APPRAISAL ON THE IMPACT OF EFFECTIVE CREDIT MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS
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APPRAISAL ON THE IMPACT OF EFFECTIVE CREDIT MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS
The influence of good credit management on commercial banks’ profitability is the main topic of this study. There are five chapters in the study.
Introduction, a basic overview of the study, a statement of the problems, the study’s aims, its limitations, and definitions of the terms are all covered in chapter one. The broad introduction to the study’s topic and a review of the literature are included in chapter two.
The topics covered in chapter three are study methodology, research design, data source, population, sample size, and data collection method.
The display of data, analysis, and hypothesis testing are all topics covered in Chapter 4.
Summary, conclusion, and recommendation make up Chapter 5.
According to the research findings, credit managers should be used effectively to deal with different credit evaluations in order to increase bank profitability.
CHAPTER ONE
1.0 INTRODUCTION
1.1 GENERAL OVERVIEW
One of the banks’ investment policies is the granting of loans and credit advances. The provision of sufficient credit to the various economic units to enable them to conduct their operations successfully and efficiently is one of the essential growth processes.
Therefore, there is a need to move money from the surplus units of the economy to the deficit ones. Commercial banks are crucial to the distribution of financial resources for capital formation in this way.
Since lending of money has become widely recognised and accepted as an important function of the banking industry (i.e., commercial banks), a function that the industry is better placed to perform in light of its position as a finance intermediary, there are many opportunities for profit improvement or maximisation through effective credit management.
All forms of credit, whether they are personal or institutional, are governed by the same basic rules of lending.
However, the criteria used to decide whether to approve or reject a credit application have been the origin of significant bad debts in the banking sector, particularly commercial banks.
A bank considers a loan or credit to be a bad debt if there is serious uncertainty about whether it can be repaid, and this doubt may arise for the reasons outlined below.
1) The wrong lending concept was selected and applied.
2) The customer’s failure to pay back the credit as agreed and by the deadline.
3) Occasional credit requests from customers.
4) Repeated attempts by a customer to go beyond the current limit without permission.
5) Overdraft balances are always at their highest. If bad loans are allowed to persist, they will undoubtedly cause a bank to fail since they have a substantial negative impact on the bank’s liquidity and profitability.
Since it is widely acknowledged that lending is the most dangerous activity carried out by commercial banks, effective lending is crucial.
Banks are required to carefully investigate a number of factors before extending credit to customers. This should allow them to evaluate the risk of the loan as well as the borrower’s willingness and capacity to repay.
1.2 STATEMENT OF THE PROBLEM
The following issues surround this research.
a. In the face of numerous borrowers, banks find it challenging to function effectively as financial intermediaries.
b. BANKS AS DEBTORS: Banks have a responsibility to depositors at all times to make money available upon request.
c. BANKS AS CREDITORS: Banks struggle to accurately evaluate and identify credit-worthy customers who will ensure repayment to maintain the balance of money flow.
Commercial banks have an obligation to maximise profit as a result of their status as commercial outlets.
1.3 OBJECTIVES OF THE STUDY
Retail general purpose banks are commercial banks. They raise deposits from stockholders and depositors of all sizes.
Loans are the most significant, most lucrative, and riskiest asset of the banks; if they are not kept liquid due to loan problems, banks may not be able to meet their obligations to depositors, and public confidence will be lost.
They lend these mobilised funds to willing customers for investment purposes as stated earlier. These problematic loans have an impact on banks’ profitability because they impair their ability to generate deposits, limit further lending to potential borrowers, and damage banks’ liquidity.
Consequently, the following are the study’s goals:
1. To figure out the best ways to manage loans so that they no longer have a negative impact on depositors’ banks and the economy.
2. To assess the value of the central bank’s commercial bank credit guidelines
3. To suggest potential improvements to credit policy guidelines that would benefit commercial banks’ clients as well.
1.4 SCOPE OF THE STUDY
A portion of the bank’s performance will be reviewed in the research of the impact of effective credit management on commercial banks’ profitability.
The success and failure of the bank in locating projects through lending will also be examined, as well as how lending and borrowing have impacted the profitability and liquidity of commercial banks.
The decision to go with United Bank was crucial because it has endured all of the nation’s banking policies and regulations.
1.5 RESEARCH HYPOTHESES
The following hypothesis was formed based on the study’s goal, which was previously stated.
1. Banks have provided sufficient financing for economic ventures.
2. Borrowers have benefited from low interest rates.
3. Better relationships between commercial banks and their credit consumers are the result of credit officers receiving proper training.
1.6 SIGNIFICANCE OF THE STUDY
1. The most valuable asset of commercial banks’ credit, loans are significant.
2. It is crucial that credit proposals are clearly stated and assessed as soon as they are created.
3. It is essential to prevent and reduce bad debts.
4. It is therefore impossible to undervalue the importance of gathering crucial data for financing and analysing the proposal.
5. It is important to remember that the risk components of loan proposals are typically difficult to assess.
6. As a result of weak and terrible credit management, several banks are currently out of business.
7. As a result, this work aims to present a method for effective credit management.
LIMITATIONS OF THE RESEARCH
The study’s shortcomings are as follows.
Two commercial banks—First Bank and Intercontinental Bank Plc—are the only participants. The study has a time limit.
Not all of the information used was derived from primary research; instead, most of it came from libraries and books.
The replies to the questions posed to the bankers who were unwilling to share or disclose specific information about their institutions to outsiders is the final significant limitation.
1.8 DEFINITION OF TERMS
BAD DEBT: These refer to an organization’s revocable debts. CANNON: universally recognised foundation upon which a concept or subject is based.
CREDIT FACILITIES: These are the types of credit associated with a bank’s credit risks. They include loans, overdrafts, advances, commercial papers, leases, and guarantees, among others.
A credit facility provided by one party (the lender) to another (the borrower) on the basis of particular terms and circumstances that have been agreed upon by both parties.
OVERDRAFT: An overdrawn account. It is a brief revolving period that was agreed upon with the bank.
POLICY: a rule.
All credit facilities provided by banks to their customers that the consumers are unable to repay within the specified time and conditions are referred to as PROBLEM LOANS.
TERM LOAN: A lending facility offered for a length of time typically longer than a year.
LIQUIDITY: Assets that can be sold to pay off debts, like cash or products.
Goods or property pledged as security for borrowed funds.
GUARANTEE: a promise given to the person to whom a debt is or will be owed or paid by one person to pay the debts of the other in the present or in the future, typically in writing.
CONVEYANCE: The act of transferring ownership of a loan, such as a mortgage, lease, charge, or vesting instrument, to a buyer.
PORTFOLIO: a group of investments or shares.
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