THE EFFECT OF CREDIT POLICY ON BAD DEBT MANAGEMENT IN NIGERIAN BANKS

1.0 Introduction

This is the introductory chapter of the chapters. is briefly explains the background of the study, statement of the problem, objectives of the study, research questions, statement of hypothesis, significance of the study, scope of the study, limitations of the study and definition of terms.

1.1 Background of the Study

Credit Policy can be viewed as written guidelines that set the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency.

This term can also be refers to as collection policy. It's also the guidelines that spell out how to decide which customers are sold on open account, the exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts. Business organizations in their attempts to make profit adopt several strategies and one of which is allowing credit to customers. Pandey, (2004) submitted that credit is a marketing tool for expanding sales. Credit sales to customers however, must be well monitored because regardless of an organization's share of the market and demand for its products, if there are no measures put in place to regulate sales made to customers on credit, there could be problems especially those related to liquidity.

The importance of credit policy therefore to any business organization cannot be over emphasized because it is a factor that has a strong influence on the cash inflow of an organization from its sales activities which is very critical to any business organization. Every credit policy set by an organization seeks to achieve adequate profitability and flow of cash (liquidity) which are the two basic factors that sustain a business in the present and determines its position in the long run. A company's credit policy refers to the actions taken by a business to grant, monitor, and collect the cash for outstanding accounts receivable (Maysami, n.d).

The credit policy of a typical organization contains the following variables:collection policy, cash discount, credit period and credit standard, while Entrepreneur Media, (2011) classified it as credit limits, credit term, deposits, customer information and documentation. And each of the components of a company's credit policy is used as a tool for monitoring account receivables which is the outcome of credit sales; it covers from the kind of customers that credit may be extended to when actual collections would be made.

There is however no particular universal credit policy that should be adopted by every organization. The credit policy of an organization should therefore be based on its particular business and cash-flow circumstances, industry standards, current economic conditions, and the degree of risk involved. For a manufacturing business organization to achieve its critical objectives of liquidity as it allows credit to customers, concern should be given to its credit policy, it should be adequately planned and its adherence must be strictly emphasized.

The reason for this paper however stemmed from the fact that in manufacturing organizations, it is usual to present, a policy that regulates credit sales to customers. Nowadays companies operate basically on credit rather than cash, both from their suppliers to their customers.

The existence of a credit policy itself is however not an issue, the main problem lies in the fact that every manufacturing organization exists in a dynamic and complex environment especially in current times where information technology is the order of the day; trends emerge on a daily basis and the behaviour of customers keep changing.

This constantly changing environment affects organizations as well as their decisions and all their policies. A credit policy that is therefore written without an understanding of the market and ample room for change in it, and one that is not frequently revisited could become obsolete in a matter of weeks, it is therefore not enough for these policies to be established but there should exist, flexibility, provisions for review and adjustments, this is necessary to help the organization move with the constantly emerging trends in the world of business.

There is no one-size-fits-all credit policy—your policy will be based on your particular business and cash-flow circumstances, industry standards, current economic conditions, and the degree of risk involved.

1.2 Statement Of Problems

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. The provision for bad and doubtful debts rises steadily in banks annual reports which send bad signals to the investors within the economy. The cases of failed banks in the economy over the years have made the investors lose confidence in the banks. Hence, the existing evidence in Nigeria, points to a decline or stagnation of private investment during the immediate past reform years.

The industries usually make short term planning as opposed to long term planning which tends to hamper their forecast and projection into the future activities and earnings. The success of any programme in bringing about a sustainable recovery in economic activity in an economy depends crucially on the behavior of investment in the aftermath of the reform process.

In Nigeria, many reform programmes have been undertaken in the banking industry with little or no impact on the investment behaviour. The behaviour of private investment has been identified as a factor for assessing the reform outcome. The existing evidence in Nigeria, points to a decline or stagnation of private investment during the immediate past reform years (World Bank 1988, Harriggen and Mosley 1991, Green Way and Morrissey 1992; Gunning; 1994; Coller 1995, dehn, 2000; Lomi and Sisay,2001).

