ABSTRACT
The goal of this study was to examine credit management, credit policy, and bank performance in Akure, Ondo State, Nigeria. The researchers wanted to see if there was a link between credit policy and performance, capital sufficiency and performance, and credit risk management and performance. A causal research design was used to achieve the study’s aims, which was aided by the use of secondary data acquired from publicly available audited financial statements of commercial banks and BOU annual supervisory reports. Multiple regression was employed in the study, which used universal sampling techniques to identify 7 banks that were licensed and operational in Akure, Ondo State, Nigeria. Credit management and the financial performance of commercial banks in Akure, Ondo state, Nigeria, were shown to have a substantial association (r = 0.639). Credit management indicators explain up to 40.8 percent of differences in the financial performance of commercial banks in Akure, Ondo state, Nigeria, according to the coefficient of determination R2. The significance of the coefficients of credit policy (LR), capital adequacy (CAR), and Credit Risk Control (NPL/TL) is -0.031, -0.555, and -1.005, respectively, according to the coefficients summary in the regression model. It was thus discovered that both the CAR and the NPL/TL are substantial, but have a different impact on the financial performance of commercial banks in Akure, Ondo State, Nigeria, with capital adequacy and credit risk control having a bigger impact than credit policy (LR). In Akure, Ondo state, Nigeria, it was discovered that there is no substantial relationship between credit policy and bank performance; nevertheless, there is a significant relationship between credit risk control, capital adequacy, and commercial bank performance. It was suggested that a moderate credit policy be used, as a strict credit policy would harm the company’s financial success.
Furthermore, banks should strive to effectively handle their credit risk by lowering their nonperforming loan ratio, which, according to the report, is the most important driver of commercial banks’ financial performance. The Nigerian Central Bank should encourage banks in Akure, Ondo State, to employ credit metrics models to manage their risks.
KEYWORDS: commercial banks, Nigeria, credit management, credit policy, financial performance
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Credit is one of the many tools a company can use to affect demand for its goods. Companies can only benefit from credit, according to Horne & Wachowicz (1998), if the profit earned from increasing sales overcomes the additional costs of receivables. Credit, according to Myers & Brealey (2003), is a procedure in which the possession of goods or services is permitted without immediate payment in exchange for a contractual agreement to pay later.
High default rates result in decreased cash flows, lower liquidity levels, and financial distress, so early detection of potential credit default is critical. Lower credit exposure, on the other hand, signifies an appropriate debtors’ level, with fewer chances of bad debts and hence better financial health. Risk management and improvement, according to Scheufler (2002), are critical in today’s business climate. The likelihood of suffering losses has increased as bankruptcy rates have risen. Economic pressures and business practices are forcing organizations to slow payments while on the other hand resources for credit management are reduced despite the higher expectations. As a result, credit experts must look for opportunities to employ tried-and-true best practices. Five common pitfalls can be avoided by upgrading your practices. Credit management is one of the most crucial aspects of any organization and should not be disregarded by any firm that deals with credit, regardless of its industry. It is the procedure for ensuring that clients will pay for the goods or services offered. Credit management, according to Myers & Brealey (2003), is a set of approaches and tactics used by a company to ensure that it maintains an ideal level of credit and manages it effectively. Credit analysis, credit rating, credit classification, and credit reporting are all aspects of financial management. Credit management, according to Nelson (2002), is simply the process through which a company manages its credit sales. It is a must for any organization that deals with credit transactions because it is difficult to operate without it.
The bigger the amount of accounts receivables and the longer they have been unpaid, the higher the financial expenses of keeping them up to date. If these receivables are not collected on time and a company’s cash needs are urgent, it may be forced to borrow, with the interest expense paid as the opportunity cost. Credit management, according to Nzotta (2004), has a significant impact on the success or failure of commercial banks and other financial organizations. This is because the quality of loan choices, and consequently the quality of risky assets, has a significant impact on deposit bank failure. Credit management, he adds, is a key indicator of the health of a deposit bank’s credit portfolio.
