ANALYSIS OF CREDIT MANAGEMENT IN THE BANKING INDUSTRY

1.1 Background of the Study
Credit management in our banking sector today has taken a different dimension from what it used to be. The banking industry has adopted a lot of strategies in checking credit management in order to stay in business. Though the banking industry in Nigeria has lost large amount of money as a result of the turning source of credit exposure and taken interest rate position. Nigerian banks are being required in the market because of their competence to provide transaction efficiency, market knowledge and funding capability. To perform these roles, the banks act as the most important participants in their transaction process of which they use their own balance sheet to make it easier and making sure that their associated risk is absorbed.

Credit extension is essential function of banks and the bank management strives to satisfy the legitimate credit needs of the community it tends to serve. This credit advances by banks as a debtor to the depositor requires exercising prudence in handling the funds of depositors. The Central Bank of Nigeria established a credit act in 1990 which empowered banks to render returns to the credit risk management system in respect to its entire customers with aggregate outstanding debit balance of one million naira and above (Ijaiya G.T and Abdulraheem A 2012). This made Nigerian banks to universally embark on upgrading their control system and risk management because this coincidental activity is recognized as the industry physiological weakness to financial risk. The researcher, a New yolk-based, said that 40% of Nigerian banks that made up exchange rate value in west Africa, has reduced the operating lending as a result of bad debts which hit more than $10 billion in 2009 and this has led to a tied-up questioning asset that is holding almost half of Nigerian banks. The central bank of Nigeria fired eight chief executive officers and set aside $ 4.1 billion in order to bail out almost 10 of the country’s lenders. The reform which was introduced by Central Bank of Nigeria (CBN) in 2010 has made Nigerian banks resume lending supporting assets management companies and set up the requirement which will allow Nigerian banks make full provision for bad debts that will boost the market.

Loans are the most important asset held by banks; but loan has its own cost and risk. In other words, the granting of credit, though beneficial for business as a whole, is not without cost, either to the supplier or to the buyer, or to both. It follows therefore that the process of granting credit to customers, and the tasks of risk assessment and risk analysis, amount to no more than weighing the benefits of granting credit against the cost to the supplier of doing so. Furthermore, that cost element is not restricted to non-payment, or bad debt losses, but applies to cost of the credit period itself and the cost incurred in late payment. Therefore, although, lending which is a primary function of commercial banks, and the single most important source of gross income for commercial banks as well as contributes to the larger part of a bank’s profits; it has its own risks if not well managed. In other words, the degree of risk associated with lending is proportionate to its contribution to profit. Since these funds are owned by third parties called depositors, prudence demands that such funds should be efficiently managed to sustain the confidence of depositors in the banking system and ensure the continued soundness of the system itself and to minimizing risk of banks failure. This is necessary because bad debts destroy part of the earning assets of banks such as loans and advances which have been described as the main source of earning and also determines the liquidity and solvency which generate two major problems (Institute of Credit Management – ICM, 2012), profitability and liquidity, which has to earn sufficient income to meet its operating costs and to have adequate return on its investments.

For this reason, the present study examined the effectiveness of credit management in Nigerian banking sector. Credit management is defined as the process of controlling and collecting payments from customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial risks (ICM, 2012). The function of Credit Management is the protection of the investment in the debtors of the company as well as maintaining the lowest levels of receivables, balancing risks inherent in achieving sales objectives. The main objectives of credit management according to ICM (2012) include ensuring that – credit terms are used to maximize sales with the minimum of risk; high risk or marginal accounts, especially those likely to get into financial difficulties, are identified and to take whatever action is necessary to safeguard sales to those customers; all amounts due are collected according to the agreed payment terms; monthly cash collection targets are achieved; a high quality of accounts receivable is maintained; an accurate and responsible database of customers is operated and maintained. Achieving these objectives lies on the effectiveness of the financial institutions that manage the credit. The reason being that credit management is associated with risk. If not properly management may result to great loss.

Brown and Moles (2012) define credit risk as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Therefore, the goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

According to Brown and Moles (2012), for most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. Drawing from the premise of Adeniyi (2002), who stated that effective supervision and monitoring of loans ensure that these loans do not turn bad forms, this study investigates the effectiveness of credit management in Nigerian banking sector. This study is working on the assumption that when banks managed their credit effectively, they overcome credit risk associated in credit management. In other words, banks, may through proper credit management, have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. The question therefore is: how effective are the Nigerian banking sector is in credit management?

1.2 Statement of the Problem
In the history of development of the Nigerian banking industry, it can be seen that most of the failures experienced in the industry prior to the consolidation era were results of imprudent lending that finally led to bad loans and some other unethical factors (Job, A.A Ogundepo A and Olanirul 2018). Also, the problem of poor attention given to distribution of loans has its effect on the bank’s performance. Most of the people collected loan from the banks and diverted the money to unprofitable ventures. Some bankers are not actually considering the necessary criteria for disbursement of loans to the customer.

One of the ways to totally avoid bad debts is to refuse to lend money at all. If banks should then refuse to lend at all, then issue of profitability is cancelled and hence the main purpose of carrying on a business which is to maximize profit, is then defeated. Credit must be adequately managed so that banks could remain in business and prudent lending could do this. Egwuatu (2014) has pointed out that many banks in Nigeria experienced a lot of bad debts. He explained that when a new government abandoned the project awarded to their predecessor, the credit loan borrowed from the bank by either the government or the contractor who manages the project is at stake. This is because most contractors borrowed to execute the project awarded to them but could not repay the loan, due to government action. Furness (2005) also illustrated that during the time of draught or poor rainfall and pest which led to low harvest, farmers who took loans from the bank may delay the repayment.

Again, experience may arise in respect of lapses on the part of the banks’ credit officers. For instance, there may be excesses over approved facility, unformatted facilities and expired facilities not renewed on time. In each of these cases the customer may easily deny even owing the bank all or part of the amount. Money deposit banks have always borne the burden alone, but this may not continue in future as the banks may be unable to take the risk of lending more which may result to loses to both the bank (whose part of its profit is from the interest from loans) as well as the borrower (whose business may collapse as a result of insufficient finance to run the business). Consequently, there may be stagnation or drop in the nation’s economy. This work therefore intends to outline, explain these problems, identify the causes and suggests lasting solutions to the problems associated with credit management and consequently banks debts.