Effectiveness Of Credit Management In The Banking Industry (A Case Study Of First Bank Of Nigeria Plc)
The research work is basically concerned with the effectiveness of credit management in the banking industry. It will also discuss about the emergence of banking industry in Nigeria.
The research will also discuss about the meaning, benefit of banking industry, purpose of banking industry, causes and types of lending and credit facility and tools used in loan monitoring and supervision.
This research work will be divided into five (5) chapters in – order to have a better understanding of the subject matter and aid locating of different chapters and numbers where they can be found.
- Chapter one will discuss the purpose and objectives of the study, scope and limitation of study.
- Chapter two will cover the reviewing of different literature from different author that are relevant to the project.
- Chapter three will be based on the research methods used in carrying out the research work.
- Chapter four is the presentation and analysis of data used.
- Finally chapter five will being summary of the work, recommendation, conclusions and references.
Table of Contents
- Title Page
- Table of Contents
- 1.1 Objective of the study
- 1.2 Scope of the study
- 1.3 Limitation of the study
- 1.4 Background of the study
- 1.5 Statement of the problem
- 1.6 Definition of terms
- 1.7 Plans of the study
2.0 Review of Related Literature
3.0 Research Methodology
- 3.1 Background of the studies
- 3.2 Source of data
- 3.3 Analysis of Data
- 3.4 Historical background of the case study
- 3.5 Corporate Organization structure
- 3.6 Sample Size
- 3.7 Population of the study
4.0 Data Presentation, Interpretation and Analysis
- 4.1 Source of Field Summary
- 4.2 Research findings
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Recommendation
- 5.3 Conclusion
It is an established fact that Banking industry occupies a prominent position in the Nigeria economy today. The significance of banks stem from the fact that they are custodians of the most sought after commodity on earth. Which is money. Availability of financial capital is obviously a condition for the rapid development and transformation of any national economy.
However, since the provision and efficient management of this scarce resource is best facilitated by the existence and appropriate function of financial institutions in the economy. It therefore follows that banks have a vital role to play by making their vast financial resources available for financing and promoting economic development banks play this unique role through granting of loans which constitute a vital function in banking operations, because of its direct effect on economic growth and business development. Loans and bank lending which is the primary function of commercial banks. It is the single most important source of gross income for the commercial banks.
Lending contributes the larger part to a bank’s profit, hence, it is the backbone of banking activities however, the degrees of risk associated with lending is proportionate to it contribution to profit.
As financial intermediaries, banks assist in channeling funds form surplus economic development generally. Since these funds are owned by third demands the depositors, prudence demands that such funds should be efficiently managed to sustain the confidence of depositors in the banking system and ensure the continued soundless of the system itself and thereby minimize risk of the bank failures.
Unlike the depositor who is certain of getting his money back on demand and, or when due a lending bankers is faced with the problem of either delay in reimbursement or out right non-reimbursement by the borrowers. As in case of National Bank of Nigeria which is being managed by Nigerian Deposit insurance corporation (NDIC) due to inability to meet its numerous customer’s cash needs. The bank was crippled by the non-payment of about N800 million Naira (eight Hundred million naira lent out to customers. Recovery of these huge debts became more difficult due to poor credit administration and control reflective in subjective appraisal of loan request, improper documentation, poor perfection of securities etc.
In January 1993, the newly reconstituted management of Owena Bank Plc, discovered several cases of expenses incurred but not properly booked, unearned income over statement and above all several unsecured, unanalyzed loans which are not charged off or provisioned lack of commercial orientation is also glaring in the management and administration of staff leans in Owena Bank Plc.
By February 1993, total outstanding staff loans was at over N60 million (sixty million Naira) exceed the bank’s paid gross loans. These loans are granted at 28% interest rate per annual against the prevailing cost of loans are said to have been used not for the purpose originally intended and are not support with documentation to secure the bank’s interest.
Many bank’s in Nigeria today are facing similar problems of national bank limited and owena bank plc stated above and many lead to bank failures if not urgently addressed. In fact, the number of banks sin operation remained at 90 as at end-December, 2002 following the insurance of an operating license to one bank (bond bank Ltd) and the revocation of the operating license of another (savannah bank plc) during the year.
Nevertheless, this worrisome position of banking industry in Nigeria possibly forms the federal government’s decision to amend C.B.N Decree 24 of 1991, which centers autonomy on the Apex Bank. This amendation granted a wider power to of bank’s debtors, in addition to the earlier provision in section 52 of the principal decree which authorizes the nation’s apex bank to compile and circulate to all banks in Nigeria a list of debtor whose outstand debts to any bank had been classified by bank examines as bad debts.
From the above therefore, the need for effective administration of credit to customers cannot be over-emphasized. Thus, the effective supervision and monitoring loans to ensure that they do not turn bad forms the theme of this study. A credit to beneficial to the bank only when the principle and interest are fully paid.
1.1 Purpose and Objective of the Study
The main purpose of the study is to measure the credit administration pattern of commercial banks using first bank Nigeria Plc as the case study.
