The Effect of Loan Management in Relation to Bank Profitability (a Case Study of First Bank Plc Bauchi Branch)
CHAPTER ONE
OBJECTIVES OF THE STUDY
The main objective of the study is to examine the effect of loan management on the performance of banks in Nigeria.
The specific objectives of the study are:
- To investigate the effect of loan management on the performance of First bank Plc, Bauchi from 2013 to 2019.
- To determine other factors that influence the performance of banks in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
2.1 WHAT IS LENDING
Lending is the process granting and allowing a borrower the use of loan on condition that they pay it back with interest at an agreed date. A loan is an asset for the lender and a liability for the borrower. To the lender, the loan is an asset that is expected to be repaid along with compensation for the costs and risk of lending. To the borrower, the loan is a liability that is required to be repaid along with charges for receiving the benefits of borrowing.
ATTRIBUTES OF GOOD LENDING
SAFETY
The lender needs to ensure that funds lent are safe and that the lender’s own financial position is sound. Safety when applied to an advance, is an understanding that the borrower has the legal capacity to borrow, and to provide security should this be required.
LIQUIDITY
Liquidity is the ability of the borrower to meet repayments as they fall due. In the case of a personal loan this would be from monthly salary, and for a business from cash generated from business operations.
PROFITABILITY
Profitability is measured in terms of the income generated by the advance in terms of interest and fees and its proper reflection of the risk involved.
CHAPTER THREE
METHODOLOGY
INTRODUCTION
This chapter is designed to provide a detailed description of the methodology adopted for the study. The main issues examined in this chapter include the research design, study population, sources of data, data analysis techniques and validity and reliability of data.
RESEARCH DESIGN
Based on the purpose of the research, the researcher decides that explanatory study is the most suitable for the topic. Even though the research starts with the description about loan management and performance of banks, the ultimate goal is to test if a relationship exists and how the Loan management could impact on performance of banks. That is to say, the aim is to find causes and effects of the problem under study. The main task is to separate such causes and to say to what extent they lead to such effects. Therefore, the study seeks to explain the causal relationship between the variables. Hence, the researcher considers explanatory study as the research design.
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION OF FINDINGS
INTRODUCTION
In the previous chapter, the methodology and sources of data for the study was examined in detail. In this section, the collected data is analysed with the view of finding relationships between the study variables. The results are discussed and compared with existing literature on the subject.
DESCRIPTIVE STATISTICS
The descriptive statistics of the dependent and independent variables used in the study are presented in Table 4.1. Return on Equity (ROE) and Net Interest Margin (NIM) which are a proxy for profitability/performance were used as the dependent variables.
The main independent variables are Loan Loss Provision to Gross Loan Advances (LLP/GLA) and Loan Portfolio profitability (LPP). These two Ratios are used to measure credit quality of the commercial banks (Nigeria banking survey, 2014). Other independent variables used in the model include Cost Income Ratio (CIR), Liquid Funds to Total Assets (LF/TA), Natural Logarithm of Total Assets (LASSET), Loan portfolio profitability (LPP) and Loan Loss Provision to Gross Loan Advance (LLP/GLA). The descriptive statistics indicate that on average, the return on equity for the selected bank is 21.34 percent. This means that investors on average receive a little over 21% on their equity. Also, the cost to income ratio (CIR) averaged 0.64 with a standard deviation of 0.213. The average values for Liquid funds to total assets
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
INTRODUCTION
This chapter presents the summary of findings, conclusions and recommendations based on the results. The summary presents a snapshot of the research findings. The inference based on the empirical study is captured in the conclusion while recommendations are proposed based on the findings.
SUMMARY OF FINDINGS
The results from the analysis indicate that loan management, measured by loan loss provision to gross loan advances (LLP/GLA) and loan portfolio profitability (LPP), has a significant effect on the financial performance of First bank Plc Bauchi branch. For instance, the result shows that an increase in loan portfolio profitability leads to an increase in the financial performance of First bank Plc Bauchi branch. The results also show that LLP/GLA has a negative but statistically insignificant effect on the financial performance of banks in Nigeria. The results imply that the higher the provision for loan loss to total advances, the higher the credit risk and hence the higher the accumulation of unpaid loans and interest. Unpaid loan and associated interest reduces the profit of the bank thereby making it less profitable.
In addition, the study reveals that the coefficient of the cost-to-income ratio is statistically insignificant and negative in the model.
Furthermore, the study established that net interest margin has a positive and statistically significant effect on the financial performance of First bank Plc Bauchi branch in Nigeria.
Finally, bank size has a positive effect on bank profitability. The implication of this result is that bank size has the potential of inducing economies of scale which makes larger banks more profitable. Thus, the larger the size of the bank, the more profitable it becomes due to economies of scale.
CONCLUSION
The purpose of the study was to examine the effect of loan management on the financial performance of First bank Plc Bauchi branch. Return on Equity (ROE) and Net Interest Margin were designated as a proxies for financial performance whiles Loan Portfolio Profitability (LPP) and Loan Loss Provision to Gross Loan Advances were used as proxies for loan management. In addition, Cost Income Ratio (CIR), Liquid Funds to Total Assets and Total Assets were used as other control variables to test their effect on financial performance of First bank Plc Bauchi branch. The results of the study established that loan management has significant effect on the financial performance of First bank Plc Bauchi branch.
Considering the factors that account for loan management as established by the research findings, it can also be concluded that the granting of loans which is a core lending activity of the banks is heavily exposed to credit risk. Management therefore needs to put in place pragmatic measures to mitigate the risk in lending so as to improve the quality of the overall loan portfolio, hence performance.
RECOMMENDATIONS
Firstly, the result shows that LLP/GLA has a negative effect on the financial performance of banks in Nigeria. It is recommended that, First bank Plc Bauchi branch should develop effective and efficient strategies and policies to improve the quality of their loans in order to improve their profitability.
Secondly, the result indicates that cost-to-income ratio has a negative effect on bank performance. It is thus recommended that efficient cost management must be adopted by Nigerian First bank Plc Bauchi branch to improve performance.
Furthermore, the result shows that net interest margin has a positive effect on the financial performance of First bank Plc Bauchi branch. It is therefore recommended that, First bank Plc Bauchi branch should be allowed to invest more in loans and advances as long as such banks have enough reserves to finance such investments.
Finally, the findings of the study indicate that bank size has a positive influence on bank performance. It is thus, recommended that, First bank Plc Bauchi branch should be allowed to scale up their operations so long as there is adequate capitalization to support their growth.
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