Abstract
This study was on effective Management of Loans and Advances in Nigeria. Three objectives were raised which included: Know the benefits of efficient and effective management of loans and advances in commercial banks, determine the cause of the present poor management of loans and advances in Nigeria commercial banks and assets the extent and depth of the poor management of commercial banks loans and advances in Nigerian economy. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from first bank, Lagos state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Chapter one
Introduction
1.1Background of the study
Loans are the most important asset held by banks; but loan has its own cost and risk. In other words, the granting of credit, though beneficial for business as a whole, is not without cost, either to the supplier or to the buyer, or to both. It follows therefore that the process of granting credit to customers, and the tasks of risk assessment and risk analysis, amount to no more than weighing the benefits of granting credit against the cost to the supplier of doing so. Furthermore, that cost element is not restricted to non-payment, or bad debt losses, but applies to cost of the credit period itself and the cost incurred in late payment. Therefore, although, lending which is a primary function of commercial banks, and the single most important source of gross income for commercial banks as well as contributes to the larger part of a bank’s profits; it has its own risks if not well managed. In other words, the degree of risk associated with lending is proportionate to its contribution to profit. Since these funds are owned by third parties called depositors, prudence demands that such funds should be efficiently managed to sustain the confidence of depositors in the banking system and ensure the continued soundness of the system itself and to minimizing risk of banks failure. This is necessary because bad debts destroy part of the earning assets of banks such as loans and advances which have been described as the main source of earning and also determines the liquidity and solvency which generate two major problems (Institute of Credit Management – ICM, 2012). That is profitability and liquidity, has to earn sufficient income to meet its operating costs and to have adequate return on its investments.
For this reason, the present study examined the effectiveness of credit management in Nigerian banking sector. Credit management is defined as the process of controlling and collecting payments from customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial risks ICM, (2012). The function of Credit Management is the protection of the investment in the debtors of the company as well as maintaining the lowest levels of receivables, balancing risks inherent in achieving sales objectives.The main objectives of credit management according to ICM (2012) include ensuring that – credit terms are used to maximize sales with the minimum of risk; high risk or marginal accounts, especially those likely to get into financial difficulties, are identified and to take whatever action is necessary to safeguard sales to those customers; all amounts due are collected according to the agreed payment terms; monthly cash collection targets are achieved; a high quality of accounts receivable is maintained; an accurate and responsible database of customers is operated and maintained. Achieving these objectives lies on the effectiveness of the financial institutions that manage the credit. The reason being that credit management is associated with risk. If not properly management may result to great loss.
Brown and Moles (2012) define credit risk as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Therefore, the goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.
According to Brown and Moles (2012), for most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. Drawing from the premise of Adeniyi (2002), who stated that effective supervision and monitoring of loans ensure that these loans do not turn bad forms, this study investigates the effectiveness of credit management in Nigerian banking sector. This study is working on the assumption that when banks managed their credit effectively, they overcome credit risk associated in credit management. In other words, banks, may through proper credit management, have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. The question therefore is: how effective are the Nigerian banking sector is in credit management?
Statement of problems
It has been noted earlier, that granting of loans and advances by commercial banks is one of the most risky businesses ventured into by commercial banks. This risky nature of loan and advances is usually as a result of the inability of borrowers to pay up their debts as when due and this problem leads to bank distress. The following fundamental problems arise from poor administration of commercial banks loans and advances:
i. High rate of defaults has resulted in the reduction of granting of loanable funds which in turn has contributed to the under-development of the Nigerian economy through reduced economic activities.
ii. The targeted earning of shareholder can be negatively affected due to bad non-performing loans.
The increasing defaults and poor management of commercial bank loans result from the ineffective maintaining of loan proceeds in order to ensure that it is in line with the procedures.
1.3 OBJECTIVES OF THE STUDY
The special objectives for the study are to:
i. Know the benefits of efficient and effective management of loans and advances in commercial banks.
ii. Determine the cause of the present poor management of loans and advances in Nigeria commercial banks.
iii. Assets the extent and depth of the poor management of commercial banks loans and advances in Nigerian economy.
1.5 RESEARCH HYPOTHESIS
The following hypotheses are formulated based on the above stated objectives.
HO: Poor management of loans and advances do not give rise to incidence of bad and doubtful debts.
HI: Poor management of loans and advances give rise to high incidence of bad and doubtful debts.
HO: The frequency and volume of loans and advances handled by commercial banks cannot drastically affect its efficient and effective management.
HI: The frequency and volume of loans and advances handled by commercial banks can drastically affect its efficient and effective management.
1.6 SIGNIFICANCE OF THE STUDY
Banks are important in all economics, banks they facilitate development. The most important aspect of this research work is to know how to properly and effectively handle the business of lending and all the principle involved.
The knowledge of the effective management of loans and advances in commercial banks are a sure way to the continuity and growth of such a bank.
Also, effective management of loans and advance prevents bank distress and liquidation.
Financially, this research intends to make a positive contribution to the body of knowledge of finance and banking in Nigeria.
1.10 Definition of terms
Credit cards – This is a plastic cards which provide a payment system and access to credit facilities apparently dominate Banks customer spending.
Debit cards – The direct debiting of cheque accounts with special ATM card point of sale terminal cards are expected to become increasingly important when cost of providing equipment and networks are finally agreed.
Credit Administration
This involves advising and monitoring of all aspect of credit on day to day basis to ensure that it is fully repaid. It commences with the approval of facility. The term and offer should be clearly documented in the letter of commitment to the customer.
Credit Control
This involves monitoring of facilities to ensure that each credit is and remains satisfactory. It encompasses disbursement according to descendible schedule of repayment agreed with the customer within the approved limit and monitoring of customer credit turnover.
Bad Debt: Debt is defined as payment which must be paid but has not been paid. Therefore this obligation becomes bad when the possibility of its recovery becomes remote. That is, when it becomes difficult to recover such debt.
Long term loans – Long term loans are those granted for periods of between 15 and 30 years.
NET – Payment due on delivery
C.N.D. – Cash next delivery
Weekly credit – Payment of all supplies Monday to Sunday (unless otherwise stated) by specified day in the next week.
Half month credit – Payment of all supplies made in the period 1st to 15th of the month by a specified date in the 2nd half month.
Liquidity – This can be defined as the ease and speed by which a company’s assets can be turned into cash sufficient to meet its current liabilities.
This material content is developed to serve as a GUIDE for students to conduct academic research
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