CREDIT MANAGEMENT IN THE BANKING SECTOR AND ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

Bank credit has been the responsibility of Central Bank of Nigeria, in order to manage our monetary system; it is also one of the instruments of monetary policy that can be used for economic system. Various sectors of the economy require finance for different purposes; one main purpose is to promote economic activities, the issue of credit becomes necessary as these economic agents do not have the ability to raise the required capital for the execution of their plans. The availability of bank credit allows firms to increase production, output and efficiency and in turn increase the profitability of banks (Agbada, 2010).

Banks major objective is to facilitate technological innovation through their intermediary roles; they provide means by which funds can be transferred from surplus units in the economy to the deficit units and this role is performed primarily through the acceptance of deposits of different categories and characteristics for onward lending by way of Loan, Advances and Overdraft. With the giant strides made by mankind in science and technology, banks as forefront institutions in satisfying human needs have undergone dramatic changes in their function ranging from settlement of debt, enhancement of international trade through the provision of letter of credit services, traveler’s cheque services, purchase and sale of foreign currencies, provision of business and advisory services, acting as agents of customers at Central Bank of Nigeria, trustees and executor of estate e.t.c.

Financial intermediation can be a casual factor for economic growth. According to Nwaru and Okorontah(2014), a 92.5% reduction in overall credit causes a reduction in the level of GDP by around 1.5%. Similarly, economic growth can be a casual factor for financial development. The economy within the present dispensation can stand the test of time without banks and other financial institutions. The bank industry is known for the provision of a basket full of inter-related services to individuals, business units, non-profit oriented organization as well as government.

In the history of development of the Nigerian banking industry, it can be seen that most of the failure experienced in the industry prior to consolidation era were result of imprudent lending that finally led to bad loans and some other unethical factors (Abdulraheem and Fatima, 2010). It is more important to note that the consolidation process in the banking sector or has however assisted in augmenting the capital base of Nigerian banks and as such increasing their ability to administer more loans for the growth and development of the economy. The sectors ability to fulfil this function is an identified impetus for the Nigerian government in achieving its dream of being among the most developed economies of the world in the year 2010. It is an open secret now that banks advance a major of their deposits to borrowers and keep smaller parts of deposits to customers on demand, even then the customers of the banks have full confidence that the deposits lying in the banks are quite safe and can be withdrawn on demand which is in line with Bank and Other Financial Act (BOFIA) 1991.

Lending and credit management is very vital to banks which if not properly carried out can hinder the effective operations of  the banks, improper lending decision which leads to accumulation of huge debts that adversely affect banks effectiveness. It is therefore expedient that bank managers should be equipped with better information, principles, techniques required for effective lending rather than regarding them as a mere guideline which have limitation, lending is highly subjective in nature, the final analysis depends on the judgement of the lender hence in making final judgement, the lender must review all techniques, principles and knowledge acquired through environment and project analysis. The credit character and prospects of the borrower must also be scrutinized.

However it is sad to note  that the Nigerian banking industry has not lived up to expectation, in this regard the industry has been bedeviled by mass failure and distress between 1990 and now, most industry have attributed this experience to a number of decisions chief of which will form the focus of this study, insider abuse and credit management.

1.2             STATEMENT OF THE PROBLEM

Today, the increasing financial improprieties, insolvency, nonperforming loan, distress in banks and near collapse of  the financial system accounted for the company and quest by business community for total economic recovery. This study identifies the problem of bank loan and advances on economic growth and development.

Secondly, the unbearable financial burdens that bank customers bear in the course of repaying these loans as a result of high interest charges, penalties etc. This study also identifies the problem of nonperforming loan on economic growth of Nigeria

The foregoing problem needs to be assessed in order to advance a more realistic measure which if properly implemented will bring about dramatic changes in the banking industry.

1.3             PURPOSE OF THE STUDY

The objective of this research works centres around finding ways of solving a particular problem that is determining the effective of the credit management techniques set by First Bank in controlling its credit extended to its prospective customers.

To discuss the role of banks in the economics development of Nigeria.

To evaluate the effect of poor credit management to bank distress in Nigeria.

1.4       RESEARCH QUESTION

1.         What is credit management?

2.         Who is due for credit?

3.         What are the methods for payments?

4.         What are the procedures for calculating credit?

5.         How do we manage credit cycle?

6.         What are the policy guiding it?

1.5       RESEARCH HYPOTTHSIS

For the purpose of this study the research hypothesis will be analyzed as follows:

TEST I

Ho:      The techniques employed in collecting debt loan do not encourage quick Repayment

Hi:       The techniques employed in collecting loans encourage quick repayment.

TEST II

Hi:       Defect in credit management will not lead to increase in bad debt

Ho:      Defect in credit management will lead to increase in bad debt.

1.6             SIGNIFICANCE OF THE STUDY

1.                  The study will enable the general public and bank to know the purpose of loan.

2.                  they will also find out the following:

i.                    The sources of payments

ii.                 The risks that is involved

iii.               The protection for the bank

iv.               The loan structure i.e. short term medium term or long term.

1.7             SCOPE AND LIMITATION OF THE STUDY

The scope of this study will cover the appraisal and credit management in banks, in which First bank is used as the case study of the research work.

The limitation of this study is based on the extent at which data rate made available, also the problem of fund and also the problem of time constraints.

1.8             DEFINITION OF TERMS

The following terms are defined below in order to make it easier and understandable for a layman.

1.                  credit management

2.                  credit policy

3.                  credit vetting

4.                  credit monitoring and collection procedures

5.                  security of payment

6.                  credit control

1.         CREDIT MANAGEMENT

It is concerned primarily with managing debtors and financing debts. It is achieved by collecting payment in accordance with the agreed terms.

2.         CREDIT POLICY

it is a rule within which credit management operates for determining how much credit to give and on what term and dealing with late payers including taking them to court.

3.         CREDIT VETTING

It is the process of assessing customers’ application for credit. It is the systematic approach for deciding individual’s credit limit that treats all customers fairly.

4.         COLLECTION PROCEDURES AND CREDIT MONITORING

This is important for collection of cash, collection of debts risking the loss of customer’s goodwill in the future.

5.         SECURITY OF PAYMENT

It is concerned about the credit, risk of borrowers therefore, a bank can decide on the following:

i.                    refuse to lend

ii.                 agreed to lend but at a high rate of interest

6.         CRDIT CONTROL

It is a process of deciding how much credit should be given to customers or borrowers and ensuring compliance with the credits terms that are set.