CREDIT CONTORL POLICIES IN FINANACIAL INSTITUTIONS: A CASE STUDY OF CITIZENS INTERNATIONAL BANK LIMITED

ABSTRACT

The     focus  of        this      study  is         on        Credit Control           Policies          in         Financial Institutions and its efficacy in minimizing loan losses. In order to achieve a purposeful study, the research reviewed related literatures on Banking,

Bank  lending  and  credit  administration.  An  analysis  of  the  responses from credit officers and information obtained from the secondary sources was carried out. The major findings among others are that:

1. Most financial institutions have formal credit polices enshrined in a manual to guide the credit officers and management.

2. Financial institutions usually include in their credit policies the loan territory, types and tenors of loans, acceptable securities, and the procedures for assessing, approving and monitoring credit facilities.

3. Financial institutions operate under a highly regulated environment through some government agencies such as the Central Bank of Nigeria (CBN), the ministry Finance, among others.

4. that despite the laudable credit policies, many finance organizations still suffer loan losses mainly because of unsound judgment by he credit officers, management override, lack of adequate supervision, or frauds and forgeries.

5. the provisions of, and compliance with adequate and sound Credit policies is paramount to minimizing loan losses.

TABLE OF CONTENTS    
            Page
Cover page    --    --    i
Title page    --    --    ii
Certification    --    --    iii
Dedication    ---    ---    iv
Acknowledgement    --    --    v
Abstract    --    --    vii
Table of contents    --    --    ix

CHAPTER ONE: INTRODUCTION
 
1.0    Introduction    --        --
1.1    The Background to the study    
1.2    The statement of the problem    --
1.3    The objectives of the study    --
1.4    The research Question        --
1.5    The significance of the study    --
1.6    Definition of terms            --
1.7    References    --    --    --

CHAPTER TWO: REVIEW                        
2.0.0    Introduction                --    --    --    --    8
2.1.0    The structure of the Nigerian Financial System    --    8
2.2.0    The meaning of Credit    --    --    --    ---    --    11
2.3.0    Types of credit Faculties        --    --    --    --    11
2.4.0    General Principles of Bank Credit    --    --    --    14
2.5.0    Basic Enquiries Concerning Bank Lending    --    --    18
2.6.0    Types of Securities    Acceptable to banks    --    --    22
2.7.0    Regulation of Bank Lending        --    --    -    29
2.8.0    Basic causes of Bank  Loan Delinquency    --    --    39
References  --    --    --    --    -    -    -    --    43
CHAPTER THREE: THE RERSEARCH METHODOLOGY
3.0    Introduction        --    --    --    --    --    --    44
3.1    Research Design        --    --    --    --    -    44
3.2    Sources of Data        --    --    --    --    -    44
3.3    The population of the study    --    --    -    --    45
3.4    Instrument of Data Collection        --    --    --    45
3.5    the tools for Data collection        -    --    --    46

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.0    Introduction    --    -    --    --    -    45
4.1    Analysis of Data    --    --    --    --    -    47
 
CHAPTER FIVE: SUMMARY OF MAJOR FINDINGS

RECOMMENDATION AND CONCLUSIONS

5.0    Introduction    --    --    --    --    --    57
6.1    the Synopsis    --    --    --    -    --    57
6.2    Summary of Findings    --    --    --    -    57
6.3    Recommendations and Conclusion    --    --    61

BIBLIOGRAPHY    --    --    --    --    63
APPENDIX    --    -    --    --    64

INTRODUCTION

1.0      PREAMBLE

Banking business is generally that of accepting deposits from the saving surplus sector of the economy with a view to paying on demand or at an agreed future date and lending to the savings deficit sector of the economy. Banks are usually custodians of money and values of individuals and body corporate.

The Paton Commission (1948) defined banking as the business of receiving from the public on current account money which is to be repayable on demand by cheque and of making advance to customers. The 1958 ordinance defined banking business as “the business of receiving money on current account, of paying and collecting cheques drawn by or paid in by customers, and of making advances to customers”. Banking business is defined in the 1969 Act as “the business of receiving monies from outside sources as deposits irrespective of the payment of interests, and the granting of money loans and acceptances of credits or the purchase of bills and cheques or the purchase and sale of securities for account of others or the incurring of the obligations to acquire claims in respect of loans prior to their maturity or the assumption of guarantees and other warranties for others or the effecting of transfers and clearings, and such other transactions as the commissioner may, on the recommendation of the central Bank, by order published in the Federal gazette designate as banking business”. A banker means any person who carries on Acceptance House, a Discount House or any other financial institution.

