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THE IMPACT
OF EFFECTIVE CREDIT MANAGEMENT ON THE PROFITABILITY
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Credit
generally denotes loans and advance made either directly by a credit (lender)
or a debtor (borrower) on the principles of different payment. The banks as a
lender, provides credit facilities by making funds available to customers in
agreed terms and condition of payment. The gain of credit to the bank is
purposed to be huge profit instead of this over year, modern banks
(particularly First Banks) have been recording huge amount of bad debt
provision which increase with each consecutive.
The term
credit is the granting of money (loan) and advances to borrowers with the
general expectation that they would honour their obligation to repay the fund
or without interest when due.
Credit is
the means by which we are able to obtain immediate benefits of goods and
services upon the promise of payment at a future date. One of the main reasons
for obtaining credit is that money which is our recognized unit of exchange is
kept in relative short supply and although we may have enough credit for those
items which require but cannot immediately afford and as these problems is not
confined to individuals. A banks objective is to make money and one of the
methods used to achieve this by loans.
However,
loans are only granted to those whom they have every confidence in them as
often as not, demand some form of security. The motive for lending money is
therefore to acquire profit for themselves and not out of favour to the
customers. Although, we are not able to adapt such stringent attitudes, our
motives for granting credit must be the same.
It is
however, dishearten to note that not withstanding the level and magnitude of
impact that the banks have on economy in terms of importance which is
unarguably immense. Whenever money is always certain a risk of not getting it
bank from such customers. It is this (non payment of loan) that has made it
necessary for this research to go into area of credit management. The impact of
effective credit management as a process is very essential for banks because
poor credit revaluation leads to poorly unstructured loans facilities that
reduce the profitability and liquidity of the banks.
First Bank
of Nigeria Plc is a leading banking institution in Nigeria with over a hundred
years of banking experience, founded in 31st March 1984 by a shipping magnate
from Liverpool, Sir Alfred Jones. It commenced as a small business bank in the
Office of Elder Dampster and Co. in Lagos. Today, First Bank of Nigeria Plc has
diversified into a wide range of network of banking activities and services
including commercial, become appetent factor in the development of the country.
It was
incorporated as limited liability company in London, with its Head Office in
Liverpool under the corporate name “Bank of British West Africa”, with a paid
up of Twelve Thousand Pounds Sterling (E12,000). It commenced business after it
had absorbed its predecessors assets in the African banking of the pre-eminent
position which the bank was established in the banking industry in Wet Africa.
In 1896, a
bank was opened in Accra, Gold Coast (now Ghana) which another was established
in Freetown Sierra Leone in 1898. This marked a milestone in banks
intentionally banking operations thereby justifying its West African coverage
operationally. The second branch in Nigeria was situated in the old Calabar in
1990 and two yeas later, it services had extend to Northern Nigeria with a
branch network of 291 in 1996 spread throughout the federation, including
London. The bank has the highest number of branches in the banking industry.
The banking
has experience a phenomenal growth over years with a share capital of 55.6
million in 1980, which rose to N684 million in 1995, the banks total assets
currently stand at N69.82 million, supported with a deposit based on N41.641
million.
When the
bank began operation in 1894, it has a staff of six composing of 3 Europeans
and 3 African today, the bank is virtually fully Nigerianalized. This is of
course has been the result of planning responsiveness of the yearning of the
Nigeria people and government as well as the banks determination to identify
with the aspiration of the country in its march towards national development.
As a result
of corporate policy to clivas its portfolio of noncore activities and in order
to meet the bank of England’s regulatory requirement of the banks foreign
partners, the standard chartered banks of Africa Plc, have reduced their
shareholding to 9.9% following the offer of 120.941.195 share to the Nigerian
public, thus bringing the equity holdings by Nigeria to 90.1%.
The bank has
maintained its leadership in financial long-term lean to the colonial
government. Today, the bank boast of a diversified loan portfolio to various
sectors of the economy. The banks rural banking record is unmarked by army
banks while its agricultural credit facilities through the community farmers
tremendous access to the much needed bank credit.
In meeting
the challenges of the second century the First Bank of Nigeria Plc is committed
to put a smile on the face of every customer.
1.2 OBJECTIVE OF THE STUDY
The
objectives of the extended essay include the followings:
i) To examine the various
considerations and analysis in the impact of credit management for lending
purpose in the principal industries especially the First Banks.
ii) To assist practitioners in the
banking industries to acquire the high degree of unperformed credits as
presently carried in their debt portfolios and assist in sound and reasonable
credit aimed at minimizing the incident of bad debt.
iii) To suggest the portion of lending (i.e.
advances and loans) that should be allotted to individuals customers.
iv) To find out from all available data
the lending structure of banks (First Banks) in Nigeria with particular
emphasis on the selected banks located in the nations.
v) To stir or stimulate interest in
this area for prospective students who may wish to develop their career in the
area or filled of credit management.
vi) To serve as a useful preliminary
paraphernalia (tool) or materials for further study in the filed of credit
management.
1.3 SIGNIFICANCE OF THE STUDY
It is the
hope of evaluate credit management process and the subsequent problems of
unperforming loans and the increasing incidence of bad debt that this study is
made. It is also hoped that it will serve as a useful tool (material to those
who may wish to further in the filed or credit portfolio in banks with view to
or in an attempt to identify those credit that are performing against these
credit with a high degree of default in order to enhance debt management
practices in the Nigerian banking environment.
The impact
of credit management as a system or a process is very essential for banks
because poorly structured loan facilities result in bad debts and losses which
in-turn goes to educe the profitability and the liquidity of the banks. Taking
into cognizance the above significance it use hope that the material as a
product of this research shall assist the practitioner in the banking industry
to promote their skills on the impact of credit management.
1.4 SCOPE OF THE STUDY
The research
examines of the banking and the activity of First Bank of Nigeria Plc. It also
highlights the importance of banking services to the economic and commercial
activity of a counting. The research emphasized more in a way and method
facilities to a customer. The maintaining of such loan by the bank officials.
It also looks into the policies guiding or these policies made and review the
steps followed by the bank to process a loan request the types of security
accepted as collateral.
1.5 LIMITATION OF THE STUDY
The
incidence of credit mis-management in the financial system has no Luther to
attract due to attention and discussion until recently.
The depth of
distress in financial system which could be essentially traceable to credit
mis-management as well as a few other forms of frauds appeared to have brought
to the need to address this economic malaise.
The
incidence of huge bad debt in the banking industry has not only attracted the
attention of the monetary authorities but the public at large. There is a
growing concern in these sectors of increase potential for bank failures if the
problems is not urgently address. The fear may be out of place when viewed
against recent development on the industry. In January 1991, the Central Bank
of Nigeria took over control of Nigeria which was established in 1933 by the
defunct Western region.
The research
is going to optically analyze the inefficient credit management procedure
adopted by some banks which is the initiator of bad debts incidence thereby reducing
its liquidity ratio. The research is aimed at finding the cases and solution to
such problems, bad debts for effective and efficient management.
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