CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Excessive
emphasis cannot be placed on the need for credit management by the banking
industry in running business activities. In the economic activities of any
nation, the banking industry plays a key role, and therefore, no economy of the
world in the current dispensation can survive without the banks and other
financial institutions. A lump of interrelated services to individual,
governments, and profit as well as non-profit making organizations are provided
by the banking industry. As financial intermediaries, they provide mechanisms
by which the deficit unit of the economy such as the acceptance of deposits of
classes and qualities with a view of lending to its customers by means of loans
and advances.
Banks
are positioned to render more services presently due to the new high-technology
operations. In the provision of facilities within and between nations for the
transfer of funds, this can be found in areas such as, provision of mechanism
for settlement of debts, enhancing foreign trade through the provision of
letter of credit services, travelers cheques services, assisting in meeting
documentation requirement, sale of foreign currencies and its purchase,
documentary credit services, acting as agent of customers of Central Bank of
Nigeria (CBN) debt conversion scheme, provision of businesses and financial
advisory services, issuing house services, trustees and executors of estate,
etc.
These
vital function performed by banks make them serve as catalysts for economic
growth and development. Perhaps, in recognition of these important roles, banks
are expected to play in economic growth and development that the financial
system of Nigeria was liberalized by the federal government through the Structural
Adjustment Programme (SAP) 1986.
In
this regard, the Nigerian banking sector has not lived up to expectation
because the industry has been bewitched in huge failure and distress between
1990 – 2000. Presently, most industry analysts have attributed this experience
to a number of reasons, chief of which will form the focus of this study
insider abuse and bad credit management. Credit management includes the
following:
·
Available of Funds:- This involves
having enough funds ready to meet or sustain bank liquidity and to grant loan
to prospective customers.
·
Credit Analysis:- This is the analysis
of the borrowers to present loss on credit management.
·
Security:- This refers to an independent
investigation on the borrower that he will provide collateral of which its
worth will cover up the loan given to him in case he fails to pay back the loan
collected.
·
Credit Granting:- This is the giving of
loan, advance or overdraft in accordance with the firm’s policy and in
compliance with all statutory regulation.
·
Regular Review of the Debtor’s Financial
Statement:- This will enable the bank to know the financial position of the
debtor to enable it demand for easy payment of any loan to prevent losses.
·
Control:- This is the management of the
elements of debt that is: loan advances and overdraft so as to avoid unsuitable
discrepancies
1.2 STATEMENT OF THE PROBLEMS
Banks
are classified as to whether they are healthy or distressed by the financial
system regulatory authorities from the use of certain systematic criteria for
assessing their conditions. The acronym for this system is CAMEL which means:
C
- Capital adequacy
A
- Asset quality
M- Management
competence
E
- Earning strength
L
- Liquidity ratio
The
rating is carried out on a 1 to 5 scale with the best performance scoring. When
a bank’s rating is poor, it is a sign of distress which means that the bank is
incapacitated to meet its obligation for its customers or at inter-bank
transactions. This could re-occur through any of the parameters of measuring
the financial strength of banks, such as the annual reports of their statement
of accounts. The Central Bank of Nigeria appointed Transitional Supervisory
Board (ISB) for six distressed banks during their first quarter in 1995 and in
conjunction with the Nigeria Deposit Issuance Corporation (NDIC) assumed
control and management of eighteen distressed banks having acquired them for a
nominal fee during the third and fourth quarters of 1995. According to
Professor Adebayo Adedeji a Nigerian Economist who attempt to highlight the
history of distress in banking sector, the first bank failure in Nigeria
occurred between 1930 and 1959 when 21 banks failed. In 1954 alone, 16 banks
failed. The causes of the mass failure then included: inadequate capital base,
fraudulent practices by owners and managers of control by professional bodies,
unequal competition from the big foreign owned banks, and manpower shortage.
The
following sector by industrial analysts:
·
Insider abuse and poor credit management
·
Incompetent management and board
·
Political instability
·
Fraudulent practices
·
Poor staffing
·
Unhealthy rivalry amongst banks
·
Over dependence on the source of income,
foreign trading income.
Among
these causes of banks failure, the insider abuse and poor credit management is
the one with the most destructive impact on the financial condition and
performance of banks.
Section
18 of the Banks and Other Financial Institution Decree (BOFID) states that “no
manager or any officer of a bank shall have any interest in loan or credit
facility, and if he has any such person interest, he shall declare the nature
of his interest to the bank” many directors, managers and officers of banks
indulge in granting loans and advances to their private business without a
security. As soon as such loan are granted, they are classified as
non-performing and as a result of this,
the researcher intend to assess credit management procedure in the banking
Industry using the United Bank for Africa (UBA) Plc Kaduna, Kaduna head office
as case study.
1.3 OBJECTIVES OF THE STUDY
The
aims and objectives of this research work are to give in detail how credit
management is carried out in the banking industry, especially in the areas listed
below:
·
Credit policy
·
Procedures of granting loans
·
Collection periods etc
Also,
for management and directors of financial institutions to manage effectively
and efficiently investment in risk assets known as credit objectives which are
maximum profitability and satisfactory liquidity ratio to meet customers’
needs. A banks credit policy is a controlled variable which in conjunction with
the prevailing socio-economic and political conditions will largely influence
the size, composition, pricing and direction of its loans and advances
portfolio.
