by banks is being managed by the credit management portfolio of the bank. To ensure proper management therefore, credit management cannot be overemphasized.
According to “PANDY” (2008) Credit Management can be defined as the procedure, steps and action taken in the loan recovery and lending a stated in the credit. Policy manual. Credit management concern itself with the formulation of credit policies with frame work of banks overall corporate objectives.
Credit policy influences the management of credit. A good policy must adequately provide and state procedure in granting different types of credit, credit portfolio and policies for lending officers.
Apparently, the role of commercial bank is basically intermediation. This involves the act of mobilizing fund the surplus areas as deposits and passing of these funds to the difficult area as loans and advances. The depositors that keep their money with the banks do so, based on trust they expect to credit their money back on demand or as agreed upon.
Consequently, the commercial bank is faced with the responsibility of not only ensuring that the loans and advance are repaid as at when due, but also ensuring the depositors can have their funds on demand or as agreed upon, the way and manner the lending function is carried out in any commercial bank may have far reaching implications on the liquidity of the banks. More so, the lending functions also affect the profitability of the bank as well as its continued existence and future survivals.
1.2 Statement of the Problems
Lending through very profitable and important to the bank and customer posses some risk. Distress in the commercial banking industry can be attributed to poor credit management and loan policy, many loans have proven bad due to non- repayment by the customers. Inconsistency and inefficiency of lending officers to make appropriate judgment in the allocation of loans.
As a result of the complexity and inefficiencies in the lending function of the banks, this study is intended to examine how a well articulated credit policy and credit management can reduce to a considerable extent. The research study provides answer to the following questions:-
- What are the practices of Nigerian banks in their lending function and in the management of loans and advances?
- What are the general principles and concept of lending in banking?
- What benefit and impact can efficient and effective lending function can have on the bank, the customers, the banking system and the economy at large?
- What significant steps and action can be taken to drastically reduce the incidence and the causes of bad problem loans, and also to reduce bad lending?
- What are the importance of lending?
1.3 Objectives of the Study
- To highlight the general principles and concept of lending banking industry.
- To determine and know whether commercial banks follow the general acceptable principle and practices of lending in Nigeria.
- To examine the benefits and impacts an efficient and effective lending function can have on the banks, the customers and the economy at large.
- To discuss significant steps and action that can be effective completion and quality of the research work.
- To discuss the importance of lending and credit management.
1.4 Significance of the Study
Finding from this study will be used to commercial banks, in the sense that it would let the bank clearly understand and appreciate the appropriateness of proper lending and credit management on banks profitability growth, as a useful means for banks to be able to meet their day to day obligations.
Also, effective credit management help in enforcing government, laid down rules and regulations pertaining to lending of a certain amount of money and also at a particular point in time.
The study will also be benefit to the students in knowing the rules and principles guarding lending and credit management for future career.
Lastly, the study will also be of benefit to the public (Bank-Customer) to let them know that there are principles for lending; this will make them to be prepare for any future borrowing.
1.5 Limitations of the Study
This study has chosen Central Bank of Nigeria out of the twenty four mega banks to critically examine the effect of lending and credit management on banks profitability growth
However, the research work has been constrained as to time, lack of recent and adequate materials. Lack of corporation of the case study. Hence, effort has been made to ensure the above limitation did not hinder effective completion and quality of the research work.
1.6 Research Methodology
The research work on the effect of the lending and credit management on the banks profitability and growth. The research work were gathered from two main sources of data i.e. primary and secondary sources of data.
The primary data employed include questionnaire and interview, while the secondary data include textbooks, internet, journals, current annual reports e.t.c.
1.7 Definition of Terms
It involves the granting of loans and advances to various customers of the bank.
It is the transaction between two parties in which one, the creditor or lender supplies goods money return for promised future payment by the other known as the debtor or borrower.
This is the process of designing and maintaining an environment in which individual working together in group efficiently accomplishes selected aim.
Is the process of ensuring that all loans and advances, banking or accommodation granted to a customer by a bank are well managed to ensure that the facility run to a satisfaction according to the term governing them are ultimately on the due data.
This is the ability of banks to convert assets into case with minimum risk cost and delay.
This is the ability of banks to make profit for its shareholder and the ability to have left over after all expenses have been deducted with out any liability.
This is the situation whereby the outcome of an occurrence hence a known or estimable probability.
These are debts that are irremovable or uncountable and no longer bankable assets, they are debt that have not been and are not expected to be paid.
These are loans and advances upon which the bank has experience default from customer in terms of repayment of the principal amount or interest.
1.8 Plan of the Study
Chapter one is the introduction aspect while chapter two is the literature review.
Chapter three deals with the research methodology and chapter four include the data presentation and analysis.
Finally, chapter five contains the findings, summary of the study, conclusion based on the data analyzed and recommendations of the study.
5.0 Summary, Conclusion and Recommendations
As revealed in the analysis of results in chapter four, from respondents to some questions, it can be seen that there is need for credit policy, which is being influenced by monetary guidelines, regulatory the limit of credit to customers and high level of supervision of loans granted.
Proper supervision posses caution, which well indicated in the credit policy, this is to ensure that the bad debt or losses are reduced considerably. These factors are inevitable when using credit policy and administering loans.
As can be deduced, if the bank is not careful in adhering to the specific credit limit, its customer will try to make the opportunity of acquiring credit above the set limit. The repayment may not be guarantee 100%, and should the customer in default in repayments, the assets of the bank gradually reduced.
The bank may then suffer financial constraint and distress, which may lead to liquidation or winding up of the bank. After credit has been granted, there is need for proper supervision. The specific methodology and procedure for monitoring loans must be ascertainable in the policy.
In preventing violation in the set rules of the regulation authorities, the reserve requirement and other directive that may be given from time to time must be adhered to; else it may lead to winding up or revocation of the bank’s license.
Lending administration can be more effective when credit policy is used. Credit policy provides a suitable guide for credit officers or administrators. Therefore, the bank to be fulfilled in carrying out its major function of lending, the formation and implementation of credit policy is very necessary.
For the growth, profitability and liquidity of the bank to attained the needed tools is a well-designed policy that would bring growth, sustained improvement in the development of the bank and the economy as a whole.
Finally, in any banking industry, aiming higher and desiring the growth and profitability of the bank, effective credit management or good principle of lending must strictly be adhered to.
The bank needs an effective and articulate credit policy to be able to carry out its lending function effectively. In doing this, the bank should put in place some planned programmes to improve the lending services of the bank, the skill level of staff and the welfare of its officers.
- Adequate staff training, seminars, training and workshops for the Credit officers and the banks staff which will enable them to make good and reliable decision in administering Loans.
- Bonuses in terms of improvement of staffs and leaves and work conditions etc. in order to boost the moral of the staff to put in their best in carrying out the appropriate duties, Credit Administration involves series of evaluation and decision making.
- The bank is faced with a fierce competition inherent in the banking sector, and a must strive to compare with its counterparts, therefore, any report of default is an indication of distress, the bank must scrutinize and evaluate new business opportunities and adjust to the change in the economic environment and the regulatory environment.
- Members of the public should be enlightened about the operation of banks, new events in banking and available banking services.
- Necessary banks habit, ethic and seminars can be organized such as public enlightenment or bank sponsored programmes on banking services in Nigeria.
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