CHAPTER ONE

INTRODUCTION

1.1      Background of the study

The banking industry has been known for its intermediary role in providing financial assistance (credit) needed in the economy. This role of financial intermediation is carried out in so many ways. First to be mentioned is the granting of loans and advances to customers which constitutes the major part of banking lending. Apart from loans and advances, other forms of bank credits like bond issued banks for and on behalf of their customers. In providing credits or for business venture, banks should as a matter at important take all necessary steps to ensure that advances are granted to those customers who can and will make judicious use at loans so that repayment will not become a problem. Therefore credit must be made to people who are capable for utilizing it well and repaying back the loan at its maturity data. Affairs at banks can be explained by reference to the fact that “loan and advances are the large single item in the asset structure of Nigeria commercial banks; it also constitutes the major source at the operating income at banks and also the most profitable asses for the employment of bank funds. According to Olashore, “credit (Loan and advances) are important to the bank balance, they account for a large proportion at banks income; such operating income produced from sound investment and effective management of such funds in credits enables the bank to:

(i)      Pay depositors interest

(ii)     Pay investors dividend

(iii)    Pay government tax

(iv)    Have further investment and

(v)     Maintain adequate reserves.

The actual work in connection with the management and conversion of such funds into various types of credit facilities in an operating function is performed by the credit department of commercial bank instruct compliance by the “Board of Director” at the bank, lie annual credit policy guidelines and prudential guideline (1990) of the Central Bank of Nigeria (CBN) and other monetary and fiscal policy issued by the government of Nigeria. The credit department is usually headed by a loan officer manager who has acquired a high skill experience and personal judgment criteria in credit administration. Medium - term loans and long-term loan including overdraft facilities.

1.2      STATEMENT OF THE PROBLEM

The only way to avoid bad debt is to refuse to lend money at all. But if banks should refuse to lend money at all issue at profitability is called hence the main purpose of carrying on business which is to maximize profit will be defeated. Credit must be adequately managed so that banks could remain in business and this could be done through prudent lending. However, irrespective of how prudent a bank may be in its lending, the fact remains that every year, provision for bad and doubtful debts should be provided for. 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 advances granted to them should not be ignored. As they regard such credit facilities as their own share at the national cake. Furthermore, failure at banks to make use of banks to make use of trained qualified and experienced personnel in their credit management is a problem that should be addressed. Bank is merely customers of the money that depositors deposit with them, and hence interest must be paid to depositors and dividend to the investors. Credit management can be seen as an integral part of lending and as such in its absence, good loans can turn into bad one. It is expedient to note that the important of credit management cannot be over emphasized and good credit management required the establishment of Adherence to and of sound and efficient credit policies of government. For banks to be successful their corporate credit policies must be sound procedures for monitoring and repayment must be ensured adequately for credit appraisal disbursement. But experiences over the year have shown that inadequate credit analysis and sound judgment of loans application has resulted to outperforming loans. Provision of credits which are in the form of loans and advances are the total amount of money a given bank lends out to its customers at any given period of time. The bank usually charges the borrower interest for bank using its money. These loans and advances usually have maturity period. Such credit facilities provided by banks are usually in the form of short term facilities.

THE OVERALL RESULTS OF THE ABOVE ARE:

(i)    It exposes the bank to various problems of debt recovery.

(ii)   Consequently expenses are incurred in form of provision made.

1.3      OBJETIVE OF THE STUDY

The main objective of this study is on credit management in Nigeria commercial banks. But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

1.   To examine the effects of bad and doubtful debt in Nigeria Commercial Banks Profitability.

2.   To assess the incidence of bad debt on the banking industry and the economy in general.

3.   To identify the possible measure of preventing the occurrence of bad debt in the Nigeria Commercial Banks.

4.   To ascertain the relationship between credit management and banks profitability

1.4      RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: the incident of bad debt on the banking industry and the economy in general is not high

H1: the incident of bad debt on the banking industry and the economy in general is high

H02: there is no significant relationship between credit management and bank profitability

H2: there is a significant relationship between credit management and bank profitability

1.5      SIGNIFICANCE OF THE STUDY

The significance of this study is to make contribution on the going study of problem loans in the Nigerian commercial Banks. The study will also add to our understanding of how Nigerian commercial banks grant their credits.    This work is also relevant in educating the readers on the basic and conflicting rudiments of Nigeria commercial Banks Credit operations and the causes of bad and doubtful debts, stating also those who stands to benefit from the study and how. The Beneficiaries of this study are:

(i)    The practicing bankers.

(ii)   The credit and loan officers,

(iii)  The bank directors/managers

(iv)  The investors etc

Moreover, this study could be of immense help to students of banking and finance to equip them when they go into the field of the course they read.

1.6      SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers credit management in Nigeria commercial banks. The researcher encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study       

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

 1.7 DEFINITIONS OF TERMS:

CREDIT: This is financial assistance in form of loans and advances granted by banks to their customers.

 LOANS: A borrowed sums of money at an agreed rate at interest, usually for a specified period of time and repayable in line with the terms of the loan agreement.

 C.B.N: Central Bank of Nigeria; This is the apex regulatory authority of the financial system.

CREDIT GUIDELINE: An annual monitoring circular (guiding Principle for Commercial and Merchant Banks lending published by the C.B.N.

CREDIT POLICY: This rules and regulations guiding banks in their lending.

  BAD AND DOUBTFUL DEBTS: This offers to all the non-performing credit facilities to reflect such specification in the C.B.N prudential guidelines.

OVER - DRAFT: This is a less formal credit facility by which a current account customer is allowed by a bank to write cheques in excess of the existing balance in his/her account.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.  

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