1.1      THE BACKGROUND OF THE STUDY

Lending of money (or credit extension) is a major service provided by banks. In its bid to do this very efficiently, some guidelines are usually set out in other ensure that loans granted are repaid at the time and in the way agreed.

Bank  lending   is   highly   regulated   as   can   be  observed   in   the

monetary circulars issued by the regulatory Authorities at the commencement of each (financial) year. The Nigerian financial system comprises of bank and non-bank financial institutions which are regulated by the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC). Securities and Exchange Commission (SEC), National Insurance Commission (NIC), Federal mortgage Bank of Nigeria (FMBN), and the National Board for Community banks (NBCB).

There are a number of reasons why bank are regulated. One is to protect the deposits of their customers, another reasons is to encourage or limit particular kind of lending because of the expected impact on the

economy. It is times aimed at ensuring sanity and professionalism in the banking sector. The restrictions imposed by statutory law and administrative regulations do not provide answers to many questions regarding safe, sound, and profitable bank credit. Each individual bank must answer questions regarding the size of the loan portfolio, desirable maturities, and types of loans to be establish the direction , and use of the funds from stockholder, depositors, and others, to control the composition and size of the loan portfolio as well as determine the general circumstances under which it is appropriate to make a loan.

This paper will look at the guiding factors which do influence a bank’s loan policies with particular references to the bank being used as case-study-citizens international Bank Limited. Items to be included while making or preparing a loan policy shall also be discussed. Attempts will be made to find out while banks still report much loan losses despite the policies and regulations in place.

1.2      STATEMENT OF THE PROBLEM

Banks and non-bank financial institutions usually adopt some policies in granting credits to their customers so as to minimize the risk of loan loss by matching Risk and Return, cash flow and loan repayment,

Project and security deposit tenors and loan tenors, approvals and offer letters.

In drawing up the lending policies, banks are guided by the rules and regulations issues by Regulatory Authorities, and their own environment both External and internal. Some of the guiding factors are the bank’s capital base, risk and profitability of various loans stability of deposits, economic conditions, experience of bank personnel, and the credit needs of the areas served.

Effective application of these polices helps to a great extent in minimizing loan losses. However, a facility may still go bad despite procedure followed in consuming the loan agreement. One will not rule off completely occurrences that could bring about loan losses such as war and natural disasters.

1.3      THE OBJECTIVE FOT HE STUDY

Credit is as old commence, and largely as human existence. This takes different shapes and forms depending on the parties involved. In all these, the lender takes precautions to minimize the risk of granting a bad loan. The organized lender therefore, usually sets out written policies for the granting of credits. This paper attempts to discuss among other things:

1. The meaning of credit and credit instruments

2. The general principles of bank lending

3. The  lending practices and credit policy formulation,

4. The case of frequent loan loses in the financial sector

5. Collateral Securities acceptable to Nigeria bankers

6. Regulation of bank lending

vii.

viii.

Assessing   the   effectives   of   credit   policies   as   a    tool

minimizing loan losses

The ways to mitigate loan losses in the financial sector.

to

1.4      RESEARCH QUESTIONS

1. What are the general principles of bank lending in Nigeria?

2. Are there restrictions as to the activities that banks should finance?

3. To what extent does collateral (security) reduce the occurrence of bad loans?

4. Why do banks experience bad loans despites a laudable credit policy?

5. What is the way forward towards improving the quality of credits in the Nigerian banking sector?

1.5      THE SIGNIFICANT OF THE STUDY

This project will provide guide to the formulation of credit policies, thus improving on the quality of credits granted by financial institutions especially in this ear of consolidation.

It will provide useful information to credit officers on the regulatory Guidelines for granting credits by financial institution as well as an elaborate detail on the canons of god lending.

Financial institutions should operate in such a way as to avoid sanctions from Regulatory authorities, and that could only be achieve by knowing the rules and regulations set out by regulatory authorities.

1.6      DEFINITION OF TEMS

1. LEASE: A lease is a contractual agreement between an owner (the lessor) and another party (the lesses ) which conveys to the lessee the right to use the leased asset for an agreed period of time in return for a consideration, usually periodic payments called rents.

2. BAD DEBT: A debt is said to be “bad” when it becomes uncollectible under the terms of agreement.

3. GUARANTOR: A guarantor is a person(s) who agrees to pay a debt on behalf of a primary debtor if the primary debtor fails to pay or becomes incapable of paying back at the agreed time.