AN EVALUATION OF CREDIT MANAGEMENT AND ITS EFFECTS ON BANKS’ PROFITABILITY; A COMPARATIVE STUDY OF FIRST BANK PLC AND FIDELITY BANK PLC

ABSTRACT

This study; An Evaluation of Credit Management and its Effects on Banks’ profitability; A comparative study of First Bank PLC and Fidelity Bank PLC is concerned with examining the process of credit  management  in the  banks and  the  effect  of non performing loan on the performance of Nigeria Banks. The results show that the impact of loan loss reserve has a negative impact on profit. This implies that higher credit risks, the higher the  profit.

The  methodology used was  interview technique  for  data  collection.  Managers and  lending officers of the two Banks were interviewed, and it was discovered that Fidelity Bank PLC which is a new generation bank performed better during the period under review. This was discovered to be as a result of their highly skilled personnel and intensive computer network.

In summary, it was recommend that Nigeria banks discard   other internal problem that delay credits to worthy customers in order to build confidence in the system and make bank credits worthwhile venture at the same time improving performance. Also, there should be less interference from top management staff and board of directors.

CHAPTER ONE

INTRODUCTION

1.1   Background of The Study

The banking industry today plays a very important  and significant  role in the  economic development of the country due to the variety of services and opportunities it provides for the populace and nation at large. Banks are distinguished from other types of financial firms because,  they accept  deposits  and  provide  credit  facilities  to  its  clients.  Thus Bossone, (2001)  suggests that banks are special intermediaries  since  they  have unique capacity to finance production by lending their own debt to agents that are willing to accept it. Banks manage liabilities, also lend money and thereby create bank assets.

Again, banks play twofold roles of backup sources of liquidity for all enterprises  in  the economy and transmission  belt for monetary policy (Corrigan,  1982). At the  same  time, there is a special feature of banks. They act as delegated monitors of borrowers on the behest of the ultimate lenders, where monitoring is costly.

The history of bank lending could be traced to the era when British goldsmiths acted  as banks. The goldsmiths discovered that only small proportion of the money kept with them for safety yielded enough interest for them. As banks emerged, the practice of the gold smith was adopted and it was found encouraging (Brealey, Myers and Marcus, 2004). With this discovery, banks started issuing out loans to those in need of them and paying interest on fixed and saving deposits.

The banks, which are the sources of such credits provide these services based on accepted principles. The service of raising funds from surplus economic units and making these funds available to deficit economic units is of utmost important to the economy. As stated earlier, banks provision of credits contribute to real productivity in the economy and this raises the

overall standard of living. Banks are corporate bodies; they have the following objectives which   are;   profit   maximization,   maximization   of  owners’   wealth,   corporate   social responsibility, increasing market shares.

Credit  management  on  the  other  hand,  is  one  of  the  most  important  and  challenging functions of all banks. It is the act of managing debtors who might have received services from banks in exchange for promise of repayment  in future. Credit  management  is faced with credit risk which is the most significant  risk faced by  banks. The success of their business depends on accurate measurement and efficient management of this risk to a greater extent than any other risk (Giesecke, 2004). Credit risk is critical since the default of a small number  of important  customers  can  generate  large  loses,  which can  lead  to  insolvency (Bessis, 2002).

In other words, credit management  entails formulation of standard credit policy that  can determine the amount and nature of loans/credits to be extended to customers.  The credit policy therefore, serves as an important tool for the realization of the basic objectives of the banking  industry.  It  ensures  that  banks’  term  and  conditions  are   followed,  thereby minimizing the credit risk.

1.2      Statement of the Problem

In developing countries such as Nigeria, financial institutions play some key roles in the growth and development of the economy. They serve as a conduct pipe for the economic.

The major consideration of the lending bank is always the recovery of both the principal and the interest on the loan and advances given to customers. The outcome of good management of bank loan portfolio leads to the upliftment and growth in performance  of such banks. Whereas the repercussion of poor management of banks loan portfolio is very bad since in most cases it leads to the collapse of such banks. In the past decades in Nigeria, there has being cases of bank failures and this has being attributed to poor credit management. Loans and  advances  are  often  being  granted  without  security  or  with  inadequate  collateral. Consequently, the banks face the difficulties of recovering such loans and advances. Thus, what would have been potentially profitable transaction results to bad  and   doubtful debt losses. It is as a result of this that a study on evaluation of credit management and its effect on Bank profit.

