Financial Analysis As A Veritable Tools For Effective Bank Lending (Case Study Of Union Bank Plc)
This study investigated financial analysis as a veritable tools for effective bank lending (Case Study of Union Bank Plc). The influence of credit management methods on the liquidity and profitability of listed industrial goods firms in Nigeria was investigated in this study. It was decided to use a descriptive survey study design. The sample population for which copies of the questionnaire were distributed was 400 respondents, representing 65% of the population. The participants provided 355 valid responses, which were examined. For descriptive statistics, one-way ANOVA was utilized, and to test the hypotheses, a basic regression analysis method was applied. The results showed that the credit risk assessment, debt recovery strategy, and receivable collection policy sub-variables have a positive and statistically significant impact on the liquidity sub-variables – ability to pay, level of bad debt, and cash inflow. Liquidity had a positive and statistically significant effect on profitability. The study thus, suggest that companies in the industry should enhance their liquidity in order to achieve the targeted profit level by having effective credit terms and proper risk assessment strategy, designing and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and employing and retained qualified accountants and credit administrators with excellent knowledge of credit control techniques.
Table of Content
- Title Page
- Table of Content
- List of Tables
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organisations of the Study
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
- 3.1 Research Design
- 3.2 Population of the Study
- 3.3 Sample Size Determination
- 3.4 Sample Size Selection Technique and Procedure
- 3.5 Research Instrument and Administration
- 3.6 Method of Data Collection
- 3.7 Method of Data Analysis
- 3.8 Validity of the Study
- 3.9 Reliability of the Study
- 3.10 Ethical Consideration
Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Analysis of Data
- 4.3 Answering Research Questions
- 4.4 Test of Hypotheses
- 4.5 Discussion of Findings
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background of the Study
The financial sector is believed to be one of the important backbones of an economy. The sectors works as a facilitator for achieving sustained economic growth through providing efficient monetary intermediation (Paudel, 2005). A strong financial system promotes investment by financing productive business opportunities, mobilizing savings & services. Credit is one of the many factors that can be used by a firm to influence demand for its products (Amahalu, Nweze& Obi, 2017). According to Horne and Wachowicz (1998), firms can only benefit from credit if the profitability generated from increased sales exceeds the added costs of receivables. Myers and Brealey (2003) define credit as a process whereby possession of goods or services s 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 ( Amahalu, Abiahu, Nweze, & Obi, 2017).
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.
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. The ability to penetrate new markets and customers hinges on the ability to quickly and easily make well-informed credit decisions and set appropriate lines of credit. 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 credit policy as the combination of the variables of credit policy is quite difficult to obtain. A firm will change one or two variables at a time and observe the effect. It should be noted that the firm’s credit policy is greatly influenced by economic condition (Pandey, 2008).
The Liquidity ratio is paramount for the financial institution to maintain its minimum liquidity reserve with the Central Bank. The Solvency ratio is to measure the long-term going concern of the Company without any interruption from the debt capital and equity capital. The calculated accounting ratios on the solvency are acceptable ratios within the range of the Licensed Finance Company and the specialized lease Company sectors. The situation of the Shareholder ratios is a more favorable for the present Financial Institution investors. The analysis of the Cash flow statement has indicated that the Company has generated sufficient cash and cash equivalent to meet business operations. However, the net cash flow from operating activities and the free cash flow negative figures for the years 2016 to 2019.
The different valuation methods can provide different answers so that only options are available to arrive at the final average price where the author of this article proposes to bid –offer U$ 80.00 per share. Based on the traditional financial results, the Company equity valuation creates a more favorable situation for the acquisition decision. The author of this article is making an assumption that the acquirer/interested Company has an exclusive right on the acquisition project.
Bank exist not only to accept deposits but also to grant credit facilities, this business activity therefore inevitably exposed banks o huge credit risk which might lead to financial distress including bankruptcy. The Basel Committed on Banking supervision (1999) defined credit risk as probability that a bank borrower or counterpart will fail to meet its obligations in accordance with agreed terms or the possibility of losing the outstanding loan partially or totally due to credit events (BCSB 2001). Credit creation is the main income generating activity for the banks Kargi (2011). Adequate management of credit risk is critical for the survival, growth and development of banks.
