Abstract
One of the major
problems confronting the Nigerian banking industry today is the increasing
incidence of loan defaults and consequent loan losses which manifested on the
profitability of the banks, with huge uncollectible loans and advances . This
study therefore, examines the effects of loans and advances on the
profitability of Nigerian banks.
The methodology
used in the research includes secondary
sources and primary sources of data collection. The data collected were
analyzed using Correlation Coefficient, Pearson Product Moment Correlation and
other statistical tools to establish trends and relationship between the
variables. Furthermore, graphs were used in the interpretation of the data
collected.
The study found
out that at 5 percent level of significant; the calculated value of z is
greater than the tabulated value in most of the banks considered in the study.
Therefore, this leads to the results that there is significant effect between
loans and advances and its profitability. In order words this means that there
is a significant effect between the way the banks manage their credits
portfolio and the profitability of the banks.
Keywords: Credit management,
Profitability, Financial Institutions, Bad debts.
Table of content
Title
Page
Certification
Dedication
Acknowledgement
Abstract
Table
of Content
Chapter One
1.0
Introduction
1.1 Background of the study
1.2 Research questions
1.3 Research objectives
1.4 Hypotheses of the study
1.5 Scope of the study
1.6 Organization of the study
1.7 Justification of the study
1.8 Significant of the study
1.9 Limitations of the study
1.10 Definition of terms and symbols
Chapter
Two
2.0
Literature review
2.1 Conceptual framework
2.2 Theoretical framework
2.3 Empirical evidence
Chapter
Three
3.0
Research Methodology
3.1 Introduction
3.2 Research of the study
3.3 Population of the study
3.4 Sampling techniques
3.5 Method of Data Collection
3.6 Method of Data Analysis
3.7 Justification of Methods and Techniques
3.8 Summary
Chapter
Four
4.0
Data analysis and
interpretation
4.1 Introduction
4.2 Analysis of Profitability; Loans and
Advances
4.3 Analysis of the Effects of classified
Loans on the Quality of Loan Assets.
Chapter
Five
5.0
Summary, Conclusion and
Recommendations
5.1 Summary
5.2 Conclusion
5.3 Recommendation
5.4 Frontier
for Further Research
Reference
CHAPTER
ONE
1.0 INTRODUCTION
Banks are profit–making
organizations performing as intermediaries between borrower and lenders in
bringing temporarily available resources from business and individual customers
as well as providing loans for those in need of financial support (Uwuigbe,
2013; Driga, 2012). Commercial Banks play a vital role in developing economies
like Nigeria, Ghana, Egypt and Algeria etc. Bank lending is very crucial for it
makes it possible the financing of agricultural, industrial and commercial
activities of the country. Commercial Banks are entrusted with the funds of depositors.
These funds are generally used by banks for their business. The fund belongs to
the customers so a programme must exist for management of these funds.
The programme must constantly address
three basic objectives: liquidity,
safety and income. Successful management
calls for proper balancing of all these three. Liquidity enables the banks to
meet loan demands of their valuable and long established customers who enjoy
good credit standing. The second objective being safety is to avoid undue risk
since banks meet responsibility of protecting the deposit entrusted to them. Proper
and prudent management of banks create and hence customer confidence. The third
being income/profitability which is aimed at growth and expansion to meet
repayment of interest charges on debt,
to achieve the objective of maximizing
wealth of shareholders and to survive competition in the banking industry
(Uwuigbe). As a matter of fact a bank cannot remain in business if it neglects
the credit function (Osayeme 2000).
Of interest to this paper is the credit component of
the banks’ portfolio that contributes to the profit of the banks and which has
lead to the problem of bad debts in Nigerian banks as a result of poor
management . Credit as the name implies is described as the right to receive
payments or the obligation to make money another (Uwuigbe, Uwalomwa and Ben-Caleb, 2012). It
is based on the faith and confidence, which the creditor reposes in the ability
and willingness of the debtor to fulfill his promise to pay. In a credit
transaction the right to receive payment and the obligation to make payments
originate at the same time. The term debt is frequently used in reference to
debtor’s obligation to make payment. Debt and credit are therefore similar
terms. Management of credit is simply the application of four management
principles which are planning, organizing directing and controlling to credit
concept. Commercial banks are major players in the financial sector of every
country’s economy. The failure or success of
these banks will to a large extent affect the financial sector and the
economy at large. In recent times some commercial banks have been wound up of
some of these banks is their poor management of their finance and credit. Many
of them were writing off huger amounts of debt yearly and also reflected some
going concern issues that related to their management of credit and finance.