1.3      Objectives of the study

i.         To compare the credit management policies of First Bank Plc and  Fidelity Bank.

ii.        To determine the different effects of different credit management policies on the profit of First Bank PLC Festac Branch Lagos and Fidelity Bank  PLC Festac Branch Lagos.

iii.       To determine the percentage of bad debts to total debts between 2011  and 2013 for the First Bank Plc Festac Branch Lagos and Fidelity Bank Plc Festac Branch Lagos.

1.4        Research Questions

i         To what extent do the credit management policies of First Bank PLC and Fidelity Bank PLC  differ?

ii         How  far  do  the  effects  of  different  credit  management  policies  on  the profitability of First Bank PLC  Festac Branch Lagos and Fidelity Banks PLC Festac Branch Lagos differ?

iii        What is the percentage of bad debts to total debts between 2011 and 2013 of First Bank PLC Festac Branch Lagos and Fidelity Bank PLC Festac Branch Lagos?

1.5       Research Hypothesis

In line with research objectives of the study, the following research hypotheses are formulated  to guide this study:

i.     There  is  no  significant  difference  between  First  Bank  and  Fidelity  Bank  credit management policies.

ii.    The different credit management policies does not impact on profitability of these banks differently.

iii.   The percentage of bad debts to total credits of First Bank PLC Festac Branch  Lagos and     Fidelity  Bank  PLC  Festac  Branch  Lagos  between  2011  and  2013     is insignificant.

1.6        Significance of the Study

i.     The  result  of  this  research  will  help  the  credit  managers  and  loan  officers  to formulate  good  credit  management  policies  that  will  maximize  profit  for  their organizations.

ii.    It will also help banks to manage loan and credit effectively without experiencing high incidence of bad debt.

iii.   The result of this study will serve as a valuable reference material for academicians and researchers on the subject matter.

1.7          Scope  of Study

The scope of this study is on the evaluation of credit management and its effect on bank profit is limited to First Bank Plc Festac Branch Lagos and Fidelity Bank Plc Festac Branch Lagos from 2011 to 2013. Time and other constraints do not permit the extension of  the survey to other branches of First Bank PLC and Fidelity Bank Plc.

1.8           Limitation of Study

This study is limited to the evaluation of credit management and its effect on the profit of First Bank Plc Festac Branch Lagos and Fidelity Bank Plc Festac Branch Lagos from 2011 to 2013.

1.9   Operational Definition of Terms

Credit:  Is a means  of obtaining  resources  or fund  at a certain  period  of time with  an obligation to repay at a subsequent period in accordance with the terms and condition of the credit obtained (Pearce, 1992). In other words, credit encompasses  any form of  deferred payment.

Credit control: Any system used by an organization to ensure that its outstanding debts are received within a reasonable period of time.. It is concerned with the efficiency in ranking customers status which has the objectives of minimizing risk inherent in credit extended to customers.

Credit Risk: Is the exposure to loss arising from the variation between the expected  and actual outcomes of investment activities (Nzotta , 2000)

Credit Policy: Is the standard set to determine the amount and nature of lending money to customers.

Interest: The charge made for borrowing a sum of money. Cost of borrowing fund.

Bank: An institution for receiving, lending, exchanging, and safeguarding money and other valuables and, in some cases, issuing notes and transacting other financial business.

Central Bank: The central Bank is the principal bank usually named by the government, with primary responsibilities of initiating, regulating and enforcing monetary policies while working closely and controlling the operational perspectives of other banks and  financial institution.

Default:  Is a  fundamental  breach  in  transaction  underlying  the  contractual  relationship between  a creditor  and  a debtor  when  the debtor  fails  or  is unable  to  meet  repayment obligations on either principal sum, interest element or both.

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