Effective Credit Administration As An Antidote To Corporate Failure
One of the major problems confronting the Nigerian banking industry today is the increasing incidence of loan defaults and consequent loan losses which manifested on the profitability of the banks, with huge uncollectible loans and advances. This study therefore, examines the effects of credit administration as an antidote to corporate failure. We used three Banks for our analysis in order to get answers to our research Question. From the study the results show that there is significant effect between loans and advances and its profitability which is an antidote for corporate failure. In order words this means that there is a significant effect between the way the banks manage their credits portfolio and the profitability of the banks.
1.1 Background to the Study
The concept of credit can be traced back in history and it was not appreciated until and after the Second World War when it was largely appreciated in Europe and later in Africa (Kiiru, 2004). Credit risk management has been an integral part of the loan process in banking business. Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed. (Kargi, 2011).When banks grant loans, they expect the customers to repay the principal and interest on an agreed date.
Banks and their customers have different perceptions of bank credit or lending. To most bankers, credit is not a capital–market activity, yet to many corporate customers’ particularly small and medium-sized companies, bank loans are their most important source of capital. The demand for medium-term or long-term lending comes mainly from commercial and industrial companies and from private individuals. However, amongst all the services provided by banks, credit creation is the main income generating activity for the banks. But this activity involves extremely high risks to both the lender (financial institution) and the borrower (client). The risk of a trading partner not fulfilling his or her obligation as per the contract can greatly hinder the smooth functioning of a bank’s operation. On the other hand, a bank with high credit risk faces potential insolvency and this does not give depositors confidence to place deposits with it.
Some financial institutions have collapsed or experienced financial problems due to inefficient credit risk management systems typified by high levels of insider loans, speculative lending, and high concentration of credit in certain sectors among other issues. Credit risk management practices and poor credit quality continue to be a dominant cause of bank failures and banking crises worldwide. Again, Financial Institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties (Gil, 1994).
1.2 Statement of the Problem:
One of the major problems confronting the banking industry today is the increasing incidence of loan defaults and consequent loan losses which manifested on the profitability of the banks. Sequel to increasing incidence of huge bad debts in the Nigerian banking industry, insider’s abuses, management’s competence have been called to question. Bad debts, it must be noted occur due to the inability of the bank’s management to recover loans granted to customers.
It is reported in the NDIC 1989 Annual Report and Accounts that the deteriorating health of the banking industry is on the increase. With reasons adduced for this development in the report to include the following amongst others:-
- Huge uncollectible loans and advances;
- The financing of long-term assets with short-term funds;
- Unsound management practices;
- Reliance on volatile deposits;
- Non-standardization of accounting practices and financial reportage.
These prompted the issuance of CBN Prudential Guideline in 1990, to sanitize the banking system. Many banks even after the liquidation of several banks in 1998, still paraded inexperience and “glaucoma” visionary managers. Also many banks lack well articulated credit policies, efficient and effective internal control, and high quality professional and motivated staff. It is in line of this that the study seeks to access effective credit administration as an antidote to corporate failure.
1.3 Objective of the Study
The basic objective of the study is to assess the performance of Nigerian banks in administering loans and advances in their asset structure and how the management serves as an antidote to the failure of the banks.
The specific/objectives of the study included the following:-
- To examine the Profitability; Loans and Advances of selected Banks
- To determine the positive relationship existing between the profitability of the banks with their loan and advances position.
- The effects of credit administration as an antidote to corporate failure among Nigerian banks
1.4 Research Questions
- What is the Profitability; Loans and Advances of selected Banks?
- What is the relationship existing between the profitability of the banks with their loan and advances position?
- What are the effects of credit administration as an antidote to corporate failure among Nigerian banks?
Scope of the Study
The Study looks at the effects of administration of credit facility (Loans and advances) as an antidote to corporate failure Nigerian Banks using some selected banks as case study.
These banks include; First Bank of Nigeria Plc. (FBN), Union Bank of Nigeria Plc. (UBN), and United Bank for Africa (UBA). The study period is 10 years spanning from 2007 to 2018. The period chosen, therefore, will be of immense value in establishing trends in loan management over the period and will aid in predicting the likely future trend. Knowledge of the likely future trend will be of help to the bank management in bringing the future under control for effective and efficient management of credit (Loans and advance)portfolio.
1.5 Significance of the Study
A study of this nature is in valuable not only to the bank’s management, other banks, share-holders, potential investors and depositors but to the economy as a whole.
