Finance is the bedrock for every
business organization whereas the growth of businesses precipitates the
general growth and development of a nation. As a result, the banking
sector has become the central interest of the entire populace, both
individual and corporate body as banks are the custodian of finance
(money) - the most sought after commodity on earth. According to Agu
(2010), availability of financial capital is obviously a condition for
the rapid development and transformation of any national economy.
Because the provision and efficient management of finance is best
facilitated by the existence and appropriate functioning of financial
institutions of the nation, the state and activities of the bank is of
public interest. Banks play this unique role through granting of loans
which constitute a vital function in banking operation, and has direct
effect on economic growth and business development. As financial
intermediaries, banks assist in channeling funds from surplus economic
units to deficit ones so as to facilitate business transactions and
economic development generally.
1.2 Background to the Study
Loans are the most important asset held
by banks; but loan has its own cost and risk. In other words, the
granting of credit, though beneficial for business as a whole, is not
without cost, either to the supplier or to the buyer, or to both. It
follows therefore that the process of granting credit to customers, and
the tasks of risk assessment and risk analysis, amount to no more than
weighing the benefits of granting credit against the cost to the
supplier of doing so. Furthermore, that cost element is not restricted
to non-payment, or bad debt losses, but applies to cost of the credit
period itself and the cost incurred in late payment. Therefore,
although, lending which is a primary function of commercial banks, and
the single most important source of gross income for
commercial banks as well as contributes to the larger part of a bank's
profits; it has its own risks if not well managed. In other words, the
degree of risk associated with lending is proportionate to its
contribution to profit. Since these funds are owned by third parties
called depositors, prudence demands that such funds should be
efficiently managed to sustain the confidence of depositors in the
banking system and ensure the continued soundness of the system itself
and to minimizing risk of banks failure. This is necessary because bad
debts destroy part of the earning assets of banks such as loans and
advances which have been described as the main source of earning and
also determines the liquidity and solvency which generate two major
problems (Institute of Credit Management - ICM, 2012). That is
profitability and liquidity, has to earn sufficient income to meet its
operating costs and to have adequate return on its investments.
For this reason, the present study
examined the effectiveness of credit management in Nigerian banking
sector. Credit management is defined as the process of controlling and
collecting payments from customers. This is the function within a bank
or company to control credit policies that will improve revenues and
reduce financial risks ICM, (2012). The function of Credit Management is
the protection of the investment in the debtors of the company as well
as maintaining the lowest levels of receivables, balancing risks
inherent in achieving sales objectives.The main objectives of credit
management according to ICM (2012) include ensuring that - credit terms
are used to maximize sales with the minimum of risk; high risk or
marginal accounts, especially those likely to get into financial
difficulties, are identified and to take whatever action is necessary to
safeguard sales to those customers; all amounts due are collected
according to the agreed payment terms; monthly cash collection targets
are achieved; a high quality of accounts receivable is maintained; an
accurate and responsible database of customers is operated and
maintained. Achieving these objectives lies on the effectiveness of the
financial institutions that manage the credit. The reason being that
credit management is associated with risk. If not properly management
may result to great loss.
Brown and Moles (2012) define credit
risk as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms. Therefore, the
goal of credit risk management is to maximize a bank’s risk-adjusted
rate of return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk inherent in the entire
portfolio as well as the risk in individual credits or transactions.
Banks should also consider the relationships between credit risk and
other risks. The effective management of credit risk is a critical
component of a comprehensive approach to risk management and essential
to the long-term success of any banking organisation.
According to Brown and Moles (2012), for
most banks, loans are the largest and most obvious source of credit
risk; however, other sources of credit risk exist throughout the
activities of a bank, including in the banking book and in the trading
book, and both on and off the balance sheet. Banks are increasingly
facing credit risk (or counterparty risk) in various financial
instruments other than loans, including acceptances, interbank
transactions, trade financing, foreign exchange transactions, financial
futures, swaps, bonds, equities, options, and in the extension of
commitments and guarantees, and the settlement of transactions. Drawing
from the premise of Adeniyi (2002), who stated that effective
supervision and monitoring of loans ensure that these loans do not turn
bad forms, this study investigates the effectiveness of credit
management in Nigerian banking sector. This study is working on the
assumption that when banks managed their credit effectively, they
overcome credit risk associated in credit management. In other words,
banks, may through proper credit management, have a keen awareness of
the need to identify, measure, monitor and control credit risk as well
as to determine that they hold adequate capital against these risks and
that they are adequately compensated for risks incurred. The question
therefore is: how effective are the Nigerian banking sector is in credit
1.3 Statement of problems
One of the ways to totally avoid bad
debts is to refuse to lend money at all. If banks should then refuse to
lend at all, then issue of profitability is cancelled and hence the main
purpose of carrying on a business which is to maximize profit, is then
defeated. Credit must be adequately managed so that banks could remain
in business and prudent lending could do this. Egwuatu (2004) has
pointed out that many banks in Nigeria experienced a lot of bad debts.
He explained that when a new government abandoned the project awarded to
their predecessor, the credit loan borrowed from the bank by either the
government or the contractor who manages the project is at stake. This
is because most contractors borrowed to execute the project awarded to
them but could not repay the loan, due to government action. Furness
(2005) also illustrated that during the time of draught or poor rainfall
and pest which led to low harvest, farmers who took loans from the bank
may delay the repayment.