The ability to wisely and effectively handle credit is a critical criterion for efficient credit management. Credit management begins with the transaction and continues until the complete and final payment is made. It’s just as crucial as finishing the trade. In fact, a sale isn’t considered complete until the money has been received. As a result, goods lending principles should be concerned with ensuring, to the extent possible, that the borrower will be able to make scheduled interest payments in full and within the required time period; otherwise, the profit from interest earned will be reduced or even wiped out when the customer eventually defaults. Credit management is largely concerned with debtor management and debt finance. Financial performance, according to the business lexicon, is the measurement of a company’s policies and activities in monetary terms. The firm’s return on investment, return on assets, and value added all reflect these outcomes. Financial performance is defined by Stoner (2003), as quoted by Turyahebya (2013), as the ability to function efficiently, financially, survive, grow, and respond to environmental opportunities and risks. In keeping with this, Sollenberg & Anderson (1995) claim that performance is judged by how well the company uses resources to achieve its goals. According to Hitt et al. (1996), many firms’ poor performance is due to underperforming assets.
STATEMENT OF THE PROBLEM
A financial institution’s stability and continued profitability are dependent on good credit management, and declining credit quality is the most common source of poor financial performance and condition. According to Gitman (1997), as credit rules are lowered, the likelihood of problematic loans increases. As a result, companies must guarantee that receivables management is efficient and effective. Delays in collecting money from debtors when it is due cause major financial problems, lead to an increase in bad debts, and have a negative impact on customer relations. If payment is late or not made at all, profitability suffers, and if payment is not made at all, the company suffers a total loss. On that logic, strategically managing credit management at the ‘front end’ is simply good business.
JoEtta (2007) conducted research on bank performance and credit risk management and discovered that there is a substantial association between financial institution performance (profitability) and credit risk management (in terms of loan performance).
Lending or credit creation aims to optimize a bank’s profit. The rate at which commercial banks borrow from the central bank has decreased to 7% from 7.5 percent. This is supposed to make it easier for commercial banks to borrow cheaply so that they can lend cheaply in an effort to keep Nigeria’s economy afloat. The goal of this research was to learn more about credit management, credit policy, and bank performance in Akure, Ondo State, Nigeria.
OBJECTIVES OF THE STUDY
The primary goal of this research is to look into credit management, credit policy, and bank performance in Akure, Ondo State, Nigeria. Specifically, this research aims to:
i. To see if there is a link between loan policy and bank financial performance in Akure, Ondo State, Nigeria.
ii. Determine whether credit risk control has a substantial impact on the financial performance of banks in Akure, Ondo State, Nigeria.
iii. To see if there is a link between capital adequacy ratio and bank financial soundness in Akure, Ondo State, Nigeria.
RESEARCH HYPOTHESES
To validate this investigation, the following null hypotheses will be used:
H01: In Akure, Ondo State, Nigeria, there is no substantial association between lending policy and bank financial performance.
H02. The credit risk control has no major impact on the financial performance of banks in Akure, Ondo State, Nigeria.
H03 In Akure, Ondo State, Nigeria, there is no significant association between capital adequacy ratio and bank financial soundness.
SIGNIFICANCE OF THE STUDY
This study will benefit all Nigerian banks, as well as the country’s central bank, by providing information on credit management, credit policy, and how advantageous it is to banks. It will also educate the banking industry about the link between credit management, credit policy, and bank performance.
This study will serve as a source of knowledge for students and scholars pursuing research on similar themes.
SCOPE OF THE STUDY
The focus of this research is on credit management, credit policy, and bank performance in Akure, Ondo State, Nigeria. Specifically, this research aims to determine whether there is a significant relationship between credit policy and bank financial performance in Akure, ondo state Nigeria, whether there is a significant influence of credit risk management on bank financial performance in Akure, ondo state Nigeria, and whether there is a significant relationship between capital adequacy ratio and bank financial soundness.
LIMITATIONS OF THE STUDY
This study was limited to the use of secondary data, which raises questions about the data’s credibility. Using secondary data means that any error in the source will be mirrored in the research, which means that inaccuracies and assumptions not stated in the source papers will reappear in the study.
The period during which the data is sampled is a significant shortcoming of this work. In comparison to other relevant studies in the literature, the sample horizon for this study is brief. Future research should expand the sample size and look at the impact of other credit management variables on bank financial performance to solve this constraint. Furthermore, no moderation or mediation effects were measured in the study of the relationship between credit management indicators and bank performance in Akure, Ondo State, Nigeria; future studies should include moderators or mediators to come up with a model that can significantly explain bank performance.
DEFINITION OF TERMS
Credit management refers to the measures put in place to avoid, minimize, or mitigate the risks connected with credit issuance.
Credit Policy: A credit policy is an institutional system for examining credit requests and determining whether or not to accept or reject them. In the administration of accounts receivables, a credit policy is crucial.
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