SEMINAR
ON
EFFECT OF CREDIT MANAGEMENT ON THE
PERFORMANCE OF SELECTED DEPOSIT MONEY BANKS IN
NIGERIA
BY
GODWIN MAUREEN OWOJOKU
2022/145729FB
HND II BANKING AND FINANCE
THE DEPARTMENT OF BANKING AND FINANCE
SCHOOL OF FINANCIAL STUDIES
THE FEDERAL POLYTECHNIC,
P.M.B 55, BIDA
NIGER STATE
FEBRUARY, 2024
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ABSTRACT
This research studies the effectiveness of credit management in deposit money bank in Nigeria.
In this research there were many considerable effort to put together in a more detail and all
coherent forms all that it will take to achieve management programmed of an organization. The
purpose of the study, statement of problem, research question as well as the need for study were
stated. Definition of credit management, purpose of credit management, credit recovery was
received. Research methodology which include data collection with method of data analysis
were received. Data presentation, discussion of result and summary of findings, a brief write up
as required summary, conclusion and recommendation forms the features that were received on
the project work.
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INTRODUCTION
Credit has been so important in modern society that we cannot think of any economy today
without the use and function of credit permits. Every sector of our economy and at most all
major economic activities either in government business organization or private sectors can be
done with creditKirkman (2019).
The increasing growth in the bank credit creation has been attributed to the positive economy
policy of the government in effort to strengthen the problem of more credit to the agriculture
industry and growing economyKirkman (2019).
Not only does the increasing trend of loans and advances reflect growth in Nigeria economy but
also show that business men are now turning more and more to the financial and financial aids.
Credit does not only put resources into hands of those who may use them more effectively than
others but serves as a vital role in helping toward ensuring that resources do not remain idle,
particularly in commercial banking where a bulk of deposits are held.
Kirkman (2019) defined credit as purchasing power and not derived income but from financial
institution either bank or as a net addition to account of purchasing power.
According to Adeniyi D.A (2019).Nigeria today has about 30 commercial bank with over 900
branches scatted all over the country banks have a vital role to play in the management of this
crucial resources of development and capital accumulation.
Therefore the role of bank in any economy especially of growing country like Nigeria cannot be
over emphasized it provide a great influence on the economic development of the nation through
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the granting of loans and financial institution that form part of the financial institution of a
countryNwanko (2018).
In view of the enormous amount involved, in the banking system of credit facilities annually, it
appear that the credit expansion do not manipulate itself on the even development of economic
structure of Nigeria which commercial banks deal are yearly huge amount of profile and
indelicate that the funds are being loanedNwanko (2018).
STATEMENT OF THE PROBLEM
Credit management is a prerequisite for a financial institution’s stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor financial
performance and condition. According to Gitman (1997), the probability of bad debts increases
as credit standards are relaxed. Firms must therefore ensure that the management of receivables
is efficient and effective .Such delays on collecting cash from debtors as they fall due has serious
financial problems, increased bad debts and affects customer relations. If payment is made late,
then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that
basis, it is simply good business to put credit management at the ‘front end’ by managing it
strategically. JoEtta (2007) also conduct research on bank performance and credit risk
management found that there is a significant relationship between financial institutions
performance (in terms of profitability) and credit risk management (in terms of loan
performance). Lending or credit creation seek to maximize profitable objective of bank, the rate
at which commercial banks borrow from the central bank has gone down to 7% from 7.5%. This
is expected to facilitate commercial banks to borrow cheaply so that they also lend cheaply in an
attempt to continue supporting Rwanda’s economy. The purpose of this study was to understand
the effect of credit management on commercial banks financial performance.
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RESEARCH QUESTIONS
The following are research question formulated to guide the study:-
i. How effective is the credit policy in curbing bad debt in Nigeria banking sector
ii. How effective is the credit administration in meeting customer demand in Nigeria
banking sector?
iii. How effective is the procedures put in place by the Nigeria banking sector for the
recovery of bad debt?
iv. What are the constraints associated with loan management in Nigeria banking sector?
OBJECTIVE OF THE STUDY
The objectives of the study are:-
i. To examine the management of bad debt and recovey process in the bank
ii. To evaluate and examine the credit policy lending practice and procedure of
selected deposit money banks in Nigeria
iii. To review the credit administration and control produce in bank
iv. To identify constraints associated with load management.