The specific objectives of the study are:
- To examine the credit policy and practices of first bank
- To review the credit administration and control procedures in the bank.
- To examine the management of bad debts and recovery process in the bank.
- To measure the effective of the procedure adopted in B and C above.
- To identify constraints associated with loan management
- To make recommendations based on the finding of the study.
1.2 Scope of Study
The study covers lending operation of first bank Nigeria plc which constitute less than one percent of the total number of banks currently licensed to operate banking business in Nigeria in accordance to decree no 25 of 1991. also, within the bank, the study will not be restricted only to the banks on credit administration and control but all activities that makes effective management of credit.
1.3 Limitation of Study
Apart from the financial and time constraints that limited the scope of study, a bank selected out of 90 banks operating in the commercial banks in the country could not be a said to be a good representation or sample of banks required to generalized the lending policies and practices in the nigeria banking industry. It should also be noted that the officers of th bank are wary of disclosing certain or vital information often tagged as confidential because of the oath of secrecy’ sworn to by them. This equally limited the extend to which useful data were made available.
1.4 Background of the Study
First bank of Nigeria plc, for over a century, has distinguished itself as a leading banking institution and major contributor to the economic advancement and development of Nigeria.
Founded in 1894 by a shipping magnate from Liverpool, sir Alfred jones, the bank commenced as a small operation in the office elder Dempter and company in lagos.
The bank was incorporated as a limited liability company on Marc 31, 1894, with head office in Liverpool. It started business under the corporate name of the bank for British west African (BBWA) with a paid-up capital of 12,000 pound sterling, after absorbing its predecessor, the African banking corporation which was established in 1892. This signaled the pre-eminent position which the bank was to establish in the years of operation, the bank recorded an impressive growth and worked closely with the colonial government in performing the traditional functions of a central bank such as specie in the west African sub-region.
To justify its west African coverage, a branch was opened in Accra, Gold cost (now Ghana) in 1896 and another in Freetown, Sierra Leone in 1898. These marked the genesis of the bank’s international Banking operations. The second branch of the bank in nigeria was in the old calabar in 1900 and two year later, services were extended to Northern Nigeria.
Currently with 339 branches spread throughout the federation, the bank maintains the largest branch network in the industry.
1.5 Statement of the Problem
One of the most important problems of the organization is lack of adequate finance to carry out their function successfully.
It is believed that availability of fund can yield so good result and contributed to the stability of an organization. Also lack of enough manpower can lead to laxity in all areas of financial management in an organization.
Frustration of these desires of credit management could lead to collapse of an organization. So credit management is very important to an organization in such organization is to survive any economic crisis.
In the light of above, this research intends to find out whether this good and strong credit management which will be supported with interview and it there are laxities in any area, the research intend to sort out what measures to take.
1.6 Definition of Terms
This is when a customer is given a limit within which his account may be overdrawn. Overdraft is granted normally for working capital purpose and amount is expected to fluctuate over the life of the facility, depending on the customer’s working capital needs at a given time.
2. Periodic Statistics:
A periodic statistical return of customer’s account operation either weekly, monthly or quarterly helps in assessing the performance of the credit customer as well as detecting any danger signal
An advance is a short term loan extended period usually 30-180 days. Advances are normally granted for specific consideration e.g. payment of school fees. Settlement of medical bill payment of collection, bridging finance etc.
4. Daily Balance:
Keeping customers daily balances accounts as contained in the computer print-out or ledger balanced, provides a good tool in watching the movement of the account. Any unexpected or strange figure showing on a customer’s account should be investigated.
5. Long Term Loan:
This loan is mostly granted for projects with longer duration such as oil exploration, real estate, equipment financing such as oil rings, computers etc. by the nature of such investment, their maturity is generally (ten) 10 years and above.
6. Medium Term Loan:
This loan is generally granted for a single purpose such as investment equipment financing, housing, purchase etc. the duration of the loan is generally longer than overdrafts and range usually between 1 and 5 years.
7. Short Term Loan:
There are loans made available for use for a period of (one) 1 year or less. The cost of short term borrowing in lower than cost of long term borrowings since a lender of long term long will have to wait further into the uncertain future to have his loan repaid. It is obvious that he will demand a higher rate of interest.
8. Contingent Facilities:
There are ‘non cash facilities of an contingent nature required by customers from their banker in order to facilitate their operations.
1.7 Plans Of The Study
This research work is divided into (five) 5 chapters,
- Chapter one is the general introduction of the study, background of the study, scope of the study limitation of the study etc.
- Chapter two the review of related literature of the study.
- Chapter three disucsses the method used in gathering information and method of analysis.
- Chapter four reveals data presentation, data interpretation data analysis and research findings.
- The last chapter which is chapter five discusses summary, recommendation and conclusion.
5.0 Summary, Conclusion and Recommendation
5.1 Summary of Findings
The main them of the study focuses on the effectiveness of credit management in the Nigeria banking industry using first bank of Nigeria plc as a scenario.
The specific objective set for the study include:
- Examination of the credit policy and practice of first bank of Nigeria plc
- Review of the credit management
- Examination of recovery problem or constraints associated with loans management
- Making recommendation based on the findings.
