IMPACT OF CREDIT MANAGEMENT ON PROFITABILITY LEVEL OF COMMERCIAL BANKS IN NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In every economy, there exist facilities for the creation, custodianship and distribution of financial assets and liabilities (Mohammed, 2002). These facilities make up the financial system in any economy of which banking is a sub-sector. Banks are global phenomena, a universal institution. In fact, banks intermediate between surplus and deficit economic units, thereby, acting as machinery for the allocation of scarce financial resources (Mohammed, 2002). Consequently, banks occupy a primary position in the economy as it is the fulcrum of the money market and the central nervous system of the economy. The banking industry worldwide, and in Nigeria particularly, had been witnessing a lot of structural changes. These changes are meant for the improvement of services for the betterment of it operators and for the benefit of the customers, shareholders as well as the economy at large.
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 (Carmero et al, 2007). 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.
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. Pandey, (2004) 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.
Credit management means the total process of lending starting from inquiring potential borrowers up to recovering the amount granted. In the sense of banking sector, credit management is concerned with activities such as accepting application, loan appraisal, loan approval, monitoring, recovery of non-performing loans, etc (Shekhar, 2005). Credit management is a term used to identify accounting functions usually conducted under the umbrella of accounts receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for business to remain financially stable. Competent credit management seeks to not only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner.
While providing credit as a main source of generating income, banks take into account many considerations as a factor of credit management which helps them to minimize the risk of default that results in financial distress and bankruptcy. This is due to the reason that while banks providing credit they are exposed to risk of default (risk of interest and principal repayment) which need to be managed effectively to acquire the required level of loan growth and performance. The types and degree of risks to which banks are exposed depends upon a number of factors such as its size, complexity of the business activities, volume etc. It is believed that generally banks face credit, market, liquidity, operational, compliance/legal/regulatory and reputation risks among which credit risk is known to have the adverse impact on profitability and growth. Hence, the success of most commercial banks lies on the achievements in credit management mitigating risk to the acceptable level.
The banks identify the existence of destructive debtors in the banking system whose method involved responding to their debt obligations in some banks and tried to have contract of new debts in other banks. Banks are trying to make the database of credit risk management system more open for them to be more functional and recognized as to enable banks to enquire or render statutory returns on borrowers. There are some banking practices which increase the risks in the bank and cannot be easily changed. This result still leads to the question: what are the possible ways that will help and make Nigerian banks manage their credit risks?
Credit risk management helps credit expert to know when to accept a credit applicant as to avoid destroying the banks reputation and making decision in order to explore unavoidable credit risk which gives more profit. Controlling a risk results in encouraging rewards that give internal audit more technical support service and customized training in banks or financial institutions. This research is presented to examine credit management and its impact on profitability level of commercial banks in Nigeria.
1.2 Statement of the Problem
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 credit management and its impact on profitability level of commercial banks in Nigeria.
1.3 Objective of the Study
The main objective of this study is to examine credit management and its impact on profitability level of commercial banks in Nigeria. Other specific objectives include to:
- Examine the impact of the credit management on the profitability of the commercial banks in Nigeria.
- Evaluate whether the lending and credit management policies of commercial bank can lead bad debt in Nigeria bank.
- Examine whether profitability objectives of the company can be achieved through the use of credit facilities by commercial banks in Nigeria
- Identify the problem that impairs the banks’ effective and efficient credit management of loans and advances and proffer solution.
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.
- What is the impact of credit management on the profitability of the commercial banks in Nigeria?
- To what extent does lending and credit management policy of commercial bank lead to bad debt in Nigeria bank?
- How can the profitability objectives of the company be achieved through the use of credit facilities by commercial banks in Nigeria?
- What are the problem that impairs the banks’ effective and efficient credit management of loans and advances?
1.5 Research Hypotheses
The following null hypotheses will be used to guide the study:
- There is no significant impact of credit management on the profitability of the commercial banks in Nigeria.
- Lending and credit management policy does not lead to bad debt in Nigeria bank.
- There is no significant impact of profitability objectives of the company on credit facilities by commercial banks in Nigeria.
- Effective and efficient credit management will have no significant impact on loans and advances of commercial banks in Nigeria
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 other 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 credit management and its impact on profitability level of commercial banks 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 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.
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.
Trade Credit: Is any amount for goods and or resources which remain unpaid at the time of purchase of such goods or services but which is deferred for future use.
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