RESEARCH HYPOTHESIS
In order to pursue the objective of the study. The following hypothesis have been
formulated for testing.
H10: There is no effective credit management in the selected deposit money Banks in
Bida,Niger State.
H20: There is effective credit management in the selected deposit money Banks in
Bida,Niger State.
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SIGNIFICANCE OF THE STUDY
This is due to the role played by the selected Banks in economic development. In view of this,
effective and efficient management should be centered on individual banks. A competition
increase in bank has to be more prudent and ensure that will increase tangible benefit. If this can
be done credit management of the banks would be strengthened.
SCOPE AND LIMITATION OF THE STUDY
In orders to provide operation mechanism for effective credit management in the selected deposit
bank Access, Zenith, First and Union bank Nigeria PLC Bida branch will be used in this research
work as a case study.
A study of this sort cannot be conduct without sum hurdles. There were some problem
encountered while conducting the study.
One major problem of the study is the load part research as there was no adequate time to put all
necessary information that will enhance with the research work.
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LITERATURE REVIEW
The impact of effectiveness of credit management in financial development is based on the
part of effectiveness of bank in credit management to improve the standard of living by
providing working capital respective business men which in turn gives job opportunities to
the public, social and economic situation of the countryBedard, J. C. and Johnstone, K. M.
(2020).
According to Paget (2019), a bank is a corporation or person who accept on current pay
cheque on such amount as demand and collected cheque for customer,
They keep to oil the wheel of business activities by essential ingredient of business quotable.
A bank is now any person or body corpora filly registered in Nigeria as per requirement of
companies and allied matter acts degree 1990 of no 1 that is issued with valid license for.
CONCEPTUAL REVIEW
Credit Risk Associated with Credit Management
Credit risk is the current and prospective risk to earnings or capital arising from an Obligor’s
failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit
risk is found in all activities in which success depends on counterparty, issue, or borrower
performance. It arises any time bank funds are extended, committee, invested or otherwise
exposed through actuaL or implied contractual agreement. whether rellected on or oil the balance
sheet. Thus risk is determined by factor extraneous to the bank such as general unemploment
levels, changing socio-economic conditions, debtors’ attitudes and political issues
Oliotan (2006), observed that banks arc increasingly facing credit risk (or counterparty risk) in
various linancial instruments other than loans, including acceptances, interhank transactions, and
trade financing foreign exchange transactions, financial futures, swaps, bound, equities, options,
and in the extension of commitment and guarantees, and the settlement of transaction. Olokoya
(2011), asserts that credit risk arises from non-performance by a borrower. It may arise from
either an inability or an unwillingness to perform in the pre-committed contracted manner. Kargi
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(2011) claimed that the single biggest contributor to the loans of many of the failed local banks
was insider lending. He further observed that the second major factor contributing to bank failure
were the high interest rates charged to borrowers operating in the high-risk. The most profound
impact of high non-performing loans in banks portfolio reduction in the bank profitability
especially when it comes to disposals.
Ezeoha (2011), stated that lending involves a number of risks. In addition to risk related to the
creditworthiness of the borrower, there are others including finding risk, interest rate risk,
clearing risk and foreign exchange risk. International lending also involves country risk.
Khrawish (2006) observed that historical experience shows that concentration of credit risk in
asset portfolios has been one: of the major causes of bank distress. This is true both for
individual institutions as well as banking system at large.
Bank Credit Defined
Bank credit is defined as a major determinant of money supply and it embraces the amount of
loans and advance given by commercial and merchant banks to economic agents.
It could be explained as a form of financial assistance given by a bank to their credit worthy
customers in from of loans and advance overdraft fertility. Letter of credit etc, which are
expected to be repaid by the debtor over a given period of time. The debtor also pays a fixed
interest on tite credit ftteility extended to him or her.
Types of Bank Credit
Credit extended by banks could take the following forms:
Overdraft: According to Benjamin A (2007), an overdraft is a form of lending on demand. A
customer granted an overdraft, is allowed to withdraw on his current account up to an agreed
limit and over a period of time usually one year.