The summary of the findings are as follows
- Deposit mobilization effort of the bank yielding result with increasing deposit over the years with a consistent trend. Of note also in the short term nature of deposits which put serious constraint on lending for long term project over 70% of deposit pledged by customer during the three years unders study were repayable within only one month.
- Closely related to the above is the increasing tend of credit facilities extended to customers. The lending policy of the bank is such that clean lending (facility) without security is kept to the barest minimum. Rather, the bank lend against more reliable and realizable securities of lien, proceed domiciliation, guarantee etc than legal mortgage which takes relatively longer time to realize. Also due to the short term nature of deposits available to it, credit facilities extended by the bank are of short term nature.
- Marching the deposits with loans and advances the bank operates within the CBN guidelines of maintaining minimum of 70% its total liabilities in cash or approved securities.
- The credit policy and control of the bank can be said to be not effective in keeping the incidence of bad debt to a lowest minimal. Over the year under study the non-performing loans accounting for as much however, attributed to the prudential guideline realizes by the CBN categorizing non-performing loans into sub-standard, doubtful and lost.
- The recovery machinery of the bank seems to be ineffective with the abysmal poor recovery performance during the three years under study. There was no time that a recovery target was met.
- Problem identified with loan management include
- Bad location of properties pledged of the gearities.
- High connection of some owners of the properties.
- Poor constitution and some properties are well perfect making their realization more difficult.
Above all, the non-performing loans are being compound by the escalating interest charges for these that rewain unserviced for long time.
Based on the findings of the study. The following recommendations are made for the effective credit management in first bank of Nigeria plc in particular and the Nigerian banking industry in generate.
- Adoption of credit ratings: there is great need for efficient information system for the banks in the country. The banking industry should employ the series of credit assistance from banks and other financial institutions. The case of a customer defaulting from more than a bank could be drastically reduced.
- Banks should ensure perfection of security before draw down of facilities. Experience has shown that customers are willing to comply with any condition set by bankers prior to disbursement. Therefore, security offered should not only be adequate and realizable to cover bank’s exposure, but must be perfected in accordance with laid down rules.
- The bankruptcy law in the country should be put to use by declaring decree 1979 provides a set of procedures for dealing with situation whereby a person who is unable to pay his debt can have bankruptcy petition filed against him so that he can once and for all free himself from the burden of the debt. Unfortunately and sadly however, there has been no report of any bankruptcy petition, against any highly connect debtors in Nigeria, since, the promulgation of the decree in 1979 to date.
- The Central Bank of Nigeria should hence forth exercise the powers conferred on it by CBN decree 24 of 1991 by compiling and circulation to all banks in Nigeria as well as making available for publication list of banks debtors whose out standing debts to any bank has been classified by bank examiners ad bad debts. This will break the bone of many so called ‘Elites’ in the society who are nothing but perpetual bad debtors. It will also aid prompt repayment to avoid embarrassment that may be caused by publication of their names of undue long default.
- One of the major problems associated with there covering of bad debts is poor location of properties pledged as securities which make the realization not only difficult but unattractive. In additional to collateral, percentage to a project before extension of credit facility. This possibly guarantee more commitment on the part of the borrowing customers and this reduce incidence of business failure that may result in bad debt.
- The recovery and securities department should be invigorated and debtors by causing for advertisement auctioning of their pledged properties in newspapers. This brings to public awareness of their indebtedness to the bank and thus reduce their recognition in the society and possibly aid repayment of the loans.
- Record of all borrowing customers should not only be properly kept. All staff handling credit matters should have sample opportunity to update their knowledge on lending with particular reference to credit analysis policy, administration and control vide training organized both internally and externally, first bank of Nigeria Plc is no doubt performing well in the area. However, due exposure in assigning credit jobs to staff especially at the branch level to give room for objective and through appraisal. A detailed credit investigated support with objective appraisal may reveal to loan proposal as potential bas debt even at the initial state and this can only be achieved by experienced and highly exposed credit officer/ managers.
- Appointment of debt consultants charged with the responsibility of assessing and recovering bad loans. The debts consultants who may be well known accountancy firm will work hand in hand with the security and loan. Recovery department to collect debt from debtors. Experience has shown that there is wisdom in employing debt consultants as there is more assurance that the debt would be recovered unlike when using an insider who might try to protect his interest.
- Lastly, the bank should endeavour to encourage the conduct of academic study of this nature on its operations which will serve as a mirror through which the bank can see itself. Reports of such could lead not only to operational efficiency but equally incorporated into the strategic corporate plans of the organization.
The banking industry has in recent years been operating in a turbulent and fast changing economic, social, legal and political environment. New accounting standard and prudential guidelines were also issued. The deregulation of the economic led to proliferation of banking industries in the country.
Deposits mobilized from customers are one the increase evidencing good effective and aggressive marketing strategy. The bank also continues to extend various forms of credit facilities through a short term basis to her numerous customers. The lending policy of the back in equally sound.
However, the poor recovery performance of non-performing loans needs to be seriously addressed possibly by adoption of the recommendation made below.
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