Credit Administration In Commercial Banks In Nigeria

Credit Administration In Commercial Banks In Nigeria (A Case Study Of First Bank Of Nigeria Plc Enugu)

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The Nigeria House of Representatives passed an act which established Central bank of Nigeria in 1956, but commenced business in 1960 following the recommendation of paton’s commission in 1958. One of its major traditional functions is to manage the nation’s money and economy through the issue of various money and monetary policy circulars.

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The Central Bank of Nigeria under the Central Bank of Nigeria Act of 1956, act was amended in 1969, but now replaced by Banks and other financial institute identities (BOFID) in 1991. The monetary management Function are assigned to the minister but the Central Bank decides on the monetary policy. Therefore, the process of monitoring monetary policy seems difficult.

Over the years, however, the use of selective credit controls had undergone several transformations and modifications. The commonest form was the sectoral   allocation  of  commercial  and  merchant   bank’s loans and

advances within the credit limit specified by the Central Bank. Under that arrangement, agricultural production and manufacturing enterprises were allocated the bulk of bank credit.

For example, Thailand’s Agricultural development bank caters for small farmers who do not have access to commercial bank lending.

Essentially, banks originally emerged as deposit takers. They eventually metamorphosed into intermediators of funds and thereby started assuming credit risk. Credit, thus, became the business of banking and the primary basis on which a bank’s quality and performance are judged.

Stuart (2005) emphasized that the spate of non-performing loans, is as high as 35%. Table 1 shows the ratio of non-performing credits, to total loans and advances in Nigeria Commercial Bank between 1999 and 2009.

Umoh (1994) raced the rising non-performing loan’s ratio in banks’ books to poor loan processing, Undue interference in the loan granting process, inadequate or absence of loan collaterals, among other things, which are all linked with poor and ineffective credit administration.

In essence this paper focuses on the concept of credit, evaluation of credit and recovery processes. The paper is divided into five sections, comprising the introduction, review of literature evaluation and finally, conclusion and recommendations.

1.2       STATEMENT OF PROBLEMS

The work intends to explain the credit administration in commercial bank in Nigeria, and how the managers apply the information when making decisions:

The approaches are:

  1. Inability to improve in recording and keeping accounting information.
  2. Improvement in errors made from manual manipulation of data.
  3. Improvement in-times spent in manual processing of accounting.

1.3      OBJECTIVES OF STUDY

The general objective of this study is to examine credit rationing behavior of commercial banks in South Western Nigeria. The specific objectives include to:

  1. Identify the factors influencing credit rationing decisions of the banks.
  2. Estimate the elsticities of probability of classification of borrowers into different groups.
  3. Examine the effect of changes in the significant variables on the elasticities and
  4. Test the appropriateness of the model applied in this study.

1.4       RESEARCH QUESTIONS

The following research question will be tested.

  1. How much or less of functions is introduced?
  2. How are statement of accounts prepared?
  3. How can loan classification helped in credit management?

1.5       HYPOTHESIS

For the purpose of this research the hypothesis will be tested as follow:

 Null Hypothesis

  1. There is no significance difference among the staff of commercial bank in Nigeria in ascertaining, whether more or less function were introduced.
  2. The is no significance difference among the staff on how statement of account are being prepared.
  3. There is no significance difference among the staff.
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1.6       SCOPE OF THE STUDY

The researcher of credit administration in commercial banks.

This is because the principles of credit administration in commercial bank changes to the development of the economy in recent years.

1.7       SIGNIFICANCE OF THE STUDY

This study is into two, academic significance and practical significance.

  1. It will help organizations appreciate the speed accuracy.
  2. It exposed the application in profit and non-profit making organization.
  3. The study will offer suggestion to managers, who will make use of the information provide in decision making.
  4. The study will provide explanation, its usage by stilled personnel of on organization such as accountants in achieving the aim of the organization.

1.8       LIMITATION OF THE STUDY

The following information will hinder the researcher effort towards actualizing the scope of this study, they are:

  1. Lack of statistical data
  2. There will be a limit time frame to carry out the study.

iii.        There will be financial problems but relying on the finance from my sponsors, it will subdued.

