Credit management in banking sector

CHAPTER ONE

I.0     INTRODUCTION

The purpose of credit in banks is to earn interest and make profit. It follows that principles of goods lending shall be concerned with ensuring, so far as possible that the borrower will be able to make scheduled payments with interest in full and within the required time period otherwise, the profit from an interest earned is reduced or even wiped out by the bad debt when the customer eventually defaults.

Credit management is concerned primarily with managing debtors and financing debts. The objectives of credit management can be stated as safe guarding the companies investments in debtors and optimizing operational cash flows. Politics and procedures must be applied for granting credit to customers, collecting payment and limiting the risk of non payments.

An important function of credit management is credit control. This is primarily a process of deciding how much credit should be given to customers or borrowers and ensuring compliances with the credit terms that is given for controlling credit repayments.

1. To avoid a liquidity storage from excessive investment.
2. To secure an optimum balance between giving credit to make sale and the financial risks from non-payments or late payment.

1.1.   BACKGROUND OF STUDY

Banking started in Nigeria in 1892. ABC was established in Lagos on mutation EDC. ABC was based in South Africa but opened a branch in Lagos to finance the shipping business of EDC which was operating steam-ship service and from that time commercial banking started and we have different ones with so many branches.

After some time, some banks were liquidating because

1. Unfair Competition
2. Lack of patronage
3. Lack of entrepreneurship
4. Lack of foresight

In a positive step to offer a counter institution, European banks, the industrial and commercial bank was established in 1929 by a group of Nigerians, this bank tried to do what the earlier British Banks were reluctant to do by offering credit liberally to Nigerian particularly Managing Directors within a years, it went into liquidation.

Commercial banks are banks principally engaged in retract banking and while concentrating in large urban areas, they never spread their tentacles to virtually all the nooks and crannies of the country with same having off shore branches.

STATEMENT OF THE PROBLEM

The problem facing the banking industries are very numerous and most of the problems are due to lack of appreciations of the crucial roles that bank plays in our economy. Such problem includes unstable micro economy within, which the banks operate.

Skye bank is a well known commercial bank that offers full range of services such as lending of fund to customers, loan and overdraft to companies and also discounting bills of exchange fro national and international business men, therefore, increasing the Gross National Product (GNP).

In this research, a bank without an effective credit management technique is likely to encounter the following:

1. Establishing a credit policy from determining how much credit to give an on what terms.
2. Dealing with late payers and non payers
3. Assessing customers application for credit
4. Collection procedures and credit motoring
5. Security of payment of the credit
6. Monitor customers payment records and receive credit terms.

PURPOSE OF THE STUDY

The objective of this research works centres around finding ways of solving a particular problem that is determining the effective of the credit management techniques set by Skye Bank in controlling its credit extended to its prospective customers.

To discuss the role of banks in the economics development of Nigeria.

To evaluate the effect of poor credit management to bank distress in Nigeria.

1.4    RESEARCH QUESTION

1. What is credit management?
2. Who is due for credit?
3. What are the methods for payments?
4. What are the procedures for calculating credit?
5. How do we manage credit cycle?
6. What are the policy guiding it?

1.5    RESEARCH HYPOTTHSIS

For the purpose of this study the research hypothesis will be analyzed as follows:

TEST I

Ho:     The techniques employed in collecting debt loan do not encourage quick Repayment

Hi:      The techniques employed in collecting loans encourage quick repayment.

TEST II

Hi:      Defect in credit management will not lead to increase in bad debt

Ho:     Defect in credit management will lead to increase in bad debt.

SIGNIFICANCE OF THE STUDY

1. The study will enable the general public and bank to know the purpose of loan.
2. they will also find out the following:
3. The sources of payments
4. The risks that is involved
5. The protection for the bank
6. The loan structure i.e. short term medium term or long term.

SCOPE AND LIMITATION OF THE STUDY

The scope of this study will cover the appraisal and credit management in banks, in which Skye bank is used as the case study of the research work.

The limitation of this study is based on the extent at which data rate made available, also the problem of fund and also the problem of time constraints.

DEFINITION OF TERMS

The following terms are defined below in order to make it easier and understandable for a layman.

1. credit management
2. credit policy
3. credit vetting
4. credit monitoring and collection procedures
5. security of payment
6. credit control

CREDIT MANAGEMENT

It is concerned primarily with managing debtors and financing debts. It is achieved by collecting payment in accordance with the agreed terms.

CREDIT POLICY

it is a rule within which credit management operates for determining how much credit to give and on what term and dealing with late payers including taking them to court.

CREDIT VETTING

It is the process of assessing customers’ application for credit. It is the systematic approach for deciding individual’s credit limit that treats all customers fairly.

COLLECTION PROCEDURES AND CREDIT MONITORING

This is important for collection of cash, collection of debts risking the loss of customer’s goodwill in the future.

SECURITY OF PAYMENT

It is concerned about the credit, risk of borrowers therefore, a bank can decide on the following:

1. refuse to lend
2. agreed to lend but at a high rate of interest

CREDIT CONTROL

It is a process of deciding how much credit should be given to customers or borrowers and ensuring compliance with the credits terms that are set.

SUMMARY OF CHAPTERS

Chapter one

Chapter one centres on the introduction, objective, significance

Chapter two

It centres on the factors credit management credit policy and collection procedure and credit monitoring

Chapter three

Focuses on e research methodology

Chapter four

Based on data analysis and summary of findings

Chapter five

Summary of findings, conclusion and recommendation of study