Loan: Is the main profit activities of the bank after bank have provided funds to ensure that
liquidity needs are fully met by provision of primary and secondary reserves, the next avenue for
the employment of bank funds is that of extension of loans.
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Letter of credit: Copestake 2007, explained letter of credits as a written order by a buyer or an
importers banks to pay the exporters for certain goods provided that the term and condition of the
credit are completed with.
Bank Lending Consideration
Usually, three important questions often come to the mind of the lending banks and bluest be
satisfied that the answers (given) to them are positive before deciding to lend. According to
Adekanye (1996) these questions are in relation to the loan profitability, safely and soundness.
a. Profitability of the loan: It must he certain that the interest rate charged on the loan and
the cost of maintaining the cost of capital.
b. Safety of the loan: A loan must be profitable and safe as it is granted. Loans that are
profitable and not safe should not he granted by the bank because it may result to bad-
debt.
c. Soundness of the loan: If the purpose of the loan goes against the government policies
general policy of the bank such loan should not be granted even through it might be profit
and safe, when considering loan, banks should as a matter of fact consider what is
commonlly known as the 5c’s of credit namely:
a. Character
b. Capacity
c. Capital
d. Collateral
e. Connection or condition
THEORETICAL LITERATURE REVIEW
The English banking system of which Nigeria is practicing from Britain through the activities
of goldsmith bank and money therefore have common origin and investor goldsmith it was
not deliberately designed as a bank through the process of trial and error, bank emerged. As
the names indicated , the goldsmiths dead with gold which is a valuable and rare commodity
because of the costly of gold, the goldsmith has a place called the strong room in which gold
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and other valuable commodity and documents were kept for safe custody with his strong
room, the goldsmith started receiving valuable commodities from people for safe keeping
receipt issued to those who deposited these valuable as evidence and only paid the goldsmith
for his service. As time goes on, people started using the receipt issued by the goldsmith for
the exchanges of other goods and services. When the goldsmith discovered that some people
who deposited valuable with him do not come for them in a short period, he stated enticing
other people inform of interest to deposit their goods and other valuable with him.
Agency Theory
A significant body of work has built up in this area within the context of the principal- agent
framework. The work of Jensen and Mecklin (2016) in particular and of Faina and Jensen (2013)
are important. Agency theory identifies the agency relationship where one party, the principal,
delegates work to another party, the agent. The agency relationship can have a number of
disadvantages relating to the opportunism or self interest of the agent: For example, the agent
may not act in the best interests of the principal, or the agent may act only partially in the best
interests of the principal. There can be a number of dimensions to this including for example, the
agency misusing his power for pecuniary, or other advantages, and the agent not taking
appropriate risks in pursuance of the principals interests because the agent views those risks as
not being appropriate and the principal may have different attitudes to risks. There is also the
problem of information asymmetry whereby the principal and the agent have access to different
levels of information; in practice this means that the principal is at a disadvantage because the
agent has more information. In the context of financial institutions and issues of risk based
internal auditing, agency theory view risk based internal auditing as being an essential
monitoring device to try to ensure that any problem that may be brought about by the principal-
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agent relationship, are minimized. Blair (2016) states; managers are supposed to be the ‘agents’
of a financial Institutions ‘owners’ but managers must be monitored and institutional
arrangements must provide some checks and balances to make sure they do not abuse their
power.
Stakeholder Theory
In juxtaposition to agency theory, Stakeholder’s theory takes into account, a wider group of
constituents rather than focusing on shareholders. A consequence of focusing on shareholders is
that the maintenance or enhancement of shareholders’ value is paramount whereas when a wider
stakeholder group such as employees, providers of credit, customers, suppliers, government and
the local community is taken into account the overriding focus on shareholders’ value become
less self evident. Nonetheless, many companies do strive to maximize shareholders value whilst
at the same time trying to take into account the interests of the wider stakeholder group. One
rationale for effectively privileging shareholders over other stakeholders is that they are
recipients of the residual cash flow (being the profits remaining once other stakeholders such as
loan creditors, have been paid).This means that the shareholders have vested interest in trying to
ensure that resources are used to maximum effect, which in turn should be to the benefit of the
society. Risk-based internal audit derives largely from models that assume that inherent risk (IR)
and control risk (CR) are distinct concepts and that inherent risk arises from attributes of the
entity and the audit environment that are completely independent of attributes that determine the
level of control risk.