The reason for the failure of these banks has sparked the interest of the
researcher in conducting further studies into the management of finance and
credit in Nigerian banks. It is in the light of the above, that this study examined the
relationship between credit management and bank performance in Nigeria.
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 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 customers, shareholders as well as the economy at large. In
Nigeria, banking business started in 1892 when the first commercial bank, the
African Banking Corporation was established. This happened 21 years after the
beginning of colonial presence in the country. By 1894, the African Banking
Corporation was acquired by Elder Dempster Lines, a shipping company, giving
birth to the British Bank of West Africa BBWA (now First Bank of Nigeria Plc),
which monopolized the banking scene until Barclays Bank, DCO (now Union Bank of
Nigeria PLC) opened a branch in 1917. The bank of Nigeria (formerly Anglo
Africa Bank) formed in 1905 had earlier been acquired by BBWA. The British and
French Bank (now United Bank for Africa Plc) became the 3rd expatriate bank to
start banking business in Nigeria when it came on – stream in 1948. Thus,
between 1892 and 1952, foreign banks monopolized the Nigerian banking scene
(Ogbodo, 1995).
The banking sector itself was then relatively
unpopular, as it was not geared towards development of the economy; neither was
their service much desired. Also, the flow of the trade tended towards foreign
entrepreneurs to the neglect of domestic entrepreneurs and business. Following
alleged discriminatory practices by the foreign banks, some notable Nigerians
grouped together with the aim of breaking the monopoly by establishing
indigenous banks.
According to Okafor, (1993), these banks offered
little or no competition to the foreign banks essentially due to their weak
capital base and low management capability.
The absence of an Apex monetary authority, money and
capital markets and any banking law did not help matters. All these led to the
first bank failure and enactment of the Nigerian Banking ordinance in 1952. The
enactment marked the beginning of regulation of the Nigerian banking industry,
though it was to a large extent, simplistic and relatively restrictive.
During the period of 1959 to 1986 when the
Structural Adjustment Programme (SAP) was introduced, the banking industry experienced
stricter regulations, which began with the establishment of the Central Bank of
Nigeria (CBN) in 1959. Through the regulatory measures of the CBN, the tide of
bank failure experienced in the first banking boom era was stemmed. The banking
industry pre SAP era was a sellers’ market. The banking public did not know any
better and simply accepted whatever services offered, however, tasteless it
was. As the government had interest in most of the existing banks, they simply
were not designed to be competitive. The government was more interested in
control and management. The few banks that were concerned about profitability
had the oligopoly of the market and did not need to make the extra effort. Because
of the dull environment, there was no need to fashion out new products, expend
scarce resources in service delivery or even selling and promoting the existing
ones vigorously. As the banking industry is the most regulated industry in
Nigeria and designed to protect depositors, all the key elements of banking
were regulated by the CBN. Price (Interest and Exchange rates) and Place
(location) were all controlled by the CBN, so banks could not compete effectively
in these spheres (Okafor, 1993). The existing banks made super profits in a
seller’s market. Marketing of bank services, competition and innovation were at
their lowest ebb. Armchair banking was the norm as banks waited for customers
to come to them.
In essence, there was enough business to go round
the banks particularly with the oil boom of the 1970s, which lasted till the
early 1980s. Adimorah, (1999:2), insists that SAP represented the first bold attempt
to redirect the economy after the regime of controls and subsidies that marked
the preceding era. The present era, the era of “guided deregulation” assigns
increasing roles to the market forces of demand and supply in the determination
of prices and consequent allocation of resources. The resultant effect of the
financial liberalization policy of the government is increased competition, which
was informed by considerable institutional expansion in the banking industry.
