Project Topic:

THE EFFECT OF CREDIT MANAGEMENT ON PROFITABILITY OF NIGERIAN BANKS

Project Information:

 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 65 ::   Attributes: Questionnaire, Data Analysis, Abstract  ::   818 people found this useful

Project Department:

BANKING FINANCE UNDERGRADUATE PROJECT TOPICS, RESEARCH WORKS AND MATERIALS

Project Body:

CHAPTER ONE

INTRODUCTION

1.1      Background of 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 world wide, 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. In Nigeria, the business of banking has not been Stagnant, the advent of the British political and economic influence brought about the evolution of banking in Nigeria. This is as far back as the last decade of 19thCentury, precisely in 1892. The first Commercial bank in Nigeria “the British African Banking Corporation

(BABC)” was formed in that year (Onanuga, 1998.) Ever since the first bank was formed, the banking industry had witnessed a lot of changes. In July 1958 for instance, in recognition of its importance at that time, the Central Bank of Nigeria was formed as the apex bank in Nigeria under the Central Bank of Nigeria Ordinance cap 30 of portfolio olio 1958, (Agom, 2000). The bank is saddled with the responsibility of supervising and monitoring banking activities in Nigeria. Another boost of the industry came up in 1961 when another history was recorded in the banking arena with the establishment of the first Merchant Bank – PHILIP HILL LTD. Though the bank was more or less like the branch of a UK Merchant Bank – HILL SAMUEL & CO. It paved the way for the establishment of the JOHN HOLT LTD’S finance firm – NIGERIAN ACCEPTANCES. These two firms later merged under the name NIGERIAN ACCEPTANCES LTD in 1969.

The Nigerian banking arena witnessed yet another change in 1990 when the Community and Peoples banking systems (a form of unit banking) were introduced to further promote and instill the habit of banking in the Nigerian populace (Mohammed , 2002). The most recent of the development in the banking industry came up when a new method of banking was introduced, the Universal System of Banking. Otherwise referred to as “The Universal Banking System” It is the latest of all banking practices globally, although in some economies they do not use the term Universal Banking, but practice it through a partial or complete removal of the differences among the various banks which hitherto specialized in a narrow range of banking. Iyari, (2001:1) opined that “The whole idea of Universal Banking was spurred by the forces of globalizations, deregulation of financial markets, trade liberalization, internationalization of economic activities and the phenomenal impact of information technology on business process and decision – making”

The Universal banking system is a system of banking that permits any bank to determine its portfolio offerings, which may involve non – financial services. The approval in principle given by the Central Bank of Nigeria for the practice of Universal banking in Nigeria in January, 2000 was well appreciated in the industry. Merchant banks are already converting to Commercial banks to be able to access the relatively cheaper and stable deposits, also given the diminishing investment banking business in the weak economy. Considerable prospects for the re-alignment of activities and forces will be explored to achieve economics of scale and to enhance profitability.

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, 1967). 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.

Banking as a service industry is organized to make profit for the shareholders vide provision of banking services and supply of financial needs to individuals and cooperate bodies. In order to achieve this, banks accept deposits from customers and lend to others. According to Sayer, (1970:175), banks seek to make themselves as attractive as debtors and as efficient as creditors that they can earn a substantial gross income from the difference between the interest they charge as creditors and the interest they pay as debtors”. Statutorily, Banks and Other Financial Institutions Act (BOFIA, 1991), Section 61, defines Banking Business as business of receiving deposits on current account, savings account, or similar accounts, paying or collecting cheques, drawn by or paid in by customers, provision of finance or such other business as the Governor of Central Bank of Nigeria (CBN), by order published in the Gazette, designate as banking business. Through credit, banks promote investments and sale of a wide range of goods and services. Banks in Nigeria have been performing this financial intermediation role in the economy. Thus, loans and advances today constitute a major asset of the total asset structure of banks in the country. (Banks’ Annual Report and Accounts)

An asset constituting a significant proportion of total assets deserves nothing less prudent and efficient management if the economy impacts of banks on the economy are to be optimally realized. In addition, banks are expected to derive their income principally from lending/credits (loans and advances) and investing, and to a lesser extent, from fees and charges received from services rendered. According to Crosse (1962:66), Income from loans and advances should constitute more than 60 percent of the total income of the banks”.

Developments in the Nigerian economy in the last decade, specifically, from 1992 to date have had considerable impact on the functioning of the banks and other non financial institutions. The decade witnessed a down – hill trend in the Nigerian economy, occasional dwindling oil revenue and the global economic recession. Banks as a sub-system of national economy is not immune and is having its own share in the form of increasing loan defaults because of the inability of borrowers to redeem their loans, which resulted in banks failure and subsequently banks distress.

1.2 STATEMENT OF THE PROBLEM

One of the major problems confronting the banking industry today is the increasing incidence of loan defaults and consequent loan losses which manifested on the profitability of the banks. Sequel to increasing incidence of huge bad debts in the Nigerian banking industry, insider’s abuses, management’s competence have been called to question. Bad debts, it must be noted occur due to the inability of the bank’s management to recover loans granted to customers.

It is reported in the NDIC 1989 Annual Report and Accounts that the deteriorating health of the banking industry is on the increase. With reasons adduced for this development in the report to include the following amongst others:-

1.   huge uncollectible loans and advances;

2.   the financing of long-term assets with short-term funds;

1.   unsound management practices;

2.   reliance on volatile deposits;

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