Credit Management and the Issue of Bad Debts in Commercial Banks in Nigeria
OBJECTIVE OF THE STUDY
The objectives of the study;
- To determine and appraise the lending procedure of banks using Union bank of Nigerian plc as a case study-with a view to highlighting the effectiveness and adequacy or otherwise the credit management policy of Nigerian banks in reducing the occurrence and consequences of bad debts.
- To highlight the rate at which inadequate collateral security provision by borrowers increases the issues of bad debt in Nigerian.
- To determine whether fund diversion has any effect on bad debt of Commercial Banks in Nigeria.
- To ascertain the extent to which government intervention in lending policies of Commercial Banks has influenced bad debts in Nigerian Commercial Banks.
- To highlight the extent to which improper project evaluation influence bad debt of Commercial Banks in Nigerian.
REVIEW OF RELATED LITERATURE
Basically, banks are in place not only to accept deposits but also to grant credit facilities, hence they are exposed to credit risk. Credit risk is by far the most important risk faced by banks and the accomplishment of their business depends on accurate measurement and efficient management of this risk to a greater extent than any other risks (Gieseche, 2004 as cited in Kargi, 2011).While financial institutions have been bedeviled with series of problems over the years for a large number of reasons, the main cause of this problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other situation that can lead to a deterioration in the credit standing of a bank’s. This occurrence is common in emerging economies such as Nigeria, Ghana, Egypt etc. However, despite the series challenges that have bedeviled the industry, the banking industry have continued to play a crucial role in the economic development of economies (e.g. Nigeria). This is because, it contributes to the real productivity of the economy and to the overall standard of living, since banks are able to simultaneously satisfy the needs and preferences of both surplus and deficit units (Owojori, 2011). It is universally acknowledged that the banking industry plays a catalytic role in the process of economic growth and development (Uwuigbe, Uwuigbe and Daramola, 2014). This acknowledgement is reinforced by contemporary conceptualization to the effect that banks are veritable vehicles for mobilizing resources (funds) from surplus units and channeling them to deficit units. These resources belong to customers so a programme must exist for the management of these funds. The programme must constantly address three basic objectives which are liquidity, safety and income. In meeting the three basic objectives, it requires establishing a schedule of actual priorities, because the most fundamental obligation of commercial banks is to meet all the demands for withdrawal of funds. Furthermore, since banks also have an obligation to satisfy the legitimate credit requirements of their depositors and the community and to meet the aspiration of profit making of the shareholders. These objective needs must also consider loans demand. Every commercial bank is under simultaneous pressure from depositors and shareholders. Customers deposit funds with those banks that meet their request for credit; Shareholders look for growth and profit of the banks which cannot be achieved without granting credits. It therefore requires a higher degree of management skill to reconcile the two. Bad credit management has lead to so many problems; most prominent is bad debt with a devastating effect on the banks and the entire economy. It is in the light of the above that the researcher looked at what ingredients are required in credit management of commercial banks and what result if they are not adequately put in place. Prior studies suggests that a good credit risk architecture, policies and structure of credit risk management, credit rating system, monitoring and control contributes to the success of credit risk management system Bagchi (2003). Similarly, Muninarayanappa and Nirmala (2004) in a related study opined that the success of credit risk management require maintenance of proper credit risk environment, credit strategy and policies. Thus the ultimate aim should be to protect and improve the loan quality. In the same vein, findings from Salas and Saurina (2002) revealed that growth in GDP, rapid credit expansion, bank size and capital ratio had a significant impact on the non-performing loans. Felix and Claudine (2008) examined the association between the performance of banks and credit risk management. As part of their findings, they observed that return on equity and return on assets both measuring profitability were inversely related to the ratio of non-performing loan to total loan of financial institutions thereby leading to a decline in profitability.
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought credit management and issues of bad debt in commercial banks in Nigeria
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information credit management and issues of bad debt in commercial banks in Nigeria. 200 staff of Union bank in Akwa Ibom statewas selected randomly by the researcher as the population of the study.
