Impact Of Credit Control On Deposit Money Bank Performance In Nigeria (Case Study Of Union Bank)
Impact Of Credit Control On Deposit Money Bank Performance In Nigeria (Case Study Of Union Bank)
Abstract
Credit extension is an essential function of banks and bank management strive to satisfy the legitimate credit needs of the community it tends to serve. This study is aimed at analysing the impact of credit control on deposit money bank performance in Nigeria with a Case Study Of Union Bank Nigeria PLC. The importance of credit in the economic growth and development of a country cannot be overemphasized. Despite the important role played by credit in the economy, it is associated with a catalogue of risks. The Nigeria banking industry witnessed some failures prior to the consolidation era due to imprudent lending that finally led to bad debt and some ethical facts. The issue of non- performance of asset and declaring of ficticious project has become the order of the day in our banking system as a result of poor credit management leading to bank distress in the industry. Three hypotheses were formulated and tested through use of chi-square on questionnaires administered to various respondents. From the data collected and the tested hypothesis, results showed that: (i) Inadequate feasibility study affects loan repayment in the banking industry, (ii) The diversion of bank loan to unprofitable ventures affects loan repayment and (iii) The problem of poor attention given to distribution of loan has negative effect on banks performance. Amongst several recommendations were the following: (a) Banks should establish sound and competent credit management unit and recruit well motivated staffs (b) Banks should ensure that the chief executive avoid approval in principle in the credit management, and (c) Banks should have a monitoring and control unit or department to carry out a sort of post- modern exercise by way of controlling and monitoring credit facilities and also ensuring completeness of all conditions precedent to draw down.
Table of Content
Chapter One:
Introduction
- 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 Organization of the Study
Chapter Two:
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
Chapter Three:
Research Methodology
- 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
Chapter Four:
Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Analysis of Data
- 4.3 Test of Hypotheses
Chapter Five:
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
- REFERENCES
- QUESTIONNAIRE
Chapter One
Introduction
1.1 Background of the Study
Credit control in our banking sector today has taken a different dimension from what it used to be. The banking industry has adopted a lot of strategies in checking credit management in order to stay in business. Thu the banking industry in Nigeria has lost large amount of money as a result of the turning source of credit exposure and taken interest rate position. Nigerian banks are being required in the market because of their competence to provide transaction efficiency, market knowledge and funding capability. To perform these roles, the banks act as the most important participants in their transaction process of which they use their own balance sheet to make it easier and making sure that their associated risk is absorbed.
Credit extension is essential function of banks and the bank management strive to satisfy the legitimate credit needs of the community it tends to serve. This credit advances by banks as a debtor to the depositor requires exercising prudence in handling the funds of depositors. The Central Bank of Nigeria established a credit act in 1990 which empowered banks to render returns to the credit risk management system in respect to its entire customers with aggregate outstanding debit balance of one million naira and above (Ijaiya G.T and Abdulraheem A (2000). This made Nigerian banks to universally embark on upgrading their control system and risk management because this coincidental activity is recognized as the industry physiological weakness to financial risk. The researcher, a New yolk-based, said that 40% of Nigerian banks that made up exchange rate value in west Africa, has reduced the operating lending as a result of bad debts which hit more than $10 billion in 2009 and this has led to a tied-up questioning asset that is holding almost half of Nigerian banks. The central bank of Nigeria fired eight chief executive officers and set aside $ 4.1 billion in order to bail out almost 10 of the country‟s lenders. The reform which was introduced by Central Bank of Nigeria (CBN) in 2010 has made Nigerian banks resume lending supporting assets management companies and set up the requirement which will allow Nigerian banks make full provision for bad debts that will boost the market.
The banks identify the existence of destructive debtors in the banking system whose method involved responding to their debt obligations in some banks and tried to have contract of new debts in other banks. Banks are trying to make the database of credit risk management system more open for them to be more functional and recognized as to enable banks to enquire or render statutory returns on borrowers. There are some banking practices which increase the risks in the bank and cannot be easily changed. This result still leads to the question: what are the possible ways that will help make Nigerian banks manage their credit risks?