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
customer may easily deny even owing the bank all or part of the amount.
Money deposit banks have always borne the burden alone, but this may not
continue in future as the banks may be unable to take the risk of
lending more which may result to loses to both the bank (whose part of
its profit is from the interest from loans) as well as the borrower
(whose business may collapse as a result of insufficient finance to run
the business). Consequently, there may be stagnation or drop in the
nation’s economy. For this reason, this study investigates the
effectiveness of credit management in Nigerian banking sectors.
1.4 Research Question
The following are research questions formulated to guide the study
i. How effective is the credit policy in curbing bad debt in Nigerian banking sector?
ii. How effective is the credit administration in meeting customers’ demand in Nigerian banking sector?
iii. How effective is the procedures put in place by the Nigerian banking sector for the recovery of bad debt?
iv. What are the constraints associated with loan management in Nigerian banking sector?
1.5 Objective of Study
The primary objective of this study is
to investigate the effectiveness of credit management in Nigerian
banking sector. Specifically, this study seeks to:
i. examine the effectiveness of credit policy in curbing bad debt in Nigerian banking sector
ii. examine the effectiveness of credit administration in meeting customers’ demand in Nigerian banking sector.
iii. examine the effectiveness of the procedures put in place by the Nigerian banking sector for the recovery of bad debt
iv. determine the constraints associated with loan management in Nigerian banking sector.
1.6 Significance of the Study
The significance of this study is that,
it will enable banker to appreciate the appraisal of their lending and
control mechanism now that they are expected to lend under tight
monetary conditions. In essence, finding from the study will assist
management and regulatory authorities in ensuring a safe banking since
development of country’s economy is tired to performance of financial
institutions in Nigeria.It is hardly an exaggeration that the difference
between the success and the failure in the banking industry is in the
effective management of the banks loans and advance. Effectiveness of
credit management is vital to the protection of assets and the
achievements of adequate returns to investment. Though many works abound
in the literature of the technique of lending, the methods of securing
such lending and the pitfalls that await the unwary banker. By
comparison it appears to be very little in point on the subject of loan
management and recovery.
A study of this subject will therefore be a welcome addition to the existing volume of banking literatures.
1.7 Statement of the Hypothesis
i. H0: The credit policy will not be effective in curbing bad debt in Nigerian banking sector
H1: The credit policy will be effective in curbing bad debt in Nigerian banking sector
ii. H0: The credit administration will not be effective in meeting customers’ demand in Nigerian banking sector
H1: The credit administration will be effective in meeting customer’s demand in the Nigerian banking sector
iii. H0: The procedures put in place by the Nigerian banking sector will not be effective for the recovery of bad debt
H1: The procedures put in place by the Nigerian banking sector will be effective for the recovery of bad debt
1.8 Justification of the study
Apart from the financial and
time constraints that justified the scope of the a bank selected some
out of the banks operating in the sector could not said to be good
representation or sample of bank required to generalize the lending
policies and practices in the Nigerian Banking Industry. Hence, it
should be noted that the officers of some the Banks were wary of
disclosing certain information often tagged as confidential because of
the oath of secrecy sworn to by them. This equally limited the extent to
which useful data were available.
1.9 Scope of the study
The study covers three commercial banks
within Surulere local government area which have currently scaled
through the twenty five billion (N25, 000,000,000) capital base.
Specifically, the bank under study include: Fidelity Bank, Zenith Bank
and First banks of Nigeria and the frame of time to be considered shall
be between 2008 and 2012. The effectiveness of credit
management in Nigerian banking sector in the area of credit policy in
curbing bad debt; credit administration in meeting customers’ demand;
the procedures put in place by the Nigerian banking sector for the
recovery of bad debt; and the constraints associated with loan
management in Nigerian banking sector.
1.10 Definition of terms
Credit cards - This is a
plastic cards which provide a payment system and access to credit
facilities apparently dominate Banks customer spending.
Debit cards - The
direct debiting of cheque accounts with special ATM card point of sale
terminal cards are expected to become increasingly important when cost
of providing equipment and networks are finally agreed.
This involves advising and monitoring of
all aspect of credit on day to day basis to ensure that it is fully
repaid. It commences with the approval of facility. The term and offer
should be clearly documented in the letter of commitment to the
This involves monitoring of facilities
to ensure that each credit is and remains satisfactory. It encompasses
disbursement according to descendible schedule of repayment agreed with
the customer within the approved limit and monitoring of customer credit
Bad Debt: Debt is
defined as payment which must be paid but has not been paid. Therefore
this obligation becomes bad when the possibility of its recovery becomes
remote. That is, when it becomes difficult to recover such debt.
Long term loans - Long term loans are those granted for periods of between 15 and 30 years.
NET - Payment due on delivery
C.N.D. - Cash next delivery
Weekly credit - Payment of all supplies Monday to Sunday (unless otherwise stated) by specified day in the next week.
Half month credit - Payment of all supplies made in the period 1st to 15th of the month by a specified date in the 2nd half month.
Liquidity - This can be
defined as the ease and speed by which a company's assets can be turned
into cash sufficient to meet its current liabilities.