THE IMPACT EFFECTIVE CREDIT DOCUMENTATION IN
COMMERCIAL BANK
(A CASE STUDY OF FIRST BANK
PLC KADUNA)
CHAPTER ONE
1.0 Introduction
Credit generally
denotes loans and advances made either directly or indirectly by a creditor
(lender) to 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 this credit to
the bank is supposed to be huge profit instead of this over the year, modern
banks (particularly commercial banks) have been recording huge amount of bad
debt provision which increase with each consecutive.
The term credit is the
granting of money (loans) and advances to borrowers with the general
expectation that they would honour their obligation to repay the fund with or
without interest when due.
Credit is the means by
which we are able to obtain immediate benefit 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 we require but can not 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 is by loans.
However, loans are
only granted to those whom they have every confidences in and then as often as
not, demand some form of security. The motive for leaning money is therefore to
acquire profit for themselves and not out of favour to the customer. Although,
we are not able to adopt 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 certainly a risk of not getting it back from such
customers. It is this (non-payment of loan) that has made it necessary for this
research to go into the 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 bank.
1.1
Historical Background of the Case Study
First bank of Nigeria
Plc is a leading banking institution in Nigeria with over a hundred years
of banking experience, founded in 31st march1894 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, merchant and international banking. And has become appetent factor in the development
of the country.
It was incorporated as
Limited Liability company in London, with it’s head office in Liverpool under
the corporate name “Bank of British West Africa; with a paid up of twelve
Thousand Pounds sterling (£12,000) it commenced business after it had absorbed
it’s predecessors assets in the African banking of the pre-eminent position
which the bank was established in the ban king industry in west Africa.
The bank in it’s early
years grew rapidly working in close corporation with the colonial government in
performing the traditional roles of a central bank.
In 1896, a branch was
opened in Accra,
Gold coast (now Ghana)
while another was established in Freetown
sierra Leone
in 1898. This marked a milestone in bank’s internationally banking operations
thereby justifying it’s west African coverage operationally.
The second branch in
Nigeria was situated in the old Calabar in 1900 and two year later, it’s
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 N68.4 million in 1995, the bank’s total assets currently
stand at N69.82 million, supported with a deposit based of 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 Nigerianlized. This 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 it’s march towards national development.
As a result of
corporate policy to divas it’s portfolio of non-core activities and in order to
meet the bank of England’s regulatory requirement the banks foreign partners,
the standard chattered 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 Nigerian to 90.1%.
The bank has
maintained its leadership in financial long-term loan to the colonial
government. To day, the banks boast of a diversified loan portfolio to various
sectors of the economy. The banks rural banking record is unmarked by army
bank’s while its agricultural credit facilities through the community farming
loan schemes have given the common man and farmers a 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
Statement of General Problem
The incidence of
credit mis-management” in the financial system has not Luther to attract due
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 authorizes but the public at large.
There is a growing
concern in these sectors of increased potential for back failures if the
problems is not urgently address. The fear may not be out of place when viewed
against recent development in 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.
This 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 it’s
liquidity ratio.
The research is aimed
at finding the cases and solution to such problems a “Bad debts for effective
and efficient management
1.3
OBJECTIVE OF THE STUDY
i.
To examine the various considerations and analysis in the impact of
credit management for lending purposes in the principal industries especially
the commercial banks.
ii.
To assist practitioners in the banking industries to acquire the high
decree of unperforming credits as presently carried in their debt portfolios
and to 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
(commercial banks) in Nigeria with
particular emphasis on the selected banks located in Nations.
v.
To stir or stimulate interest in this area for prospective students who
may wish to develop their career in the area or field of credit management.
vi.
To serve as a useful preliminary paraphernalia (tool) or materials for
further study in the field of credit management.
1.4
Significance of the Study
It is the hope to
evaluate credit management process and the subsequent problems of un-performing
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 field 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
reduce 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.