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
SUMMARY, CONCLUSION AND RECOMMENDATION
It is important to ascertain that the objective of this study was to ascertain credit management and issues of bad debt in commercial banks in Nigeria.In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenge of credit management and issues of bad debt in commercial banks in Nigeria
This study was on credit management and issues of bad debt in commercial banks in Nigeria. Five objectives were raised which included:To determine and appraise the lending procedure of banks using Union bank of Nigerian plc as a case study-with a view to highlighting the effectiveness and adequacy or otherwise the credit management policy of Nigerian banks in reducing the occurrence and consequences of bad debts, to highlight the rate at which inadequate collateral security provision by borrowers increases the issues of bad debt in Nigerian, to determine whether fund diversion has any effect on bad debt of Commercial Banks in Nigeria, to ascertain the extent to which government intervention in lending policies of Commercial Banks has influenced bad debts in Nigerian Commercial Banks, to highlight the extent to which improper project evaluation influence bad debt of Commercial Banks in Nigerian. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staffof Union bank in Akwa Ibom state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, marketers and customer care officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
In conclusion, lending involves more risk than virtually any other banking activities. Not all loans should be granted. A profitable loan, which is not safe, should not be granted. The attitude of most borrowers towards loans and advance granted to them should not be ignored – as they regard such credit facilities as their own share of the national cake. Moreover, some fraudulent bank officials receive bribe before approving loans, some officials still bargain the percentage of the credit to be given to them before the approval is made. These eventually lead to poor appraisal of such facility and as well in danger of becoming a doubtful debt because such a bank officials will lack the moral justification to pursue and recover the loan. Furthermore, failure of banks to make use of trained, qualified and experienced personnel in their credit management is a problem that should be addressed Management should therefore analyze the nature of risk carefully before extending credit. Efficient and effective credit management remains a hidden treasure the exact value of which undiscerning boards may be unaware. Efficiency should be predicated on a high quality credit management and adherence to professional banking ethics. It is however, gratifying that, to ensure compliance by enthroning deterrence, the CBN plans a Credit Risk Management Bureau to stem the activities of bad debtors. Credit Bureau (Alao 1996) is envisaged to provide information on bank debtors and their profit to enable banks take decisions on persons applying for loans. This is to arrest the ignoble activities of bad debtors and their accomplices who move from one bank to another leaving a trail of non-performing loans. This will enhance the compilation of “Bad Debtors Black Book” advocated by Sadiku (1993). If this book is introduced, people will be scared to have their names in that register.
The prescription for bad and doubtful debts in Nigeria Commercial Banks could be resolved through the following recommendations:-
- Banks Management should establish sound lending policies, adequate credit administration procedure and an effective and efficient machinery to monitor lending function with established guidelines.
- Reduction of interest rates on lending.
- The character and financial statement of the borrower must be properly studied.
- The Central Bank of Nigeria should re-introduce interest rate regulation on banks.
- Banks should be making public the names of bad and doubtful debtors (by compilation of bad debtors‟ black book in banks).
- For agricultural lending, the rate should be pegged; say 5% while banks that extended such credits to farmers should be allowed to recoup their loss margin through fax rebate among other incentives.
- Giving business advisory services to customers and further extension of credit to alleviate a promising problem loans.
- Finally, the financial institutions should all together, set up credit bureau system which is a form of data bank where every bank will submit the names of its defaulting customers for references by others. This will equally frustrate multiple borrowing from banks for the same purpose by the dubious customers.
- Bagchi, S K. (2003), Credit Risk Management–A Panacea or Conundrum?, SBI Monthly Review, vol. 42 No. 10, pp. 497-504.
- Drigă, I. (2012). Financial Risks Analysis for a Commercial Bank in the Romanian Banking System, Annales Universitatis Apulensis Series Oeconomica, 14(1), pp. 164-177.
- Felix, A.T and Claudine, T.N (2008). Bank Performance and Credit Risk Management, Unpublished Masters Dissertation in Finance, University of Skovde.
- Funso, Kolapo, T.; Kolade, Ayeni, R., et al., (2012). Credit Risk and Commercial Banks’ Performance in Nigeria: A Panel Model Approach, Australian Journal of Business and Management Research, vol.2, No.02, pp. 31-38.
- Greuning, H and Brajovic, B., (2004), Analyzing and Managing Banking Risk A Framework for Assessing Corporate Governance and Financial Risk, The World Bank, bilingual edition, Publisher Irecson.