To the bank’s management and managers of other banks, the study draws their attention to the importance of this asset (loans and advances) to the overall success and growth of their organizations. As the largest component of a bank’s total assets, there is the need for its effective and efficient management. Besides, loans and advances are also the most profitable and risky assets, hence the need for proper management for maximum profitability while minimizing the risk element.
1.6 Definition of Terms
Credit Risk Management:
Credit risk management is defined as identification, measurement, monitoring and control of risk arising from the possibility of default in loan repayments. Credit risk management in this study was measured looking at Credit Terms, Collection policy, Client Appraisal.
Credit terms are defined as specific time period, rate of interest and penalties imposed to borrowers for late payment under which credit is advanced by financial institutions. This was measured using mean and standard deviation on a 5 Likert scale. Strongly agree = 5 (very high mean) with mean range of 4.20-5.00, agree = 4 (high mean) with mean range of 3.40-4.19, Not sure = 3 (average mean) with a mean range of 2.60-3.39, disagree = 2 (low mean) with a mean range of 1.80-2.59 and strongly disagree =1 (very low mean) with mean range of 1.00-1.79.
The steps that a company follows in ensuring timely payment of its accounts receivable. Collection policies vary by company. An example of the steps a company can takes involves a friendly phone call to make sure payment is made on time, followed by a firm phone call when a payment is late, followed by a threatening letter, and finally turning the client over to a collection agency. This was measured using mean and standard deviation on a 5 Likert scale. Strongly agree = 5 (very high mean) with mean range of 4.20-5.00, agree = 4 (high mean) with a mean range of 3.40-4.19, Not sure = 3 (average mean) with mean range of 2.60-3.39, disagree = 2 (low mean) with a mean range of 1.80-2.59 and strongly disagree = 1 (very low mean) with mean range of 1.00-1.79.
Loan performance is seen as indicator of microfinance to make repayment in due time. This is measured under repayment rate and recovery rate. Repayment Rate: Repayment rate is the act of paying back money previously borrowed from a lender. This is measured using percentage and from 95-100 percent means repayment is very high.
The recovery rate is the extent to which principal and accrued interest on a debt instrument that is in default can be recovered, expressed as a percentage of the instrument’s face value. The recovery rate can also be defined as the value of a security when it emerges from default. This was measured using percentages whereby from 80-94 percent was high; 70-79 percent was moderate, 69-50 low and less than 50 was very low.
Summary, Conclusion and Recommendations
One of the major problems confronting the Nigerian banking industry today is the increasing incidence of loan defaults and consequent loan losses which manifested on the profitability of the banks, huge uncollectible loans and advances.
Many banks even after the liquidation of several banks in 1998, still paraded inexperience and “glaucoma” visionary managers administrators. There is a growing concern in these quarters of increased potential for bank failures and bank distress if the problem is not urgently addressed. This study therefore, examines the impact of loans and advances on the profitability of Nigerian banks. The study found out that at 5 percent level of significant, the calculated value of the z value is greater than the tabulated value in most of the banks considered in the study.
Therefore, this leads to the results that there is significant relationship between loans and advances and its profitability. In order words this means that there is a significant relationship between the way the banks manage their credits and the profitability of the banks.
To assess the strength of the relationship, we employ the Pearson’s Product Moment Coefficient Correlation and we found that the value of r from the SPSS output indicated that the value of r in most of the banks show a value more than 50 percent. This reflects strong positive relationship between the amount of loans granted by the banks and the bank’s profitability.
Similarly the value of r2 indicated a value greater than 50 percent which, this implies that more than 50% of the variation in the bank’s profitability is as a result of loans and advances management.
Based on the findings of the study the following conclusions were made:
First, the variations in the bank’s profitability are as a result of the problems of the administration and management of the loans and advances of the banks. This can be observed as most of the banks have more than 50 percent of their profitability being determined by the fluctuations in the way the loans and advances were handled.
Furthermore the study established that the effects of credit management on the profitability of the banks studied cut across all the banks, the Kruscal Wallis statistical tests suggests that the z value calculated is less than the tabulated z value in most cases. This means that the effect of the credit management on the profitability of the banks is almost on all the banks. This leads to the conclusion that the way credit is being administered by the banks leads to their profitability and determines its survival as a corporate entity.
The following recommendations have been made based on the findings of the study:
There is the need for a strong policy on the management of banks’ credit facility. This involves the need for control at the various stages of collecting loans and advances in the banks.
Furthermore, banks must ensure strict tradeoff between the liquidity and the profitability of the banks. This will ensure strict compliance with the money being kept by the bank and the amount granted for loans and advances.
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