Despite all the these limitations, much effort will be made to ensure that these problems do not weight the need to carry out a sound researcher.

1.9       DEFINITION OF TERMS

BANK

According to Wahab A. Lawal in the journal of Banking, Banks is defined as a monetary institution owned by either government or private business for the purpose of profit making.

CREDIT

            Wahab and Muftau (2007) defined credit as the money that bank give out as loans and advances with a future date of repayment which include aggregate of all loans, advances, overdrafts, bills discounted bank guarantees, bank acceptance, commercial paper, lease and identities.

LENDING IN BANK

Chris and Amenawo (2005] lending in banks is critical in order to facilitate the growth of banks and invariably its environment.

BANK LOAN

Chris and Amenawo (2005) loans are funds granted to individual and organization to meet their temporary or long-term deficient operation.

BANK DEBT

According to my own understanding, bad debt are loans that become impossible to recover due to known circumstances.

DOUBLE DEBT

Double debt are account receivable where the recovery of the loan on the immaturity date is doubtful.

PLC

This is the abbreviation of public limited company.

PRUDENTIAL GUIDELINES

According to my understanding prudential guideline situated by the Central Bank of Nigeria for commercial banks to follow in order to avoid careless granting of credit that will be difficult to recover.

COLLECTION POLICY  

Mallan J.O (2000) defines collection policy as a procedure the firms follows to obtain payment of past due accounts.

CUSTOMER

A person or corporation who holds regular transaction with a bank bought that special accounts, cheques or pass book.

CREDIT POLICIES

Ession (2007) can be defined as policies  directed at developing and encouraging investment in certain sector of the economy.

CHAPTER TWO

2.0       LITERATURE REVIEW

The literature review of this chapter is organized in three section.

  1. Conceptual foundation
  2. Empirical literature review

iii.        Summary of the literature review.

2.1       CONCEPTUAL FOUNDATION

A lot have been written in various magazines, newspapers journals, textbooks by several researchers yet there still need to write more on this topic.

2.1.1                EVALUATION OF CREDIT

            The devastating effect of credit loss which is the aftermath of non-performing loans and advances makes sound evaluation of credit request paramount in all our banks. The credit officers of banks need to properly evaluate and articulate the projects. The customers and the prevailing economic situations Mather 1962 described two basic principles for evaluating credit as safety, suitability and profitability. In the first instance, banks must emphasize among other things, the character (honesty, integrity and reliability, of borrowers. The probability that the amount granted would be repaid from the cash flows generated from the operations of the company much as a matter of requirement will be high.

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The borrower must be able to provide acceptable security, which will serve as something to fall back on if the expected source of repayment fails, secondly, the bank should be satisfied of the loan must be legal and non-conflicting with the economic and monetary policies of the government, Central Bank of Nigeria (CBN) guidelines and Banks and other financial institutions Decree, Certain Ventures such as gambling be avoided while giving credit facilities to customers.

Also, profitability is a guiding force to any operation of the bank, including credit extension. As profit oriented institutions, banks necessarily expect their facilities to yield certain level of profits with which they can declare dividends to make shareholders happy, the interest charged on loans and advances constitutes a major sources of income to the banks among others.

However, the enumerated principles of leading identified by Mather were discovered to be inadequate, there are some other factors which must be considered when granting loans and advances. The factors are usually described as the Canons of leading and according to Adekanye 1983 are presented in question forms as follows: How long does he want it?

How much does the customer want to borrow:

The introduction of the banking in Nigeria house of representatives passed an act which established Central Bank of Nigeria, one of its major traditional functions is to manage the nation’s money and economy through the issue of various money and monetary policy circulars.

2.1.2                THE IMPORTANCE OF CREDIT IN MODERN ECONOMY

The credit is important to our modern economy in the following ways

  1. Credit provides a convenient and economical medium of exchange by supplementary or superseding other Forms of money. It saves the community the cost of acquiring large sum of standard money.
  2. Credit enables the financial system to render its two fold services by providing a system exchange and s system of capital supply.
  3. Credit aids the creation of money in the process of lending is thus a powerful instrument that could be employed by the monetary authorities as a tools of policy to turn the economy around.

