Effect Of Credit Management On The Profitability Of Nigerian Deposit Money Banks (A Study Of Selected Deposit Banks)
This research work is determine, “effect of credit management on the profitability of Nigerian deposit money banks using First Bank of Nigeria plc as a case study. It is also examine the performance of banks based on its ability to generate income through the provision of various credit management service to customers. The project employed the use of questionnaire to sources of data which is administered to the banks staff as well as personnel interview and observation while the collected data was analyzed through the use of regression analysis in the testing of hypothesis. The result shows that credit management reduces the level of fraudulent practices in banks and boost its profitability. Finally, it is clear in the finding that a lot still need to be done in the area of innovation and regulatory requirement to enhance its better performance before banks can reap the benefit of credit management service.
1.1 Background of Study
It has become necessary to take a cursory look at the concept of debts, its ramification and problems associated with management. The issue of problem associated with loans advance management prompts the this central bank of Nigeria (CBN) to reduce the guidelines in a circular entitled “prudential guidelines for licensed Banks” the main purpose of this, is to ensure that the financial guideline ensure conformity with stand to facilitate comparison across banks. The true financial position of bank is often obscured by the accounting period involving its assets and liabilities. The prudential guidelines focus o the assets side of banks balance sheet i.e. loans and advances.In the past, bank different scientifically on the condition under which loan is classified recoverable, doubtful or lost. As such conditions were inherently judgment and there were high potentials for substantial under provision implying that many banks could appear healthier than they really are.Total saving deposit in the commercial banking system represented 85.3% and 8.3%. such saving deposit in the financial system in this period respectively consequently, it is obvious from forgoing, that commercial banks occupy a strategic position in the economy and are able to influence the course of event in the economy. However, numerous complaints have been made against them by the general public (especially their customers) and the monetary authority as regard their inability to meet the demand for credit by their non-challant attitude in respect of the various monetary policies and their non- fulfillment of the credit guidelines on the hand.
The techniques employed by banks in this intermediary function should provide them with perfect knowledge of the out comes of lending such that funds will be allocated to investment in which the profitability of full payment is certain. Virtually all lending decisions are made under creditors on uncertainty, the credit and uncertainty associated with lending decision. The statement implies that if credits are to be money deposit banks should be based less in quantitative data and more on principles too subjective to provide sound and unbiased judgment. Furthermore, the banks depend heavily on historical information as a basis for decision making.
Apparently aware of the inadequate of his decision base, the bank lending has often sought solace in tangible and marketable assets as security is an insurance. The increasing trend of provisions for doubtful in most money-deposit banks is a major source of concern not to management but also top the shareholders who are becoming more aware of the dangers posed ,by these credits. Credit destroy part of the dangers posed by these credit. Credit destroy part of the earning assets of banks such as loans and advances which have been described as the liquidity and solvency which generate two major problem, that is profitability and liquidity, has to earn sufficient income to meet its operating costs and to have adequate return on to its investments.
1.2 Statement of the Problem
The problem for this study is to appraise the landing and credit management policies of a typical money-depot bank (the first bank of Nigeria plc) with a view to examine the inadequacies in the system and to suggest policy recommendation that would go a long way in bringing about an efficient and optimal lending pattern in the Nigeria economy.
Again, experience may arise in respect of lapses on the part of the banks credit officers. For instance there may be excesses over approved facility, unformatted facilities and expired facilities not renewed on time. In each of these cases the customers may easily deny even owning the bank all or part of the amount.
1.3 Objective of the Study
The main purpose of this study is to examine the effects of loans and advances management on profitability of Nigerian banks.
- Determine the impact of non-performing loans on performance of banks in Nigeria
- Determine the impact of bad debts on performance of banks in Nigeria
- Determine the impact of capital adequacy on performance of banks in Nigeria
- Determine the impact of banks liquidity on performance of banks in Nigeria
1.4 Research Question
The study aims to answer the following research questions
- Do non-performing loans have any impact on the performance of banks in Nigeria?
- Do bad debts have any impact on the performance of banks in Nigeria?
- Does capital adequacy have any impact on the performance of banks in Nigeria?
- Does liquidity level have any impact on the performance of banks in Nigeria?
1.5 Research Hypothesis
This study is designed to test the following hypothesis
H01: Non-performing loans (NPLN) have no impact on the Return on Equity (ROE) of the Nigerian banking sector
H02: Total Bad debts (TBDR) have no impact on the Return on Equity (ROE) of banks in Nigeria
H03: Capital adequacy (CPAD) has no impact on the Return on Equity (ROE) of banks in Nigeria
1.6 Significance of the Study
The major justification of the study is that, an aggregate industry figures must be employed while the trends in the individual banks and the actual figure may vary widely from this, giving a different pattern of information and perhaps influence there from.
The data employed are secondary. It is important to keep in mind that constituencies are usually associated been obtained form sources considered must reliable in the present circumstances. The fact is that bank activities are influenced by social and political development in economy may not present the accurate position of the study.
