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EVALUATION OF BANK LENDING PRACTICES AND CREDIT MANAGEMENT IN NIGERIAN

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Lending is one of the main activities of commercial banks and other financial institutions in Nigeria. This is evident by the size of loans that form banks’ assets and the annual substantial increase in the amount of credit granted to borrowers in the country. Loan portfolio is naturally the largest asset and the largest source of income for banks (Babalola, 2012 and Jahn, 2012).

The Commercial Banks mostly grant credit on short-term basis except in few occasions where they lend on medium and long-term basis provided it will not hamper the liquidity of the bank. Commercial banks loans must be given with collaterals or securities to back up the loans in case of a default. Often, there are policies that guide commercial bank lending which must be adhered to before loans are granted. The level of interest rate has a very great role to play in commercial bank lending practices (Adekanyi, 1983; Aburine, 2008).

According to Ugoani (2013), banking activities have continued to be of immense support to the growth of the economy, especially through the credit facilities they offer to various sectors. These credits are expected to improve investments and in turn impact positively on economic growth. The various sectors of bank lending to the Nigeria economy as pointed out by the Central Bank of Nigeria (2013), include, Production sector, General commerce sector, Services sector, and Others.

Generally, banks render a number of services to the economy, foremost of which is the provision of finance which has been described as a lubricant for economic growth (Greuning and Brajovic. 2004). A critical factor in this growth process is adequate supply of credit to the various sectors of the economy to carry on their activities. The role of the banking system in this regard is that of financial intermediation which entails moving funds from the surplus unit to deficit unit of the economy, to facilitate trade and capital formation.

Lending which may be on short term, medium or long term basis is one of the services that commercial banks usually render to their customers. In other words, banks do grant loans; overdrafts and advances to individuals, business organizations as well as government in order to enable them embark on developmental activities as a means of aiding their growth in particular or contributing towards the economic development of a country in general. The customer may be in need of the fund for the various purposes which may spread through new capital venture bridging loan, farming, contract jobs, and business expansion among others (Nwanyanwu, 2010).

Credit Management can be viewed as written guidelines that set the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency. Ugoani (2013) submitted that credit is a marketing tool for expanding sales. Credit sales to customers however, must be well monitored because regardless of an organizations share of the market and demand for its products, if there are no measures put in place to regulate sales made to customers on credit, there could be problems especially those related to profitability. A company rich in fixed assets may still be short of cash and therefore have difficulty in meeting current obligations. The profitability of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors (Felix and Claudine, 2008).

1.2 Statement of the Problem

It is a widely accepted fact that lending as a service of commercial banks is of paramount importance to economic growth and development, since the capital outlays needed for most developmental projects come majorly from these banks. Credit management plays an important role in the lives of many people and in almost all industries that involve monetary investment in some form. Credit is mainly granted by banks including to several other functions like mobilizing deposits, local and international transfers, and currency exchange service. Hence, the issue of credit management has a profound implication both at the micro and macro level. When credit is allocated poorly it raises costs to successful borrowers, erodes the fund, and reduces banks flexibility in redirecting towards alternative activities.

Moreover, the more the credit, the higher is the risk associated with it. The problem of loan default, which is resulted from poor credit management, reduces the lending capacity of a bank. It also denies new applicants’ access to credit as the bank’s cash flow management problems augment in direct proportion to the increasing default problem. Also the problem of poor attention given to distribution of loans has its effect on the bank’s performance. Most of the people collected loan from the banks and diverted the money to unprofitable ventures. Some bankers are not actually considering the necessary criteria for disbursement of loans to the customer. In other words, it may disturb the normal inflow and outflow of fund a bank has to keep staying in sustainable credit market. Therefore, the principal concern of this study is to examine the evaluation of bank lending practices and credit management in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to examine the Evaluation of bank lending practices and credit management in Nigeria. Other specific objectives include to:

Examine the impact of Credit management on bank profitability
Evaluate the influence of lending practice bank profitability.
Determine the influence of lending practice and credit management on loans and advances of banks in Nigeria.

1.4 Research Questions

Base on the problems which this research work is aimed at finding solutions to, the following questions are put forward in finding solutions to the problems.

To what extent does credit management influences bank profitability?
To what extent does lending practice influences bank profitability?
It ways do lending practice and credit management influence loans and advances of banks in Nigeria?

1.5 Research Hypotheses

The following null hypotheses will be used to guide the study:

H_O: Credit management does not influence bank profitability
H_O: Lending practice policy does not lead to bank profitability.

1.6 Significance of the Study

A study of this nature is in valuable not only to the bank’s management, other banks, share-holders, potential investors and depositors but to the economy as a whole.

To the bank’s management and managers of banks, the study draws their attention to the importance of this asset (loans and advances) to the overall success and growth of their organizations. As the largest component of a bank’s total assets, there is the need for its effective and efficient management. Besides, loans and advances are also the most profitable and risky assets, hence the need for proper management for maximum profitability while minimizing the risk element.