However, despite the creation of risk management department in all the banks, which is responsible for managing the banks risk including credit risk, available records shows that the spate of bad loans (non-performing loans) was as high as 35% in Nigeria deposit between 1999 and 2009, Sanusi (2010). The increasing level of non-performance loan rates in banks books, poor loan processing, undue interference in the loan granting process; inadequate or absence of loancollaterals among other things are linked with poor and ineffective credit risk management that negatively impact on banks performance. This is a very disturbing phenomenon because the high level of non-performing assets in the bank’s portfolio if not brought under control, might erode the capital base of the banks and reduce its profitability.
According to Augusto (2003), lending policies should be clearly defined and set forth in such a manner as to provide effective supervision by the directors and senior officers. In as much as board of director of every bank has the legal responsibility to formulate lending policies and to supervise their implementation. In addition, according to Gilbson (2006), management should maintain a written loan annually by the board of director’s policy guideline should include a written description of the overall credit grading process and establish responsibility for the various loan review function.
1.2 Statement of the Problem
The sources and causes of problem loans cover a multitude of mistakes a bank may permit a borrower to make, as well as mistake directly attributable to weaknesses in the bank’s credit administration and management. Some well constructed loans may develop problems due to unforeseen circumstances on the part of the borrower, however, bank management must endeavor to protect a loan by every means possible in order to preserve it performance measured return on assets, earnings per share, return on equity, dividend per share, market to book value ratio and others. The success of deposit money bank largely depend on the effectiveness of their credit management system because these institutions generate most of their income from interest earned on loans extended to small and medium entrepreneurs. The Central Bank Annual Supervision Report, 2010 indicated high incidence of credit risk reflected in the rising levels of non-performing loans by the deposit money bank in the last 10 years, a situation that has adversely impacted on their profitability. This trend not only threatens the viability and sustainability of the deposit money banks but also hinders the achievement of the goals for which they were intended which are to provide credit to the rural unbanked population and bridge the financing gap in the mainstream financial sector. Sound credit management is a prerequisite for a financial Institution’s stability continuing profitability; while deteriorating credit quality is the most frequent cause of poor financial performance and condition.
1.3 Objective of the Study
The main objective of this study is to investigate financial analysis as a veritable tools for effective bank lending (Case Study Of Union Bank Plc).
Specific objectives include:
- Investigate the impact of credit risk assessment on Customer’s Ability to Pay.
- Determine the influence of debt recovery strategy on the company’s level of bad debt.
- Assess the effect of the receivable collection policy on Cash Inflow.
1.4 Research Questions
- What is the impact of credit risk assessment on the Customer’s Ability to Pay?
- What is the influence of a Debt Recovery Strategy on a company’s Level of Bad Debt?
- What is the effect of the receivable collection policy on Cash Inflow?
1.5 Research Hypothesis
- Ho1: Credit Risk Assessment has No Significant Impact on the Customer’s Ability to Pay.
- Ho2: Debt Recovery Strategy has No Significant Influence on the Company’s Level of Bad Debt.
- Ho3: Receivable Collection Policy has No Significant Effect on Cash Inflow
1.6 Significance of the Study
This study is highly significant to students and scholars in the field of management sciences.The findings and literature reviewed will add to their previous knowledge of the subject of this study. This research is also beneficial to stakeholders in the banking sector. The recommendations made in this study will serve as a framework for bank’s policy formulation.
1.7 Scope of the Study
This research work focussed on the financial analysis as a veritable tools for effective bank lending (Case Study Of Union Bank Plc). The study also covered the impact of credit risk assessment on the Customer’s Ability to Pay their loan, the influence of debt recovery strategy on the company’s level of bad debt and the effect of the receivable collection policy on Cash Inflow.
