Evaluation of Bank Lending and Credit Management in Nigeria
Chapter One
OBJECTIVES OF THE STUDY
The objectives of this study are as follows
- To examine how a feasibility study affects loan repayment in the banking
- To highlight the extent in which diversion of bank loans to unprofitable ventures affects loan repayment.
- To examine how the distribution of loans affects banks’ performance if banks give proper attention
CHAPTER TWO
REVIEW OF RELATED LITERATURE
THEORETICAL REVIEW
ORIGIN OF BANK CREDIT
The origin of bank credit could be traced to the medieval times, long before the advent of goldsmiths in the western civilization. As far back as 1850 BC, lending activities were recorded in the temple Samas in sipper of Babylon. The actual existence of the temple covered a century or two previously. During this period, lending was primarily for consumption and the imposition of interest was termed as exploitation. One of the earliest enactments on bank lending is Hebrew Law. Hebrew Law recognized lending but prohibited the taking of interest. Enrichment through lending with interest was frowned at and severe punishments were prescribed for such acts. This was later incorporated into Mosaic laws which prescribed thus, “You shall not lend upon interest to your brother”. About 1545, the mosaic laws were abolished and the taking of interest on loans was made legal. The Arabic civilization also recognized lending activities, but usury is condemned and prohibited as much as possible.
However, as commerce developed and as the opportunities for transactions in money became abundant, secular practices went in the direction of lending with interest. Modern principles and practices of bank lending could be traced to the activities of goldsmiths who transacted business in benches and which formed the basis for formal banking business which started in 1587in Venice-Italy. In Nigeria, the origin of lending could be traced to the activities of traditional financial intermediaries, long before the advent of the colonial masters. These intermediaries developed as a consequence of the credit needs of the rural population. It is noteworthy that the basic occupation of the rural populace was peasant farming and crafts and these sustained the unformalized intermediation structures available at that time. These intermediaries consist of voluntary “ESUSU” groups, age grade associations, village rural development schemes, family fund pools, extended family cooperatives funds, social clubs etc. Essentially, people relied on these groups for their credit needs.
The traditional financial intermediaries constitute substantial source of credit for economic activities prior to the advent of commercial banks in Nigeria. It is not worthy that today, that role has not been entirely eliminated by the presence of organized banks. The impacts of these institutions are still felt in the rural and semi-urban centres. Basically they serve three functions: savings function, credit function and investment function.
THE CONCEPT OF CREDIT
According to Onyeagocha (2001), the term credit is used specifically to refer to the faith placed by a creditor (lender) in a debtor (borrower) by extending a loan usually in the form of money, goods or securities to debtors. Essentially, when a loan is made, the lender is said to have extended credit to the borrower and he automatically accepts the credit of the borrower.
Credit can therefore be defined as a transaction between two parties in which the creditor or lender supplies money, goods and services or securities in return for promised future payments by the debtor or borrower.
There are three major types of credit. These are commercial credit, consumer credit and investment credit.
Commercial credit can be bank credit such as overdraft, loans and advances; trade credit from suppliers; commercial papers (or note); invoice discounting; bill finance; hire purchase; factoring etc.
Consumer credit is a kind of permission granted to an individual or a household to purchase goods like refrigerator, television, car, electronic sets, which could not be paid for immediately but for which instalment payments are made over a period of time.
Investment credit allows a business concern such as corporate body, sole proprietorship or partnership to obtain credit for capital goods for expansion of factoring or procurement of machinery.
The tenor of a loan varies from short to medium, role to long term depending on the institution, nature and functions.
The importance of credit (and consequently the role of banks) in the economic growth and development of a country cannot be over-emphasize. The functions of credit are primarily two: it facilitate the transfer of capital or money to where it will be most effectively and efficiently used; and secondly, credit economizes the use of currency or coin money as granting of credit has a multiplier effect on the volume of currency or coin in circulation. Perhaps, we need to add here that the cost of credit (notable interest and discount rate) is one of essential tools to be used to control and regulate money by the central bank of Nigeria through its monetary policy.
Despite the important role played by credit in the economy, it is associated with a catalogue of risks. According to Obalemo (2004), credit risk is an assumed risk that a borrower won‟t pay back the lender as agreed.
The various types of credit risks include management risk, geographical risk, business risk, financial risk and industrial risk. The probable occurrence of partial or total default requires a thorough risk assessment prior to granting loans.
CHAPTER THREE
RESEARCH METHODOLOGY
RESEARCH DESIGN
Nachmais and Nachmais (cited in Baridam 1995:49) posit that research design could be seen as the framework or plan that is used as a guide in collecting and analysing data for a study. It is knowledge of proof that allows the researcher draw inferences concerning causal relationship among the variables under investigation.
This study is made up of Quasi-experimental research otherwise called surveys. This is due to the complex relationship that exists among the variables. According to Baridam (1995:50) “in Quasa-experimental research, the various elements of the design are not under control of the researcher” This type of design is special suited to descriptive studies, which implies natural observation of the characteristics of the research subjects without manipulation of the research.
SOURCES AND TECHNIQUES OF DATA COLLECTION
Both primary and secondary data is to be used in this study. The main instrument or tool to be used in the collection of primary data is the questionnaire while the secondary data will be obtained from the works of other researchers.
The primary data was obtained by the researcher from the senior and other staff of the bank where the research was focused on, through the administration of questionnaire. The secondary data was collected through the library of The Central Bank of Nigeria, Enugu.
DESCRIPTI0N OF POPULATION AND SAMPLE PROCEDURE
The population of the study refers to the Banks. But since the researcher does not intend to study the population in this case, she has resorted to use sample size of forty (40). This is because it is only the people who are knowledgeable and also have the ability to influence decision in respect to the banking business that information may be obtained.
Consequently, a sample size of forty (40) persons was drawn from the population using a simple random sampling method. Apart from that, questions relating to the subject of the study were asked. Respondents were required to tick right against the letters they feel is correct and to give opinions where it is required. Out of forty (40) questionnaires distributed, only thirty six were completed and returned. However, this is a fair figure representing 90% of the total sample size. This percentage is acceptable because the researcher expected at least 75% in her assumption. Thus certain generalisations are made in the study.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION.
ANALYSIS AND INTERPRETATION OF DATA
In this section, the null hypothesis will be to ascertain their validity or non-validity using the chi-square
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
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.
SUMMARY OF FINDINGS
This study was directed towards perhaps the most sensitive problem on Credit Management And Bank Lending in the banking industry 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.
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 And Bank Lending in the sector causing many banks to have become distressed. The study therefore, focused on Credit Management And Bank Lending in banks with particular references to Frist 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.
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.
References
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- Ahmadu, A.S, Taked.C. and Shawn. T. (1998). Bank loan loss Provision: a re-examination of Capital Management and Signalling effects, working paper, Department of Accounting, Syracuse University, 1-37.
- Al-khouri.R.(2011), assessing the Risk and performance of the GCC Banking sector, international journal of finance and economic, ISSN 1450-2887 issue 65, 72-8.
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