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Financial procedures are procedures for preparing and reporting credible information about transactions.

Financial resources in any country should be adequately mobilised, given the critical role of finance in economic development.

According to Nwankwo (1993:p.2), finance resources are a critical aspect in economic development.

As a result, resource mobilisation has become a criterion for achieving rapid economic growth in any economy. The first phase in mobilising resources for development is the mobilisation of financial resources, which leads to capital formation. Capital formation necessitated either the release of domestic commodities and services for real investment or the importation of resources from elsewhere, or both.

Adewumi and Ojo (1989:P.10). They emphasised the importance of financial resources, pointing out that the financial institution provides an effective institutional mechanism for mobilising resources and directing them to less critical uses in order to move them to more productive alternatives.

The writer contends that the efficiency of any financial system, particularly in a developing economy like Nigeria, is determined by the extent to which the financial information role is effectively and efficiently discharged in relation to the economic good of the country and the institution’s own objectives.

The basic role of a commercial bank, according to Racheal (91984:p.478), is to extend credit to deserving borrowers. It has been stated that the most important institution in the mobilisation of finances is the commercial bank.

Furthermore, Khat Khate and Racheal (1984:p.516) noted that commercial banks are the most relevant institution in developing nations for encouraging and mobilising deposits, as well as converting such savings into productive investment.

First, because of their office network; second, because commercial banks, through routine credit operations, frequently activate deposits that are otherwise inactive; and third, since banks are extremely liquid and hence attract depositors.

Oji (1984: P9) proposed in the Nigerian case that the commercial banking system be utilised as a representative because it accounts for approximately 85% of all institutional savings in the system. Mayor (1982:P 13) went on to say that the commercial banking system is the most significant financial intermediary for two reasons.

For starters, the total amount of deposits in the commercial banking system has the potential to generate deposit demand as a result of lending activities.

Because demand deposits account for a major portion of the money issued, the banking sector has the ability to increase the nation’s money supply. The agreement that commercial banks require liquid assets, particularly short-term assets that can be converted into cash loans on his behalf, constitutes the majority of assets.

Good bank lending ensures high profit levels, greater returns, and the emphasis of meeting social responsibility to the benefit of society, whereas bad bank lending can affect the bank negatively in a variety of ways.

For example, it may take a significant portion of the bank’s annual profit, which the bank requires to stay in business. This, together with the indiscriminate extension of loans, even when they are within the credit guidelines, without effective oversight of such loans and accounts, has resulted in an increased tendency for the existence of bad debt.

The bank has failed to establish several measures against bad debt and has a habit of forgetting every loan committed the moment the contract is signed. The author’s position here is that the cause of bad debt is inappropriate loan supervision and administration. As a result, the Hallmark Bank Limited was chosen as the case study.


Hallmark Limited was founded on 29 October 1990, and received its licence to operate as a commercial bank on 2 January 1991. The bank began operations on April 2, 1991, with an authorised and fully paid-up capital of # 50 million (fifty million).

The equity basis was later extended to # 100 million and had reached 200 million Naira by March 1995. Its headquarters and registered office are located at Plot BC, Okigwe Road,

Ugwu Orji Owerri, Imo State, Nigeria. Currently, the bank has branches around the country as well as correspondent banks in London, Norway, and the United States of America.


The commercial banking system shares many similarities with the rest of the financial industry and the business community. Its goal was to maximise profit. According to Clem (1994: P.4), commercial banks are profit-seeking enterprises, and as such, they share the same set of expectations about the health of the economy as other businesses.

In light of this, it made loans available to borrowers at interest, which is a source of profit for the bank. Along with the expansion of the credit sector comes an increase in the incidence of bad debt due, among other things, to inadequate management.

Hallmark Bank Limited, like most commercial banks, has a high rate of bad debt and one year of stated losses. For example, in 1994, the bank suffered a net loss of 112,153 million as a result of the bank’s net portfolio being [predominantly not performing (chairman annual report 1996: P.28).

In 1995, the bank made a profit of # 87, 879,000 after deducting a provision for bad debt of # 1, 836,645 from its earnings. Added to the 130.481,720 amended provision in 1994 at the request of the Nigerian Central Bank and those for the subsequent years, the bank provision for bad debt climbed to a startling # 134, 318, 380 (chairman report 1996, P 20 – 21).

Given the phenomena of bad debt and the resulting loss reported by the bank, there is a need to investigate the bank’s credit management in order to get insight into how best to reduce the incidence of bad debt. The bank’s management has expressed legitimate concern about this because it affects the bank’s profitability as well as inhibits its expansion.


As the bank sector expands to meet the expanding complexity of the Nigerian economy, it has been observed that the amount of bad and dubious debt of the bank has increased, contributing to the distress nature of some banks.

The concern that arises is why, after providing the bank’s management expertise with numerous lending guidelines, such financing was classified as bad debt.

In light of the foregoing, the specific purposes to be discovered include

(i) Does the bank have specific loan policies?

(ii) Who is held accountable for the bank’s loan policies?

(iii) If a strong relationship exists between the bank loan and profitability.

(iv) To provide a probable solution to the bank’s poor performance.

(v) What are the causes of bank bad debt?


The following questions are raised in order to carry out this research.

1. Does the bank have specific loan policies?

2. Who is held accountable for the bank’s loan policies?

3. If there is a meaningful relationship between bank loan and profitability,

4. To recommend a likely solution to the bank’s poor performance.

1. What is the root cause of bank bad debt?


To discover answers to the numerous questions raised above, the author developed four hypotheses that would be tested.