1.8 Limitations of the Study
Several constraints militated against the quality and quantity of this study. Firstly, the unavailability of materials needed for the proper evaluation of the subject of this study both online and offline significantly determined its quality and quantity. The researcher was also faced with financial constraints which eventually determined the extent to which the research could analyse this research work. The time allocated for the completion of this study also significantly impacted the quality and quantity of this study. The outcome/output of this study was ultimately determined by the time spent in gathering the needed information for this study.
1.9 Definition of Terms
The lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt until it is repaid as well as to repay the principal amount borrowed.
Possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed.
Formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand.
The business function concerned with profitability, expenses, cash and credit, so that the “organization may have the means to carry out its objective as satisfactorily as possible;” the latter often defined as maximizing the value of the firm for stockholders.
A financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
An assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios and other techniques, that make use of information taken from financial statements and other reports.
1.10 Organisations of the Study
There are five chapters in this study, the first of which discusses the background, statement of the research problem, aims, research question, and research hypotheses as well as the study’s significance, scope, and limitations. Chapter 2 contains conceptual, theoretical, and empirical reviews. The study methodology is covered in Chapter 3. This chapter covers the research design, the study’s population, the sample size and methodology, the data collection source and method, the study’s instruments, the data analysis method, and the validity and reliability of the study. Chapter four covers data presentation, data analysis and discussion of findings. Chapter five encompasses the summary, conclusion and recommendations.
Summary, Conclusion and Recommendation
Credit management strategies are plans of action aimed to guarantee that trade credit is granted and controlled appropriately. It would improve receivable collection from trade debtors by implementing appropriate methods, resulting in improved sales volume, total revenue, and lower financial risks. The goal of this research is to see how credit management tactics affect liquidity and profitability. This was determined by examining the influence of credit risk assessment strategy on customers’ ability to pay, the impact of debt recovery strategy on bad debt levels, and the impact of credit collection method on cash inflow levels. The fourth sub-objective looked at the impact of liquidity on profitability as a moderating factor. The following is a summary of the research findings based on the analysis:
- Hypotheses one to three revealed that the three tactics of credit risk assessment, debt recovery, and credit collection all had a positive and significant impact on a company’s liquidity as assessed by customer ability to pay, bad debt level, and cash inflow.
- Giving customer’s credit would enhance sales and raise the industry’s market share.
- Credit management solutions increase liquidity through proper plans of action, improve receivable collections, and help the organization achieve its goals.
- Adequate liquidity allows businesses to take advantage of the cash discount rate and engage in initiatives with a positive net present value, which boosts profits.
Credit management strategies, as measured by credit risk assessment, debt recovery strategy, and credit collection strategy, have a positive and significant impact on liquidity and profitability of quoted industrial goods firms in Nigeria, according to the findings of this study. The following is a policy recommendation based on the study’s findings:
- The customer’s capacity to pay is influenced by the credit risk assessment strategy. Setting a credit period, evaluating the degree of the durability of collateral presented as security before credit is granted, offering rebates to speed up receivables collections, and raising an invoice as a credit instrument for transaction proof are all requirements for organizations in this industry. The controller should review financial accounts of customers and determine their creditworthiness to assess consumer information and avoid risk.
- The company’s bad debt level is influenced by the debt recovery approach. To facilitate debt recovery, debt recovery plans should be established and implemented, particularly for overdue debts resulting from credit sales to customers. This would aid businesses in increasing receivable collections and reducing bad debt losses.
- The way you collect receivables has a big impact on your cash flow.
Industrial goods sector in Nigeria should pay particular attention to receivables and liquidity. When properly managed, this initiative is likely to have an impact on the company’s financial performance. The study thus, suggest that companies in the industry should enhance their liquidity in order to achieve the targeted profit level by having effective credit terms and proper risk assessment strategy, designing and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and employing and retained qualified accountants and credit administrators with excellent knowledge of credit control techniques.
Industrial goods sector in Nigeria should pay particular attention to receivables and liquidity. When properly managed, this initiative is likely to have an impact on the company’s financial performance. The study thus, suggest that companies in the industry should enhance their liquidity in order to achieve the targeted profit level by having effective credit terms and proper risk assessment strategy, designing and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and employing and retained qualified accountants and credit administrators with excellent knowledge of credit control techniques
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