1.3 Objectives Of The Study

To be able to proffer adequate answers to the problem identified above, this paper will look at the following objectives:

1. To determine if an organizations credit policy affects its liquidity.
2. To determine whether an organizations collection period affects its liquidity
3. To determine whether an organizations collection policy determines its cash flow.
4. To investigate the causes of bad and doubtful debts in Nigeria Commercial Banks
5. To examine the effects of bad and doubtful debts in banks profitability, investors, the public and the economy.

1.4 Research Question

• What effects has the credit policy had on the organizations obligations to its own creditors?
• Does production cycle considered when setting the credit standards & collection period?
• Is it true that the credit terms are reasonable enough to induce prompt payment?
• Does credit policy has a negative effect on the liquidity position of banks in Nig.?
• Does the bank collection period affect its liquidity?
• To what extent does feasibility study affect loan repayment in the banking industry?
• To what extent does diversion of bank loans to unprofitable venture affect loan repayment?
• Does distribution of loans have effect on banks performance if given proper attention?

1.5 Statement Of Hypothesis

H0: production cycle is not considered when setting the credit standards & collection period

H1: production cycle is considered when setting the credit standards & collection period.

H0: credit policy does not have a negative effect on the liquidity position of banks in Nig

H1: credit policy has a negative effect on the liquidity position of banks in Nig.

1.6 Significance Of The Study

This study will be useful to the executive and managers in the banking industry and other financial institutions. This is because it provides guidance which will enhance effect and efficient credit policy and management of bad debt which aimed at attaining and boosting maximum profitability and liquidity in their banks.

The depositor (public) on the other hand will be more enlightened on the need to be honest and fulfill the responsibilities in credit transaction with the banks so that they can look up to improve service from the banks. Finally to the researcher, this is an eye opener because as a potential manager it will guide one in future on how to manage loan facilities.

1.7 Scope Of The Study

This study is aimed at analyzing the loan administration management in the banking industry in Nigeria with a particular reference to Diamond bank Nigeria plc from the period of 2010-2015. The study intends to analyze the loan facilities in banking industry. It also reviews the various concepts procedures for efficient and effective credit management. It examines the success and failure (if any) as well as recommending corrective measure.

1.8 Limitation of the Study

In this study, they course of carrying out this research encounters a lot of difficulties and was constrained in many areas among which are:

Data from banks: The problem of getting the managers, staff and customers of the two banks to answer questions in the proposed questionnaire, in many cases, information given by both banks and the ones from internet were not simplified. That is, they are very difficult to understand.

Time Constraints: In the aspect of theoretical and practical of this work, the researcher being a student had to apportion her time so as to carry out concurrently with other academic assignment.

Financial Constraints: The research was constrained by cavity of materials and other expenses. However, in spite of the limitations, effort were made by the researcher to utilize the limited resources at her disposal to ensure that the work is successfully completed.

1.9 Definition Of Terms

Below are the major terms used in the course of this research work

Bankruptcy: A state where a person or firm is unable to meet their financial obligations.

Management: Management is the study of decision-makers from the supervisor and line managers at lower levels to the Board of Directors.

Loans And Advances: These are credit facilities granted by banks to their customers. They could be short, medium or long term depending on the length of period of repayment

Overdraft: A credit facility (usually short term) granted by banks to current account holders and it carries interest charges on daily basis

Bank: Section 61 of BOFIA 1991 Act defines a banking business as business of receiving deposits on current account or other similar account paying or collecting cheques drawn by or paid in by customers.

Customer: A person is a customer if he or she has account with the bank.

Financial Ratio: These are ratios usually expressed in mathematical terms to test the financial obligations.

Financial Statement: They are firm balance sheets, profit and loss account and classified statement which show the financial state of affairs of the firm.

Guarantor: A person or group of persons who stand for bank customers for credit facilities.

Collateral / Securities: Is an asset presented by a customer to his bank to secure a credit facility granted to him by the bank.