With
a good credit policy in place, banks and other financial institution will be
capacitated of guaranteeing the realization of their credit objectives.
1.4 RESEARCH HYPOTHESIS
Here
we draw two statements which will be subjected to test in the later part of the
work. They are the null hypothesis (HO) and the alternative hypothesis
(H1).
NULL HYPOTHESIS
Assessment
of credit management procedure does not help to prevent improper utilization of
funds and enhance attainment of stated objectives.
ALTERNATIVE HYPOTHESIS
Assessment
of credit management procedure help to prevent improper utilization of funds and
enhance attainment of stated objectives.
1.5 SIGNIFICANCE
OF THE STUDY
Numerous
analysis have studied the trend of credit management and its effect in the
banking industry but this study will include credit analysis, evaluation and
control procedure to ensure that debts are not overdue for collection and to
maintain a set standard for granting of credit. In addition to these, it will
also help managers and directors coming up to know the importance of debt
management to a firm and that a high level of solvency and liquidity can be
achieved or rather maintained where there is good debt management.
1.6 SCOPE
OF THE STUDY
The
scope of credit management is wide; it is applicable to insurance companies,
manufacturing industries, financial institutions, etc to mention but few. The
researcher tries to assess the process, policies, procedures, and credit
collection periods of credit management in the case study; United Bank for
Africa (UBA) from 2014 to 2015.
1.7 HISTORICAL
BACKGROUND OF THE CASE STUDY
United
Bank for Africa (UBA) Plc is one of the leading and oldest financial service
groups in Nigeria and Sub-Saharan Africa. In different base of shareholders
include: individual institutions and leading international banks such as
Dutsche Banker’s Trust and Note dei Paschi di Siena. The Bank was formally
known as the British and French Bank during its inception in 1948, the Bank was
later indigenized in 1961 and became United Bank for Africa thereafter.
UBA
maintains an inventing motivation spirit and has maintained a consistent record
of excellence through its collective six decade existence. The following are
some highlights:-
·
First Nigerian bank to offer an IPO
following its listing on the Nigerian Stock Exchange (NSE) in 1997.
·
Only Sub-Saharan African Bank (ex-RSA)
with a branch in the USA (New York Established since 1984) and London in 2007.
·
First Nigerian Company with a Global
Depository Receipt (GDR) programme 1988.
·
Only Nigerian bank to obtain a banking
industry in Ghana.
·
First ever successful merger in Nigeria
Banking History – 2005.
·
Excellent credit ratings (short and long
term); global credit rating (SA) AA+ and A+ in 2005.
·
First to introduce a branched Nigerian
Government Band index – 2006.
·
First Nigerian bank to surpass the N1
trillion balance sheet size (including contingents) 2006.
·
First Nigerian Bank to enter into a
strategic relationship with the International Finance Corporation (IFC).
·
The first bank to establish a branch in
a University Campus. In recognition of the bank’s relentless efforts in
maintaining the leading position over the years, several bodies and institution
have given awards and accolades as a token of their appreciation. The following
are some of these
·
African outstanding bank in telecom
finance in 2007.
·
A1+ in Fitch rating 2007
·
Largest bank in Nigeria by asset,
deposit, branches, atm and customers – Fitch 2007.
·
Largest e-banking footprint in Nigeria
2007.
·
Africa’s overall Best agent – Money Gram
2007
·
Number one bank in Nigeria – Augusto and
Co. 2007
·
African Bank of the year 2008
·
Top 500 Banks in the world in terms of
brand value 2009
·
Best in business among Nigerian Banks,
2009
·
Outstanding African Bank of the year
2010
·
Nigeria’s business leaders,
entrepreneurs and corporate champion 2010.
·
Bank of the year in Africa 2012.
·
Forbes Africa top 25 companies.
1.8 DEFINITION
OF TERMS
Debit: This is an obligation
owned to a creditor (possibility or value of goods services received) but which
is yet to be paid for.
Bad
debt: A debt is
considered bad when its collection is no longer realistic.
Doubtful
Debit: A debt
doubtful when the likelihood of the payment is very slim.
Problem
debt: A problem
is any loan or credit in which the lending institution or creditor is having
problems concerning its collection and facing a high probability of loss.
Debtor: Any person or organization owing
debt.
Creditor: A person or organization to whom
debt is owed.
Management: A group of
people carrying out certain functions in an organization such as planning.
The activity of these people is also referred to as management.
Information: Processed data used for
making decision. Also data arranged in an orderly manner.
Data: Raw
facts that needs processing or/and arrangement to become information.
Primary
Data: Data
collected directly from source.
Secondary
Data: Data collected
from a source other than the primary source.
Research: This is a planned, organized,
systematic and scientific process of arriving at a conclusion through careful
collection, analysis and interpretation of data.