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EMPIRICAL REVIEW
Considering the definition of credit in chapter one according to unknown (200) defined credit as
a purchasing power not derived from income but from financial institution either an offset of the
balance of income held by depositors in bank, while management is the coordination of all
resources of an organization in order to attain organization objectives.
According to Sewagudde (2017).Credit management involves the collection compilation storage,
analysis and retrieval of information regarding trading on credit.
Pandy (2016) defines credit management as the process or act of lending out sum of money to
people whereby the whole process is controlled, planned, organized, acquired and coordinated.
Procknow H.V (2021) as they viewed bank credit is anything or money borrowed in order to
obtain something worth having which would be out of financial business and performance as a
broad study of commercial and its operation, these include area.
Procknow H.V (2021) credit management involve the collection compilation storage analysis
and retrieval of information regarding trading on credit.
Credit management is the process of controlling and collection payment from customers. This is
the function within a bank or company to control credit policies that will improve revenues and
reduce financial relation Procknow H.V (2021).
A credit manage is a person employed by an organization to manage credit department and make
decisions concerning credit limits, acceptable the terms of payment to their customers.
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Responsibilities of credit manager:-
i. Controlling bad debt exposure and expenses management of credit in the company’s
ledger.
ii. Maintaining strong cash flows through efficient collectivities the efficiency of cash
flow is measured using various methods, most common of which is days sales
outstanding (DSO)
iii. Ensuring an adequate allowance for doubtful account is kept by the company.
iv. Monitoring the account receivable portfolio for tremors and warning signs.
v. Obtaining security intensive where necessary common example of this could be
PPSA’S latter of credit or personal guarantees.
vi. Enforcing the ‘stop list of supply of goods and services to customers
vii. Initiating legal or other recovery action against customers who are delinquent.
viii. Setting and ensuring compliance with a corporate credit policy.
PURPOSE OF CREDIT MANAGEMENT IN ORGANIZATION
Commercial banks gave out credit to other banks to fulfill some directives from central bank of
Nigeria and for economy development, (Adekunlefemi, 2017).
In Nigeria the annual budget for investment of loans for each sector of the economy certain
percentages will be given to each the central bank of Nigeria will now allocate the specific
percentages that will go to each sector of the economy each Commercial must not issue about
the directive from central bank of Nigeria is the a pox bank. Another reason why commercial
bank grant credit is for economic development, when loan are granted to businessmen.
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METHODOLOGY
Research methodology is the purpose by which data are collected with regards to a specify study
in other words it is a method used to collect data to advance study of particular subject matter so
as to learn new fact.
This chapter is meant to show everything about this research methodology. It show the research
population and sampling techniques that was applied on the research work, research
methodology can also be a systematic way of finding new knowledge of a subject or topic of
solving existing problem not yet been brought to a logical conclusion research methodology in
this chapter will touch interview and questioning of staff and customer and documentary source,
the instrument data collection techniques and method of data analysis.
DATA PRESENTATION AND ANALYSIS
In this aspect, the work deals with the presentation and analysis of data collection. It concern
questionnaire which is presented in the tables, sample percentage and summative ration. The
stated hypotheses were tested using the chi-square table to determine the significance of the
opinion expressed by the various groups included in the sample.
Customer View
Question: have you made any request for credit facility from this bank at any time?
Alternative No. of Respondent Percentage %
Yes 38 76
No 12 24
Total 50 100
Source: Field Survey
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The table above shows that 76% of the respondent agree that they were property assessed before
loan was been given to him, while 24% of the respondent disagreed.
Question 3:
Did you provide any collateral before getting your loan?
Alternative No. of Respondent Percentage %
Yes 42 84
No 8 16
Total 50 100
Source: Field Survey
The above table shows that 84% of the respondent agree that they provided collaterals as a result
of granting the loan, while 16% disagreed.
Staff View
Question: has the bank been able to meet the several requirement of the C.B.N.