1.7 Scope of the Study
As this study intends to determine the impact of credit management on the profitability of the Nigerian banking sector, this study will focus on the outside influences on the credit management of banks in terms of non-performing loans, bad debts, liquidity level and an extra internal influence which will be measured by the banks’ capital adequacy. Therefore, non- performing loans, bad debts, liquidity level and capital adequacy will be used to measure banks’ credit management, while bank performance for the purpose of this study will be measured by the return on equity (ROE) which is the earning power of the shareholders’ equity (i.e. the amount of money that shareholders’ fund is able to generate yearly).
1.8 Limitation of the Study
During the course of written this research work, the respondent that justify the question took a lot of time before making an effect on the questionnaire paper.
The time for the research works is so short to go on extra mile for move data.
This research work will be limited to the volume of information acquired through materials like national dailies, periodic journals, text books speeches, internet materials and write-ups on related subject.
Lack of Adequate Finance:
During the course of writing this research, there is lack of finance to travel from one place to another place for the collection of more data for the research work.
Unco-operate Attitude of Respondents:
As it is unduly know that banks are often busy, so questionnaire administration were not answered very well because majority of the staff were occupied with the customers. This constraints might be regard as the non-response during peak periods.
1.9 Definition of Terms
These are terms that can be found in this research project:
An asset can be anything owned by a business organization or individuals which has commercial or exchange value Olakanmi K.O (2001)
This is the banks strong room where money and valuable materials are kept. RALP K.O (1980)
Issue of banks notes by the banks which are not having gold banking
This includes both paper money and metallic money coins. This term is generally used for money. Femi Aborisade (1997)
The bank and the financial institution Decree of 1991 (BOFID) section b1 defined bank any person receiving deposit on current accounts or other similar accounting paying or collecting of cheques drawn or paid in by customers.
Provision of Finance:
Such other business as the governor of the central bank may resonate.
- First bank Nigeria plc: This can be said to be bank established with the aim of maximizing profits.
- Financial institutions that engage in financial intermediator that is, process of mobilizing deposit from the surplus sector and lending it to deficit sector and lending sector for investment.
1.10 Organizations of the Study
The chapter one consist of the introductory part of the study which includes the study background, the statement of the research problem, the study objective and scope of the study.
The second chapter is a critical review of other literatures relevant to the study and its objectives including the theoretical framework for the study. While the third chapter is methods of data collection, sampling and data analysis used in conducting the study. The fourth chapter centres around the research findings including an analysis of how it relates to previous findings. The fifth chapter consists of the summary of findings, conclusion and recommendations base on the study objectives.
Summary, Conclusion and Recommendation
This aim of this study is to determine the effect of credit management on the profitability of Nigerian deposit money banks (a study of selected deposit banks). It is also examine the performance of banks based on its ability to generate income through the provision of various credit management service to customers. Survey research design was employed for the study and with the convenience sampling the method, 80 participant was enrolled for the study of which 77 was validated for the study. The project employed the use of questionnaire to sources of data which is administered to the banks staff as well as personnel interview and observation while the collected data was analyzed through the use of regression analysis in the testing of hypothesis.
In this fast economic world the banks are considered as backbone for the acceleration of economic activities because they play pivotal role but banks have to face several types of risks because risk is inherited to banking operations and the most severe one is credit risk. The continuity of business of the banks is only possible if the business of the bank is not damaged by the negative winds of credit risk. The roles of deposit money banks in financial sector and in Nigeria economy cannot be undermined. They engage in serious financial intermediation where funds are taken from the surplus units and made available to the deficit units. This role exposes them to various types of risks and one of which is credit risk. Sound credit management is requisite for banks to overcome the risk associated with credit management.
Findings from the study revealed that shows that credit management reduces the level of fraudulent practices in banks and boost its profitability. Findings from the study also revealed that there is need for banking sector to operate with a standard credit policy. Also The result shows that In first bank plc, there is available system for appraising of loan request before they are granted. More so, the result shows that financial statement is important in analyzing reports.
In line with the findings of the study, the study recommends:
- The urgent need for deposit money banks in Nigeria to intensify their capacity in credit analysis and loan administration while the regulatory authority should pay more attention to banks’ compliance to relevant provisions of the Bank and other Financial Institutions Act (1999) as emended and other prudential guidelines.
- The management of banks especially credit officers must do diligence by adhering to prudential guidelines when given out credit facilities.
- Banks must put in place sound credit-granting process, strictly hold fast to know your customer (KYC) system, applying effective measures in measuring and monitoring of credit and ensure effective controls over credit risk.
- The commercial banks should ensure guarantee of credits which would serve as a shield against credit loss of customer’s fund. Small Deposit Money Banks which are poorly capitalized should not offer certain categories of credit facilities. Thus, the worth of capital for a bank serves as a shield against loss of depositors’ funds. Nigerian deposit money banks should be well capitalized even without the ‘regulatory eyes’ of the authority.
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