Credit risk management helps credit expert to know when to accept a credit applicant as to avoid destroying the banks reputation and making decision in order to explore unavoidable credit risk which gives more profit. Controlling a risk results in encouraging rewards that give internal audit more technical support service and customized training in banks or financial institutions. This research is presented to outline, find, investigate the impact of credit control on deposit money bank performance in nigeria (case study of union bank)
1.2 Statement of the Problem
In the history of development of the Nigerian banking industry, it can be seen that most of the failures experienced in the industry prior to the consolidation era were results of imprudent lending that finally led to bad loans and some other unethical factors (Job, A.A Ogundepo A and Olanirul (2008)). Also the problem of poor attention given to distribution of loans has its effect on the bank‟s performance. Most of the people collected loan from the banks and diverted the money to unprofitable ventures. Some bankers are not actually considering the necessary criteria for disbursement of loans to the customer. This work therefore intends to outline, explain these problems identify the causes and suggests lasting solutions to the problems associated with credit management and consequently banks debts.
1.3 Objectives of the Study
The objectives of this study is as follows
- To examine how feasibility study affect loan repayment in the banking industry.
- To highlight the extent in which diversion of bank loans to unprofitable ventures affect loan repayment.
- To examine how distribution of loans affect banks performance if banks give proper attention.
1.4 Research Questions
The questions here are
- To what extent does feasibility study affect loan repayment in the banking industry?
- To what extent does diversion of bank loans to unprofitable venture affect loan repayment?
- Does distribution of loans have effect on banks performance if given proper attention?
1.5 Statement of Hypotheses
A reputable credit management system enhances good control on lending and proper keeping of credit account.
Hypotheses 1
- Ho. Inadequate feasibility study does not affect loan repayment in banking industry.
- Hi. Inadequate feasibility study affects loan repayment in banking industry.
Hypotheses 2
- Ho. The diversion of bank loans to unprofitably ventures does not affect loan repayment.
- Hi. The diversion of bank loans to unprofitably ventures affects loan repayment.
Hypotheses 3
- Ho. The problem of poor attention given to distribution of loans does not have effect on banks performance.
- Hi. The problem of poor attention given to distribution of loans has effect on banks performance.
1.6 Significance of the Study
This study will be useful to the executive and managers in the banking industry and other financial institutions. This is because it provides guidance which will enhance effect and efficient credit management aimed at attaining and boosting maximum profitability and liquidity in their banks. The depositor (public) on the other hand will be more enlightened on the need to be honest and fulfil the responsibilities in credit transaction with the banks so that they can look up to improve service from the banks. Finally to the researcher, this is an eye opener because as a potential manager it will guide one in future on how to manage credit facilities.
1.7 Scope of the Study
This study is aimed at analysing the impact of credit control on deposit money bank performance in Nigeria a case study of union bank. The study intends to analyse the credit facilities in banking industry. It also reviews the various concepts procedures for efficient and effective credit management. It examines the success and failure (if any) as well as recommending corrective measure.
1.8 Limitation of the Study
In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.
1.9 Definition of Terms
Below are the major terms used in the course of this research work.
1) Bankruptcy:
A state where a person or firm is unable to meet their financial obligations.
2) Management:
Management is the study of decision-makers from the supervisor and line managers at lower levels to the Board of Directors.
3) Loans and Advances:
These are credit facilities granted by banks to their customers. They could be short, medium or long term depending on the length of period of repayment
4) Overdraft:
A credit facility (usually short term) granted by banks to current account holders and it carries interest charges on daily basis
5) Bank:
Section 61 of BOFIA 1991 Act defines a banking business as business of receiving deposits on current account or other similar account paying or collecting cheques drawn by or paid in by customers.
6) Customer:
A person is a customer if he or she has account with the bank.
7) Financial Ratio:
These are ratios usually expressed in mathematical terms to test the financial obligations.
8) Financial Statement:
They are firm balance sheets, profit and loss account and classified statement which show the financial state of affairs of the firm.
9) Guarantor:
A person or group of persons who stand for bank customers for credit facilities.
10) Collateral / Securities:
Is an asset presented by a customer to his bank to secure a credit facility granted to him by the bank.
1.10 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows.
- Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study.
Chapter Five
Summary, Conclusion and Recommendation
5.1 Introduction
This chapter is divided into three distinct parts. The first part is concerned with the summary of the whole study from the beginning to the end. The second part deals with the conclusion where inferences and generalization were made or drawn from. Findings in the analysis of the study formed the recommendation section which brought the research to an end.