Alternative No. of Respondent Percentage %
Yes 47 94
No 3 6
Total 50 100
Source: Field Survey
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The table above shows that 94% of the respondent agreed that the bank has been able to meet
CBN requirements while 6% disagreed.
Question 3: Have customers been turning up in paying back credit given to them?
Table 8
Alternative No. of Respondent Percentage %
Yes 39 78
No 11 22
Total 50 100
Source: Field Survey
In the above table, 78% agreed that customers have been turning up in paying back credit given
to them but 22% disagreed.
Test of Hypothesis
HO: inappropriate loan supervision and monitoring is not the major cause of bad debt
HI: inappropriate loan supervision and monitoring is the major cause of bad debt.
The chi square X2 satisfied tool formula was used in testing the hypothesis.
Formula chi square X2 = ∑(0i – ei)
Ei
Hypothesis
Table 11 .
Option No. of Respondent
Yes 33
No 17
Total 50
Source: Field Survey
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The above statistical table shows that the observed frequency for yes is 33, no 17. The expected
frequency on the average of 25 for each.
The chi square table is as follows
= X2 = ∑(0i – ei)
Ei
Where X2 chi-squurc
oi observed frequency
ei = expected frequency
Table 12
E O Oi – ei (oi – ei)2 (0i – ei)
ei
Yes 25 33 8 64 2.56
No 25 17 -8 64 2.56
Toal 50 X2 = 5.12
Source: Field Survey
To determine the chisquare (x2) from the above table at the level of significance with the degree
of freedom (df) 1=3841
Decision:
Since chi-square (x2) calculates 5.12 which is greater than 3.84 I, the null hypothesis is then
rejected. This implies that: inappropriate loan supervision and monetary is the major cause of
bad debt.
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The strength of variation of the predictor values that influence credit management in listed
deposit money banks.
ROA = 0.017 + 0.001(RM) + 0.002(ARBP) + 0.003(IAS) + 0.00 1(IAC) + e
From the above regression model, it was found that return on asset in listed deposit money banks
in Nigeria would be at 0.017, holding risk management, annual audit risk based planning,
internal auditing standards and internal audit capacity constant. A unit increase in effective risk
management would lead to increase in return on asset in commercial banks by factor of 0.001
with a P Value of 0.822; a unit increase in credit management planning would lead to increase in
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return on asset in banks by factor of 0.002 with a P Value of 0.608. Therefore, positive impact
exists between return on asset (ROA) and credit management influencing financial performance
in Union Bank in Nigeria, clearly indicating that effective credits management, annual audit risk
based planning, internal auditing standards and influence financial performance in the banks, as
they are statistically significant with a P-Value of 0.822, at 95% confidence levels. This implies
that risk management, annual risk based planning, internal auditing standards and internal audit
capacity influence return on assets in listed deposit money bank in Nigeria.
IMPLICATION FOR THE STUDY
The impact of each variable of the study has been analyzed and investigated using multivariate
regression analysis. Preliminary analysis was performed on the data to ensure no violation of the
assumptions underlying the application of multivariate regression analysis. The empirical
investigation reveals a positive impact between risks based internal audit procedures such as
selection, risk management; annual audit risk based planning, internal auditing standards and
internal audit capacity (Independent Variables) and quality of financial performance (Dependent
Variable) of listed deposit money banks in Nigeria.
The findings for the study reveal that hypothesis 1, which states that there is no significant
relationship between credit management in bank it was statistically rejected by the analysis
where p value 0.822 and r = .001 which indicate that there is significant positive impact between
risks management and financial performance of bank in credit management . This suggests that
risk assessment relates positively with financial performance of listed deposit money banks in
Nigeria. The findings are similar to that of Maiteka (2010) who found that there existed a strong
and positive relationship between risk assessment and corporate governance in public sectors.
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Hypothesis 2, which states that there is no significant relationship between annual risk based
internal audit planning and financial performance of listed deposit money banks in Nigeria was
tested and the result rejected the hypothesis, where p value 0.002, and r = 0.608. This indicates
that annual risk based internal audit planning is a significant predictor of financial performance
of listed deposit money banks in Nigeria.
