CREDIT MANAGEMENT AND ISSUES OF BAD DEBTS IN COMMERCIAL BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The Nigerian banking industry is one sector of the Nigerian economy, whose services are ever needed by individuals and corporate organizations.  One of the key players in this industry is commercial banks. The popularity of commercial banks is not because they are the only legally or commercially recognized intermediary in the system but because of their branch network, large customer base and the ease with which people transact business with them. (Afolabi, 1991). Commercial Bank lending represent the heart of the industry. Loans dominate the bank’s asset holding and generate the largest share of their operating income. Loan department/ officers are among the most visible, while loan policies typically determine how fast a community develops and what types of business spring up. The greatest challenge to the banks today is granting profitable loans at reasonable risks in the face of intense competition. (Olalusi, 1999). It is a known fact that not all credit facilities provided by banks are collected back. Many banks in Nigeria have been liquidated as a result of bad debts. The current state of our economy is a pointer to the fact that banks need to improve on their services as it relates to bridging the gap between the surplus and deficit units of the economy. Thus, a good management scheme will help to reduce the amounts which may be lost as bad debts and also in the collection process and period. (Nnanna, 2001). In June 2012, the former Finance Minister, Anthony Ani, predicted that “the merged banks will eventually die” (Daily Sun, June 18, 2012). There have been debates about the banking industry and it’s rising and falling status, mergers, and acquisitions, recapitalization, and nationalization of banks, failed banks tribunal and so on since the early 1980s. The underpinning was a lasting solution to the crisis that seems to engulf the banking industry. Moreover, the banking industry has been known for its intermediation role in providing financial assistance (credit) needed in the economy. This role is normally carried out in many ways, for example, granting of loans and advances to customers, which constitute the major part of bank lending. Apart from loans and advances, there are other forms of banking or bank credits or bonds issued by banks for and on behalf of customers. Banks are merely custodians of the money they lend; hence interest must be paid to depositors and dividends to the investors. Credit management can be seen as an integral part of lending and as such in its absence, good loans can turn bad. It is expedient to note that the importance of credit management cannot be over-emphasized and good credit management requires the establishment of adherence to and of sound and efficient credit policies of the government. For banks to be successful, their corporate credit appraisal, disbursement, adequate monitoring, and repayment must be assured. But experiences over the years have shown that inadequate credit analysis and sound judgment of loans application have resulted in nonperforming loans. The 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 using its money. These loans and advances usually have maturity period In providing credits for business ventures, banks should as a matter of importance take all necessary steps to ensure that advances are granted to those customers who can and will make judicious use of loans so that repayment will not become a problem. Therefore credits must be made to people who are capable of utilizing it well and repaying the loan at its maturity. The place of loans and advances in the affairs of banks can be explained by referring to the fact that “loans and advances are the largest single item in the assets structures of Nigeria commercial Banks (Ani 2012).” It also constitutes the main source of the operating income of banks and also the most profitable assets for the employment of bank funds (Nwankwo 1980). In providing credits for business ventures, banks should as a matter of importance take all necessary steps to ensure that advances are granted to those customers who can and will make judicious use of loans so that repayment will not become a problem. Therefore credits must be made to people who are capable of utilizing it well and repaying the loan at its maturity. The place of loans and advances in the affairs of banks can be explained by referring to the fact that “loans and advances are the largest single item in the assets structures of Nigeria commercial Banks In the past, the bank owner were euphoric over their success, delighted with the profits but are surprised when the huge profits are compared with the bad and doubtful debts. At this juncture, it is a glaring indication that most banks were only declaring mere paper profits and it became very obvious that the bank’s performance was below expectations.

1.2       STATEMENT OF THE PROBLEM

A review of the financial statement of commercial banks over the years shows that the huge amounts of money that are always written off as bad debts each year has been on the increase. Maybe, it is because commercial banks extend credits to the wrong people or that they don’t do enough in terms of collection efforts (Central bank of Nigeria (Sanusi Lamido Sanusi 2010) report presented to the CBN board. One of the ways to totally avoid bad debts is to refuse to lend money at all. If banks should then refuse to lend at all, then the issue of profitability is canceled and hence the main purpose of carrying on a business, which is to maximize profit, is then defeated. Credit must be adequately managed so that banks could remain in business and prudent lending could do this. The provision for bad and doubtful debts rises steadily in banks’ annual reports which send bad signals to the investors within the economy. The cases of failed banks in the economy over the years have made the investors lose confidence in the banks. Hence, the existing evidence in Nigeria points to a decline or stagnation of private investment during the immediate past reform years. The industries usually make short term planning as opposed to long term planning which tends to hamper their forecast and projection into the future activities and earnings. The success of any program in bringing about a sustainable recovery in economic activity in an economy depends crucially on the behavior of investors in the aftermath of the reform process. In Nigeria, many reform programs have been undertaken in the banking industry with little or no impact on investment behavior. The behavior of private investment has been identified as a factor for assessing the reform outcome. The existing evidence in Nigeria points to a decline or stagnation of private investment during the immediate past reform years (World Bank 1988, Harriggen and Mosley 1991, Green Way and Morrissey 1992; Gunning; 1994; Coller 1995, Dehn, 2000; Lomi and Sisay, 2001). It is against this background and others that the researcher is interested in investigating the issue of credit management and bad debts in commercial banks in Nigeria.

1.3       OBJECTIVES OF THE STUDY

This study sought to evaluate credit management and issues of bad debt in commercial banks in Nigeria. Specifically, the study sought to:

1. access the relationship between the issues of bad debt and commercial banks in Nigerian.
2. identify the various measures adopted by commercial banks in the prevention of bad debt.

iii. identify the effects of bad debt on the performance of commercial banks.

4. investigate the causes of bad debts in Commercial Banks in Nigeria.

1.4       RESEARCH QUESTIONS

1. What is the relationship between the issues of bad debt and commercial banks in Nigerian?
2. What are the various measures adopted by commercial banks in the prevention of bad debt?

iii.   What are the effects of bad debt on the performance of commercial banks?

1. What are the causes of bad debts in Commercial Banks in Nigeria?

1.5       Research Hypotheses

Ho1: There is no relationship between the issues of bad debt and commercial banks in Nigerian.

Ho2: There are no measures adopted by commercial banks in the prevention of bad debt.

Ho3: Bad debt has no effect on the performance of commercial banks.      

1.6       Significance of the Study

This study will be of immense benefit to other researchers who intend to know more about this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for another study.

1.7       Scope/Limitations of the Study

This study is on credit management and issues of bad debts in commercial banks in Nigeria with a view of finding a lasting solution to the problem.

Limitations of the study

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire, and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted to the research work.

1.8       Definition of Terms

Credit management: is a person employed by an organization to manage the credit department and make decisions concerning credit limits, acceptable levels of risk, terms of payment and enforcement actions with their customers.

Bad debt: Bad debt is debt that is not collectible and therefore worthless to the creditor. Bad debt is usually a product of the debtor going into bankruptcy but may also occur when the creditor’s cost of pursuing the debt collection activities is more than the amount of the debt.

Commercial banks:  A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. The main function of a commercial bank is to accept deposits from the public for the purpose of lending money to the borrowers.

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