5.2 Summary of Findings
This study was directed towards perhaps the most sensitive problem on impact of credit control on deposit money bank performance in Nigeria.
The study was organized with five chapters. Chapter one introduced research topic under the background of the study, the chapter also stated the problems, objectives, significance of the study, limitations and as well as definition of relevant terms used in the study.
Chapter two focused on the review of literature related to the topic, while chapter three shows the research methodology used in gathering the relevant information needed, the decision and the administration of the questionnaire, and equally the parameters used for the analysis of the questionnaire.
Chapter four focused on the presentation, analysis and interpretation of data collection from the bank used. Finally the fifth chapter draws conclusion and also makes recommendation, which if adhered to, can enable banks manage their loans, recover their loans and make higher profits.
From the findings on hypothesis tested (under chapter four), the result showed the following:
That inadequate feasibility study affects loan repayment in the banking industry, That the diversion of bank loan to unprofitable ventures affect loan repayment; and
That the problem of poor attention given to distribution of loan has negative effect on banks performance.
5.2 Conclusion
The issue of non-performance of assets and declaration of fictitious projects has become the order of the day in our banking system. This is a result of poor credit management in the sector causing many banks to have become distressed. The study therefore, focused on credit management in banks with particular references to Union Bank of Nigeria. Plc. Data collected and hypothesis tested revealed that inadequate feasibility study affects loan repayment; the diversion of bank loan to unprofitable ventures affects loan repayment and the problem of poor attention given to distribution of loan has negative effect on banks performance in the economy.
5.4 Recommendation
Taking cognizance of the problem of the study together with researcher‟s personal observations, it is believed that if they are strictly adhered to, some of the problems surrounding credit management which banks are encountering will be a thing of the past. The recommendations are as follow:
Banks should establish sound and competent credit management units and recruit well- motivated staff. Credit officers are the cutting edge of credit programmes. They perform a range of functions from project appraisal through credit disbursement and deposit mobilization to loan collection. Issues restraining to their selection, training, placement, job evaluation, reward and discipline need to be tackled effectively.
Proper loan appraisal and follow-up, including very careful loan screening procedure and timely disbursement of approved loan should be undertaken by credit officers to reduce delinquencies and default.
Precaution in credit administration is important in reducing credit risk and can be achieved through (i) demand for appropriate collateral security before granting loans, and (ii) Effective loan supervision and monitoring by credit officers.
Banks in Nigeria should enhance their capacity in credit analysis and loan administration while the regulatory authority should pay more attention to bank compliance to relevant provisions of the Bank and other Financial Institution Act (1999) and prudential guidelines.
There should be credit manual, which should be strictly adhered to at every stage of the credit process when credits are administered and managed in accordance with laid down policies and procedures, the occurrence of reckless un-suitable credits and poor loan administration will be drastically reduced or eliminated.
Banks should ensure that the chief executive avoids „approval in principle in the credit process. Approval in principle is anticipating approval given by chairman in time of exigency and it is expected to ratify by the board of directors even when the outcome of the transaction is unknown and unfavourable. This has caused some banks‟ chief executives their job in the past. It is advisable to adhere to laid down credit process/procedure.
Bankers are advised to imbibe the spirit of „‟after-sales-services „‟. They should monitor the credit process as to prevent possible diversion of funds. There is a great danger in not monitoring a customer for it can lead to bad loan.
Banks should have a monitoring and control units or department to carry out a sort of post- mortem exercise by way of controlling and monitoring credit facilities and also ensuring completeness of all conditions precedent to draw down.
They should put in place proper credit documentation which serves as the official documentation verifying the existence of a credit facility and contains information relating to the credit. This will aid banks in recovery when the loan goes bad
Credits should also be extended within the target nerves and lending strategy of the institution. Identifying to the key feature of credit origination to be the assessment of the risk profile of the customer /transaction, banks should develop procedure that adequately capture salient issues regarding the borrower‟s industry, macro-economic factors, purpose of the credit, source of repayment, track record and repayment history of the borrower, repayment capacity of the borrower, the proposed terms and conditions, adequacy and enforceability of collaterals and appropriate authorization for the borrowing.
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