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THE IMPACT OF EFFECTIVE CREDIT MANAGEMENT ON THE PROFITABILITY

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Credit generally denotes loans and advance made either directly by a credit (lender) or a debtor (borrower) on the principles of different payment. The banks as a lender, provides credit facilities by making funds available to customers in agreed terms and condition of payment. The gain of credit to the bank is purposed to be huge profit instead of this over year, modern banks (particularly First Banks) have been recording huge amount of bad debt provision which increase with each consecutive.

The term credit is the granting of money (loan) and advances to borrowers with the general expectation that they would honour their obligation to repay the fund or without interest when due.

Credit is the means by which we are able to obtain immediate benefits of goods and services upon the promise of payment at a future date. One of the main reasons for obtaining credit is that money which is our recognized unit of exchange is kept in relative short supply and although we may have enough credit for those items which require but cannot immediately afford and as these problems is not confined to individuals. A banks objective is to make money and one of the methods used to achieve this by loans.

However, loans are only granted to those whom they have every confidence in them as often as not, demand some form of security. The motive for lending money is therefore to acquire profit for themselves and not out of favour to the customers. Although, we are not able to adapt such stringent attitudes, our motives for granting credit must be the same.

It is however, dishearten to note that not withstanding the level and magnitude of impact that the banks have on economy in terms of importance which is unarguably immense. Whenever money is always certain a risk of not getting it bank from such customers. It is this (non payment of loan) that has made it necessary for this research to go into area of credit management. The impact of effective credit management as a process is very essential for banks because poor credit revaluation leads to poorly unstructured loans facilities that reduce the profitability and liquidity of the banks.

First Bank of Nigeria Plc is a leading banking institution in Nigeria with over a hundred years of banking experience, founded in 31st March 1984 by a shipping magnate from Liverpool, Sir Alfred Jones. It commenced as a small business bank in the Office of Elder Dampster and Co. in Lagos. Today, First Bank of Nigeria Plc has diversified into a wide range of network of banking activities and services including commercial, become appetent factor in the development of the country.

It was incorporated as limited liability company in London, with its Head Office in Liverpool under the corporate name “Bank of British West Africa”, with a paid up of Twelve Thousand Pounds Sterling (E12,000). It commenced business after it had absorbed its predecessors assets in the African banking of the pre-eminent position which the bank was established in the banking industry in Wet Africa.

In 1896, a bank was opened in Accra, Gold Coast (now Ghana) which another was established in Freetown Sierra Leone in 1898. This marked a milestone in banks intentionally banking operations thereby justifying its West African coverage operationally. The second branch in Nigeria was situated in the old Calabar in 1990 and two yeas later, it services had extend to Northern Nigeria with a branch network of 291 in 1996 spread throughout the federation, including London. The bank has the highest number of branches in the banking industry.

The banking has experience a phenomenal growth over years with a share capital of 55.6 million in 1980, which rose to N684 million in 1995, the banks total assets currently stand at N69.82 million, supported with a deposit based on N41.641 million.

When the bank began operation in 1894, it has a staff of six composing of 3 Europeans and 3 African today, the bank is virtually fully Nigerianalized. This is of course has been the result of planning responsiveness of the yearning of the Nigeria people and government as well as the banks determination to identify with the aspiration of the country in its march towards national development.

As a result of corporate policy to clivas its portfolio of noncore activities and in order to meet the bank of England’s regulatory requirement of the banks foreign partners, the standard chartered banks of Africa Plc, have reduced their shareholding to 9.9% following the offer of 120.941.195 share to the Nigerian public, thus bringing the equity holdings by Nigeria to 90.1%.

The bank has maintained its leadership in financial long-term lean to the colonial government. Today, the bank boast of a diversified loan portfolio to various sectors of the economy. The banks rural banking record is unmarked by army banks while its agricultural credit facilities through the community farmers tremendous access to the much needed bank credit.

In meeting the challenges of the second century the First Bank of Nigeria Plc is committed to put a smile on the face of every customer.

1.2   OBJECTIVE OF THE STUDY

The objectives of the extended essay include the followings:

i)            To examine the various considerations and analysis in the impact of credit management for lending purpose in the principal industries especially the First Banks.

ii)          To assist practitioners in the banking industries to acquire the high degree of unperformed credits as presently carried in their debt portfolios and assist in sound and reasonable credit aimed at minimizing the incident of bad debt.

iii)        To suggest the portion of lending (i.e. advances and loans) that should be allotted to individuals customers.

iv)         To find out from all available data the lending structure of banks (First Banks) in Nigeria with particular emphasis on the selected banks located in the nations.

v)           To stir or stimulate interest in this area for prospective students who may wish to develop their career in the area or filled of credit management.

vi)         To serve as a useful preliminary paraphernalia (tool) or materials for further study in the filed of credit management.

1.3   SIGNIFICANCE OF THE STUDY

It is the hope of evaluate credit management process and the subsequent problems of unperforming loans and the increasing incidence of bad debt that this study is made. It is also hoped that it will serve as a useful tool (material to those who may wish to further in the filed or credit portfolio in banks with view to or in an attempt to identify those credit that are performing against these credit with a high degree of default in order to enhance debt management practices in the Nigerian banking environment.

The impact of credit management as a system or a process is very essential for banks because poorly structured loan facilities result in bad debts and losses which in-turn goes to educe the profitability and the liquidity of the banks. Taking into cognizance the above significance it use hope that the material as a product of this research shall assist the practitioner in the banking industry to promote their skills on the impact of credit management.

1.4   SCOPE OF THE STUDY

The research examines of the banking and the activity of First Bank of Nigeria Plc. It also highlights the importance of banking services to the economic and commercial activity of a counting. The research emphasized more in a way and method facilities to a customer. The maintaining of such loan by the bank officials. It also looks into the policies guiding or these policies made and review the steps followed by the bank to process a loan request the types of security accepted as collateral.

1.5   LIMITATION OF THE STUDY

The incidence of credit mis-management in the financial system has no Luther to attract due to attention and discussion until recently.

The depth of distress in financial system which could be essentially traceable to credit mis-management as well as a few other forms of frauds appeared to have brought to the need to address this economic malaise.

The incidence of huge bad debt in the banking industry has not only attracted the attention of the monetary authorities but the public at large. There is a growing concern in these sectors of increase potential for bank failures if the problems is not urgently address. The fear may be out of place when viewed against recent development on the industry. In January 1991, the Central Bank of Nigeria took over control of Nigeria which was established in 1933 by the defunct Western region.

The research is going to optically analyze the inefficient credit management procedure adopted by some banks which is the initiator of bad debts incidence thereby reducing its liquidity ratio. The research is aimed at finding the cases and solution to such problems, bad debts for effective and efficient management.

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