IMPACT OF BANK CREDIT GRANT ON BUSINESS PERFORMANCE

1.1 Introduction

Banks are profit-making organizations performing as intermediaries connecting borrowers and lenders in bringing temporarily available resources from business and individual customers as well as providing loans for those in need of financial support (Uwuigbe, 2013; Driga, 2012). Banks play a vital role in developing economies like Nigeria, Ghana, Egypt and Algeria. Bank lending is very crucial for it make possible the financing of agricultural, industrial and commercial activities of the countries. Banks are entrusted with the funds of depositors. These funds are generally used by banks for their business. The fund belongs to the customers so a programme must exist for management of these funds (Osayeme 2000).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

The credit component of the banks’ portfolio that contributes to the profit of the banks and which led to the problem of bad debts in Nigerian banks as a result of poor management. Credit as the name implies is described as the right to receive payments or the obligation to make payments on demand or at some future date on account of the immediate transfer of goods or money another (Uwuigbe, Uwalomwa and Ben- Caleb, 2012). It is based on the faith and confidence, which the creditor reposes in the ability and willingness of the debtor to fulfill his promise to pay. In a credit transaction the right to receive payment and the obligation to make payments originate at the same time.

The term debt is frequently used in reference to debtor’s obligation to make payment. Debt and credit are therefore similar terms. Management of credit is simply the application of four management principles which are planning, organizing directing and controlling to credit concept. Commercial banks are major players in the financial sector of every country’s economy. The failure or success of these banks will to a large extent affect the financial sector and the economy at large. In recent times some commercial banks have been wound up leaving customers to their fate. It is important to note that the main reason of the illiquidating of most of these banks is their inefficient and ineffective management of their capital-funds and credits.

The issue of problem associated with loans advance management prompts the this central bank of Nigeria (CBN) to reduce the guidelines in a circular entitled “prudential guidelines for licensed Banks” the main purpose of this, is to ensure that the financial guideline ensure conformity with stand to facilitate comparison across banks. The true financial position of bank is often obscured by the accounting period involving its assets and liabilities. The prudential guidelines focus o the assets side of banks balance sheet i.e. loans and advances.

The techniques employed by banks in this intermediary function should provide them with perfect knowledge of the outcomes of lending such that funds will be allocated to investment in which the profitability of full payment is certain. Virtually all lending decisions are made under creditors on uncertainty, the credit and uncertainty associated with lending decision. The statement implies that if credits are to be money deposit banks should be based less in quantitative data and more on principles too subjective to provide sound and unbiased judgment. Furthermore, the banks depend heavily on historical information as a basis for decision making.

Apparently aware of the inadequate of his decision base, the bank lending has often sought solace in tangible and marketable assets as security is an insurance. The increasing trend of provisions for doubtful in most money-deposit banks is a major source of concern not to management but also top the shareholders who are becoming more aware of the dangers posed by these credits. Credit destroys part of the dangers posed by these credits. Credit destroy part of the earning assets of banks such as loans and advances which have been described as the liquidity and solvency which generate two major problem, that is profitability and liquidity, has to earn sufficient income to meet its operating costs and to have adequate return on to its investments.

Therefore, in First Bank of Nigeria PLC where the research was carried out, the activities that was conducted is to know the impact of bank credit grant on business performance.

1.3 Statement of Problems

Investigation revealed that banks exist not only to accept deposit, but also to grant credit facilities, these business activities therefore inevitably expose banks to huge credit risks which might lead to financial distress, including bankruptcy. Two types of risk are typically identified when considering banks loans than any other banking business. Firstly, is the credit risk, that is, the possibility that promised payment will not be made. Secondly, another type of risk is the liquidity pressure associated with bank loans.

The demand for bank loans is typically higher in boom periods when tight monetary policy causes security price and the rate of deposit growth to decline. The increasing level of non-performing loan rates in banks’ books, poor loan processing, inadequate or absence of loan collaterals among other factors are linked with poor and ineffective credit risks management that negatively impacts on bank performances.

1.4 Aim and Objectives of Study

The aim of the study is to examine the impact of bank credit grant on business performance using first bank of Nigeria PLC as a case study. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the effect of bank credit grant on business performance in First Bank of Nigeria PLC
2. To determine the liquidity level has on the performance of banks in Nigeria
3. To find out the factors militating bank credit grant have on the performance of First Bank of Nigeria PLC
4. To investigate the impact of capital adequacy has on the performance of First Bank of Nigeria PLC

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Are there factors militating bank credit grant have on the performance of First Bank of Nigeria PLC?
• What is the effect of bank credit grant on business performance in First Bank of Nigeria PLC?
• What is the liquidity level bank performance in First Bank of Nigeria PLC?
• What is the impact of capital adequacy has on the performance of First Bank of Nigeria PLC?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There are no significant factors militating bank credit grant have on the performance of First Bank of Nigeria PLC
• H1: There are significant factors militating bank credit grant have on the performance of First Bank of Nigeria PLC

1.7 Significance of Study

The significance of this study will be evident in the fact that its result will demonstrate how;

1. Banks will be able to establish very strict credit management policies which must not only minimize any tendency of incurring losses of non- performing loans, but also to improve the performance of banks.
2. Banks will hence emphasize the security of loans, ensuring that collaterals are valuable and easily convertible to cash or cash equivalents at the expiration of the obligation, in cases where customers are unable to fulfill their own end of the obligation.
3. Banks will be very careful as to ensure that the rate of bad debts written- off drastically, as it will reduce the burden on the profitability of the banks. This is evident in the fact that bad debts are charged against profit in the banks’ year-end financial statements.
4. Finally, this study will through its result, create an understanding of the relationship between credit management and the performance of banks in Nigeria, to enable banking firms determine such areas to focus on in order to improve their performance.

1.8 Scope of Study

The scope of the research is focused on the impact of bank credit grant on business performance using first bank of Nigeria PLC as a case study.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

These are terms that can be found in this research project:

Asset:

An asset can be anything owned by a business organization or individuals which has commercial or exchange value Olakanmi K.O (2001)

Bank:

The bank and the financial institution Decree of 1991 (BOFID) section b1 defined bank any person receiving deposit on current accounts or other similar accounting paying or collecting of cheques drawn or paid in by customers.

Provision of Finance:

It is such other business as the governor of the central bank may resonate.

First bank Nigeria plc:

This can be said to be bank established with the aim of maximizing profits.