An Evaluation of Credit Management and its Effects on Banks’ Profitability

Description

– An Evaluation of Credit Management and its Effects on Banks’ Profitability –

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Abstract

This study; An Evaluation of Credit Management and its Effects on Banks’ profitability; A comparative study of First Bank PLC and Fidelity Bank PLC is concerned with examining the process of credit management in the banks and the effect of non performing loan on the performance of Nigeria Banks.

The results show that the impact of loan loss reserve has a negative impact on profit. This implies that higher credit risks, the higher the profit. The methodology used was interview technique for data collection.

Managers and lending officers of the two Banks were interviewed, and it was discovered that Fidelity Bank PLC which is a new generation bank performed better during the period under review. This was discovered to be as a result of their highly skilled personnel and intensive computer network.

In summary, it was recommend that Nigeria banks discard other internal problem that delay credits to worthy customers in order to build confidence in the system and make bank credits worthwhile venture at the same time improving performance.

Also, there should be less interference from top management staff and board of directors.

Introduction

1.1 Background of the Study

The banking industry today plays a very important and significant role in the economic development of the country due to the variety of services and opportunities it provides for the populace and nation at large.

Banks are distinguished from other types of financial firms because, they accept deposits and provide credit facilities to its  clients.

Thus  Bossone, (2001) suggests that banks are special intermediaries since they have unique capacity to finance production by lending their own debt to agents that are willing to accept it. Banks manage liabilities, also lend money and thereby create bank assets.

Again, banks play twofold roles of backup sources of liquidity for all enterprises in the economy and transmission belt for monetary policy (Corrigan, 1982). At  the  same  time, there is a special feature of banks. They act as delegated monitors of borrowers on the behest of the ultimate lenders, where monitoring is costly.

The history of bank lending could be traced to the era when British  goldsmiths  acted  as banks. The goldsmiths discovered that only small  proportion of the  money  kept  with them for safety yielded enough interest for them.

As banks emerged, the practice of the gold smith was adopted and it was found encouraging (Brealey, Myers and Marcus, 2004). With this discovery, banks started issuing out loans to those in need of them and  paying interest on fixed and saving deposits.

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