They include, among other things:

Ho: There is a considerable relationship between the bank’s earnings and the overall loan and advance it grants.

Ho, there is no substantial association between the bank’s profit and the overall loan and advance issued by it.

There is a considerable association between the amount of bank deposits and the type of loan.

Ho, there is no substantial association between the amount of bank deposit and the type of loan.

Ho: There is a considerable relationship between the level of risk in a loan proposal and the loan that the bank grants.

Ho, there is no statistically significant association between the level of risk in a loan proposal and the loan issued by the bank.

Ho: There is a considerable association between banks’ perceptions of various types of security and the amount of loan issued.

Ho, there is no statistically significant association between the banks’ view of various types of security and the amount of loan issued.


This is a comprehensive study of credit management and the causes of bad debt in banks, as well as how they effect bank performance, using solely Hallmark Bank of Nigeria as a case study. The researcher encountered some difficulties and constraints when attempting to gather the relevant information. For example, on some occasions, it was impossible to contact the bank officers who should have provided the necessary information.


For a better understanding of the study, the author provided operational definitions for the following words throughout the study:

Debt: Simply put, debt is what belongs to someone else. It is also known as a responsibility to make future payments. It can be defined as money, products, or services belonging to another as a result of an express or inferred agreement that gave rise to a capital duty to pay. Debt, simply described, is credit recovered by a borrower from a lender.

A bad debt occurs when a debtor or borrower fails to satisfy his matured obligation and all efforts by the borrower to salvage the debt fail. This results in bad debt.

Credit can be defined as what belongs to someone as a result of an express or inferred agreement that gave rise to a legal obligation to pay. Techniquecal credit is debt relief from a pure lender obtained by a borrower.


The sort of facility that a bank provides to its customers is determined by the reason for which the facility will be used, even though they may belong to different sectors. Aside from the loan’s purpose. The amount of time until repayment is due.

It also resulted in the categorization of finance into long, short, and medium term. The type of loans done by hallmark bank is limited, as are other commercial banks. Overdraft, loan advance, discounting, documentary letter of credit facility, trust receipt, bands, and guarantee are some of the services available.


According to Adekanye (1983: P 10), overdraft is the most commonly used type of credit grant short term funding that is frequently used to tie over the population cycle and finance infrequent seasonal peaks. It normally matures within a year,

but in practise, most overdrafts are reversible. This finance is best suited for funding transactions with high self-liquidity over a short period of time. Overdraft advances are theoretically repayable on demand, although interest is due on the outstanding balance on a daily basis.

1.8.3 LOANS

Loans are often lent by borrowing and secured against the borrowing company’s assets. It is duly used as part of a financial facility package. Repayment can be done in a single lump sum or in installments over time.

The repayment schedule can be adapted to the earning capability of the asset typically acquired or to the projected cash flow of the firm. The interest rate is determined by the market rate, the length of the loan, and the industry in which the business is categorised.


According to Nwankwo C.C (1993:P.25), an advance is a sort of loan given to finance a certain project. The most crucial distinction is that repayment is to be made in installments or as agreed upon from the financed project.

This type of financing is particularly appropriate for licenced products, buying and selling, and credit in the nature of seed time to harvesting period, though it must be comparatively of short duration, usually not exceeding six months, is made to the exporter by which time the facility becomes explicit.


In most circumstances, the facility is issued in conjunction with a letter of credit and as a supplement to a document credit facility. Instead of debiting the customer’s account before collecting the document, the trust receipt account could be reversed. The letter of credit must be of the insurance variety.

Before collecting the chipping document, the customer must sign a trust receipt, a promissory note, or a letter of hypothecation, depending on the situation, holding the items in trust for the bank and pledging to transfer the proceeds immediately into the bank account. It has the same interest rate as an overdraft.


These are explicit and contingent liabilities that will only be realised if the client for whom the liability was assumed defaults.

Customers occasionally request this form of contingent non-cash financing in order to facilitate their business operations. Several types of bonds are issued depending on the purpose of the bond,

such as a performance bond, which is an undertaking by the bank that the customer will perform according to specification, a bid or tender bond, which assures the party to which they are issued to the bond of custom, and an exercise bond.

Discount: by building up an exchange on his consumers and ensuring that it is accepted on their behalf. The provider has a negotiable instrument that can be discounted or billbrokered for a little sum subtracted from the face value of the bill to cover the incident of risk, administrative expertise, and interest from the date of discount to the due date.

Where the bill bears good and acceptors. They may be accepted by the bank to support additional bank financing, usually of a bridging nature, until the bill matures.


According to Adenkenye N.C (1983:p15), this is comparable to a guarantee in that banks agree to pay a particular sum on behalf of the customer provided certain conditions stipulated in its terms are met. Letters of credit are typically provided in conjunction with bills of exchange, which provide additional security for overseas trade funding.

The documentary credit facility is an international trade debt settlement tool. The bank that issues the letter of credit agrees to make payment on the imposter’s behalf. Payment is paid to the exporter in exchange for the presentation of the documents indicated in the credit.

If a bank is issuing documents specified in the credit on behalf of the customer and has not collected the local currency equivalent of the transaction pro to the insurance of such credit,

such a bank has contemplated a contingent facility to the customer up to the time when actual payment is made, assuring the board that the duty payable on imported and locally manufactured goods will be paid by the bank if the customer fails to pay.

A guarantee is a pledge to guarantee another’s debt made to a person or financial institution to whom the borrower is already or is about to become. The guarantor or his authorised agent must sign the guarantee in writing.

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