SUMMARY OF FINDINGS
The summary were similar to that of Maiteka (2010) who found that there existed a strong and
positive relationship between credit management in banks with an adjusted R2 of 0.78 3
indicating that the risk based audit explain 78.3 % of the variability in the corporate public
governance in enhancing public service delivery. Also, the findings were similar to that of Chen,
(2003) who investigated the relationship between corporate governance and risk taking behavior
in Taiwanese Banking Industry. He took a sample consisting of 39 domestic banks, and of the 39
surveys mailed, 24 completed responses were returned thus a response rate of 6 1.54% of the 24
survey responses. 13 (54.1%) of the credit unions reported that more than 60% of their internal
audit activities are risk oriented.
SUMMARY OF THE STUDY
This chapter deals with the research of findings as regard the effectiveness of credit management
in Niger state economy ( a case study of some selected Bank in Bida). The researcher work is
summarized with conclusion drawn and possible recommendation made
- One can fully appreciate the importance of credit management as access using the
influence of the financial institution of goods and its importance to the customers
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- Giving out credit to customers and for a prompt payments from the customers, promotes
the customers image from the bank and even the personality of the customer.
- The researcher revel that credit management information helps the organization to
achieve it aim and objectives
- It also reveal how credit management has made impacts in preventing fraud in business
organization
- It reveal that a company should operate without the use of credit management in an
organization
CONCLUSIONS
A prudent and effective credit management may improve the profit performance of the banking
system, increase credit creation based on the expansion role in Niger state economy and the
entire Nigeria economy.
In conclusion the role of effective credit management in a bank is of paramount importance for it
to enable the prove and improve the profitability of the bank.
RECOMMENDATIONS
The researcher believes that this study has achieved its predetermined objectives by carefully
identify the effectiveness of credit management operation in selected deposit money banks
The researcher has sum sets of recommendation to the management these are:2e
i. The management of the selected banks should try to introduce advisory service to
their customer with financially and managerial advice especially the farmer who are
interested in obtaining loan for agricultural product to improve the economy. This
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could be done through the supply of banking periodicals, economic analysis and
interpretation into languages in which the illiterates can easily understand and know
the meaning
ii. Promotional lending and credit should be encouraged by visiting the customers place
of business to find additional verification purpose for the customer use of credit
iii. A central bank credit management quadrant scheme should be established to cover all
loans to the preferred sector, this will alleviate the fear of being unable to receive
loans from borrowers
iv. Branch officer of the selected Bank should be given a greater degree of freedom to
assess the credit worthiness of borrower and approve loans accordingly instead of
sending all loans proposals to the head offices would be restricted to those of
correlation and monitoring the branch office activities.
v. Committee should be setup which will report directly to the banks, they would safe
guard the effective implantation of guideline lastly management of union bankshold
enlighten its customers on the importance and needs of them to pay their loans
promptly as they have promised before the loan was given to them. In order to avoid
bad Debts because some customers that didn’t pay as promptly may lose that
personalities to the bank.
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Adeniyi D.A (2019).The law and practice of Banking in Nigeria. University of Ile Ife press Ife
Adekunlefemi, 2017). A practical guide to Bank Borrowing, United kingdomGiabman
Benlest (2019). Credit management involve the collection, compilation , storage abnalysis and
Retrieval of information regarding credit management
Blair (2016) A practical guide to Bank Borrowing, United kingdom Giabman
Bedard, J. C. and Johnstone, K. M. (2020).Earnings manipulation risk, corporate governance
risk, and auditors’ planning and pricing decisions”, The Accounting Review, Vol. 79
No.2, pp.227-3 04.
Huberman and Miles (2008). Corporate governance and control, working paper, ECGI, Brussels
Kirkman (2019) Introduction to banking 2nd edition Diamond printing Press Lagos Street Minna
Mecklin (2016) Credit management involve the collection and Analysis retrival information
Nwanko(2018) The Nigerian Finance System. Mac Millian Press London
Procknow H.V (2021) Define credit management as the process or act of lending out sum money
to people where by the whole process is controlled pllaned and organize.
Pandy (2016) The year of the audit committee, Internal Auditor Vol.57. (2), pp. .46-51.
Sewagudde (2017).Earnings manipulation risk, corporate governance risk, and auditors’ planning
and pricing decisions”, The Accounting Review, Vol. 79 No.2, pp.227-3 04.
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