The study is also significant to the shareholders, both existing and potential ones. This springs from the fact that the proper management of this resource will enhance reasonable returns on shareholders’ investment. As pointed out earlier, banks performance of intermediation activity involves accepting deposits from surplus unit of the economy and channeling it to the deficit units. This role ensures proper allocation of scarce financial resources to the various sectors of the economy thereby enhancing the overall growth and development of the national economy.

A study of this nature will draw the attention of bank’s management to the need for proper management of loans and advance to obviate failure and its negative consequence on profitability and economy growth. Bank’s failure erodes depositor confidence in the financial system, thus resulting in dearth of loanable funds to the economy. To enhance depositor confidence in the system, there must be proper management of the loans and advances portfolio to enhance growth of the bank. Students as well as other researchers would find this study worthwhile.

The study, therefore, is timely, current and relevant not only for the continued visibility of the financial system but the overall growth and development of the economy. The findings of this study if duly and adequately incorporated by all the operators of the banking industry and the financial system in general will enhance profitability and efficiency in the provision of banking services in the country.

1.7 Scope and Delimitation of the Study

This study is aimed at examining the Evaluation of bank lending practices and credit management in Nigerian with a particular reference to some selected banks as case study. The study intends to analyze the credit facilities in banking industry. It also reviews the various concepts procedures for efficient and effective lending practices and credit management. It examines the success and failure (if any) as well as recommending corrective measure. Data collections will be restricted to selected staff of Access Bank and GTbank in Lagos state, Nigeria.

1.8 Limitations of the Study

In the course of this research work, the researcher might encounter some bureaucratic problems which are very peculiar to Nigeria firms. These factors are as follows:

Time: The time specified for submission for this research work might obviously too short and as such, might not be able to go about the selected banks thoroughly in carrying out this research.

Lack of knowledgeable and sincere personnel: Some of the officials employed in the banking industry have no knowledge on the ways of ensuring that credit management works effectively and they might also not approachable because they place themselves on a very high esteem and also shortcomings from the basics such as deliberate distortion of facts and amongst others.

Lack of Facilities: Research facilities such as transportation make research easy and interesting. But it is often noted that Nigeria has a poor transportation system which greatly might affect me in conducting this research.

1.9 Definition of Key Terms

For easy comprehension of this research work, the writer intends to define the following terms:

Bad Debts: They are losses which are incurred by banks when some of its customers fail to pay part or all the money being owed to the firm.

Credit Management is 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.

Lending Practice: These are laid down principles which guide the lending practice of banks. These principles could be due to external or internal factors. These principles act as a blue print to measure the effectiveness of commercial banks lending activities.

Profitability: This is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities.

Model Specification

Multiple Econometric Regression model will be developed for hypotheses 1 to 2

The general econometric model will be developed as follow:

BP = f(LP, CM)……………………….i

Model Specification

General model specification for the study is given below

Simple Regression Model was build for each of the hypotheses.

Model for Hypothesis One

H_O: Credit management does not influence bank profitability

General regression model for hypothesis one is:

BP₁ = a₁ + b₁CM + μ₁……………………… i

Where:

BP: bank profitability measured by Return on Assets (ROA) is Dependent Variable

CM = Credit Management measured by Credit interests/Credit facilities ratio (Independent variable)

a₁= the part of the BP or return on assets which is not due to Credit Management (CM)

b₁ = the rate at which BP will change if Credit Management changes by one unit.

μ₁ = Error term for hypothesis 1

Model for Hypothesis Two

H_O: Lending practice policy does not lead to bank profitability.

General regression model for hypothesis one is:

BP₂ = a₂ + b₂LP + μ₂……………………… i

Where:

BP₂: bank profitability measured by Return on Assets (ROA) is Dependent Variable

LP = Lending Practice measured by bad debt (Independent variable)

a₂= the part of the BP or return on assets which is not due to Lending Practice (LP)

b₂ = the rate at which BP will change if Lending Practice (LP) changes by one unit.

μ₂ = Error term for hypothesis 2.

Credit Management and Bank Profitability

S/N	Years	Credit Management (CM) = Credit interests/Credit facilities (%)	Bank Profitability (BP) Measured by Return on Assets (ROA=PAT/TA)
		For : FBN Plc
1	2012	2.15	0.02
2	2013	6.34	0.48
3	2014	5.75	0.36
4	2015	7.41	0.54
5	2016	4.23	0.48
		For : Zenith Plc
6	2012	4.62	0.69
7	2013	3.68	0.31
8	2014	2.89	0.07
9	2015	6.44	0.64
10	2016	5.17	0.92
		For : Access Bank Plc
11	2012	5.51	0.65
12	2013	4.52	0.63
13	2014	3.11	0.09
14	2015	1.68	0.13
15	2016	2.71	0.44

Source: Computed from the extractions from Annual Reports and Accounts of FBN Zenith and Access Bank Plc

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