2.1.3                CONCEPT OF CREDIT AND CREDIT ADMINISTRATION

Credit in the context of this study is the bank borrowing facilities extended to customers and other applicants through their request, credit administration is the system, process and procedure which guilds and regulates the qualification of applicants request for credit before they are granted.

According to Orji 1996 credit is the right to receive payment of the obligation to make payment on demand or at some future time on account of the immediate transfer of goods or money, this is generally based upon the confidence which the creditors response  on the ability or willingness of the debtor  to fulfill his promise to pay. The receive payment and the obligation to make payment originates simultaneously.

Ojo 1992 view lending administration as major control measure that the bank uses to regulate lending. However the holistic activities of credit administration or writing funds it analysis the objectives of granting credit from its start to the finished.

2.1.4                FUNDAMENTALS OF LENDING PRINCIPLES AND CREDIT ANALYSIS

            Loan and advances from the bank of a commercial banks total asset base. The next income from loans is the bulk of the banks single largest exposure to risk. Due to these resources the quality of the bank’s loan portfolio critical to the success of the bank. The amount of the bank can leads as well as the rules and terms from granting loans are limited by these factors:

  1. The amount of funds available to the bank, these limits how much the bank lend.
  2. CBN monetary guidelines and other regulation the bank must comply with regulations.
  3. The cost of funds, this influence the pricing of loans and other investment.
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Hill 1983 states that is the past, the problem of non-performance debts have always been attributed to the need for internal assessment of the qualification for the loans. But modern credit management practice demands that the bank inquire about the fire of lending:

  1. The capacity of the borrower
  2. The character of the borrower
  3. The collected attached to the request
  4. The capital the borrower possess

The three basic principles of lending which banks to granting credit to applicants at any level. These principle are:

  1. The safety principle.
  2. The profitability principle.
  3. The suitability principle.

2.1.5                CONCEPT OF CREDIT ANALYSIS

            Hussain (1988) defines credit analysis as the assignment of some risk can be measured with historical and projected financial data,. The decision, by the households, to borrow or apply for credit is conceptualized as a sequential process. In the first step. The household decides on whether to apply or not, it follows that after this initial decision, some applied for credit, in the second stage. The banks decide on whether to give the borrower all the credit asked for, or partially approve the demand by reducing the amount requested for or to totally reject the application, from these outcomes, based on the discretion of the groups, one credit constrained rationed are these whose applications were rationed. Two are those rejected, three is the credit non-constrained and are those whose applications were fully approved.

2.1.6                THE CENTRAL BANK OF NIGERIA

According to Ahmed A. (1991) the following objective which can change from time to time depending on the economic position of a particular country, introduction by the central banks.

  1. To develop banking habit, financial system and manpower for the banking industry.
  2. To generate rapid economic development

iii.        To ensue balance of payments equilibrium.

  1. To facilitate full employment

2.1.7                THE EXTENT OF BANK REGULATION AND SUPERVISION IN NIGERIA

The phases of bank regulation and supervision in Nigeria can be classified into three:

  1. The post Nigeria banking ordinance period (1952 -1958).
  2. The post-CBN establishment period (1959 – 1986).

iii.        The eva of financial reforms (1987 to date).

The bank failures that came with period of free banking largely the failure of indigenous banks brought serious hardship to many depositors, leading to the enactment of the banking ordinance of 1952. This brought some sanity into banking scene, the ordinance was amended in 1958 and 1962 and finally repeated in 1969 with the enactment of the banking decree the ordinance was principally to regulate banking operations and practice.

The establishment of the CBN as the apex regulatory agency for licensed banks ushered in another phase of bank regulation and supervision in Nigeria. The act establishing the CBN as well as the banking decree were repealed with

Credit Administration In Commercial Banks In Nigeria

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