Banks expanded their operations and opened branches in almost every state in
the country.
According to Ekpeyong (1994), the total number of
Merchant and Commercial banks in 1960 were 11. By 1985, It grew to 40and by
1992, 119 banks. 1992 compared to 1994, there were 2,391 and 2,547 branches
respectively of banks in Nigeria. In the present day, we have 120 Merchant and Commercial
banks as well as non-bank financial institutions. Clearly, the era of armchair
banking had come to an end as competition intensified; because, banks became
more aggressive and innovative in order to survive. This is coupled with the
level of sophistication of bank customers who now demanded better services
offered by banks.
Nankwo, (1980), emphasizes that the reform in the
financial sector has been a cardinal goal of the Structural Adjustment
Programme (SAP) adopted by many African countries. One noticeable feature of the
de-regulation is that financial institutions are encroaching on ones another’s
territory. Traditional roles of Merchant banks have been expanded to include
commercial banking. This has been made more obvious by the announcement of the
approval in principle of Universal Banking in Nigeria in January 2000 by the
CBN (Odozi, 2000).
The genesis of Nigerian banks competition for
customers may be traced to a list of monetary and fiscal policies and
programmes by the regulatory authority CBN – beginning from the middle 1980’s. With
the deregulation, saw a steady growth in the number of commercial banks
operating in the country. Nwankwo, (1980:96), opines that, some of the
significant development and changes during the post SAP era which deserve
special mention include:-
a). The redefinition and re-orientation in the
techniques of sourcing deposits.
b) The enthronement of market forces in the
determination of the cost of capital
c) The establishment of
the Nigerian Deposit Insurance Company (NDIC) as a means of safeguarding depositor’s
funds
d) The introduction of
prudential guidelines to regulate and act as an instrument for measuring the
state of facilities offered.
e) The increased
specialization and diversification of banking as exemplified by the
establishment of people’s bank, community bank, mortgage financial institutions
etc
f) Frequent changes in the monetary policy and their
consequences on corporate project and planning.
The changes and subsequent prevailing competition
arising there from in the industry meant that, banks had to be highly innovative
and aggressive in the services offered. All these factors paved the way for the
disappearance of easy money from the vaults of the banks. The banks that were
unable to cope became less profitable and some eventually became distressed.
Sokunbi, (2002), is of the opinion that when the monetary authorities
liquidated 31 banks in the 90’s, the impression was created that the Nigerian
banking sector had been sanitized. Nevertheless, the search for customers and
the struggle to retain the existing ones have remained an enduring task. Most banks
offer similar product range, quality of products and service delivery and
operate on a level ground with one or two core competencies, and most
importantly, the application of technology. But this is often time not enough
to favour the use of a particular bank.
Banks have to find a way of differentiating their
services from competition to attract customers and what better way to do it
than to improve service quality and move away from an immediate reward as satisfied
customers assure profitability for now and in the future. Oduwole, (2002), is
of the view that competitive pressure are forcing banks to reposition with
improved service quality as well as an increased responsiveness. Drucker, (1995),
adds that banks have a growing awareness to check:
a)
Declining profits
b)
Shrinking market share
c)
Threat to corporate survival
d)
Larger cycle time
Abolo, (1999), asks the pertinent question that,
what really are banks competing for? The answer is always the same. There are three
vital interdependent elements. A business thrives because; sufficient number of
customers wants or need their services and are able to pay for them; these can
be provided with a substantial profit margin and customers choose to buy from
that bank rather than another. The customers are becoming more demanding than
ever before. Customers take it for granted that the banks will deliver a low cost
and high quality product and service, haven said that, they demand it faster
and customized to their individual needs. To be a survivor in the banking
industry today, banks must produce world class quality services, designed to
meet the specific customer’s need, and deliver them at a competitive price.
1.2 RESEARCH QUESTIONS
i.
What is the
structure put in place by Nigeria banks for management of loans and advances
ii.
What is the
regulatory and institutional framework within the bank perform their financial
intermediation role?
iii.
What is the
Bank’s practices in granting loans and advances and their recovery procedures
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