Effective Credit Administration As An Antidote To Corporate Failure

Effective Credit Administration As An Antidote To Corporate Failure

Chapter One

Preface

Background to the Study

The conception of credit can be traced back in history and it wasn’t appreciated until and after the Second World War when it was largely appreciated in Europe and latterly in Africa( Kiiru, 2004). Credit threat operation has been an integral part of the loan process in banking business. Credit threat is the current and prospective threat to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or else to perform as agreed.( Kargi, 2011).

When banks grant loans, they anticipate the guests to repay the star and interest on an agreed date.

Banks and their guests have different comprehensions of bank credit or lending. To utmost bankers, credit isn’t a capital – request exertion, yet to numerous commercial guests ’ particularly small and medium- sized companies, bank loans are their most important source of capital. The demand for medium- term or long- term lending comes substantially from marketable and artificial companies and from private individualities. still, amongst all the services handed by banks, credit creation is the main income generating exertion for the banks. But this exertion involves extremely high pitfalls to both the lender( fiscal institution) and the borrower( customer). The threat of a trading mate not fulfilling his or her obligation as per the contract can greatly hamper the smooth functioning of a bank’s operation. On the other hand, a bank with high credit threat faces implicit bankruptcy and this doesn’t give depositors confidence to place deposits with it.

Some fiscal institutions have collapsed or endured fiscal problems due to hamstrung credit threat operation systems illustrated by high situations of bigwig loans, academic lending, and high attention of credit in certain sectors among other issues. Credit threat operation practices and poor credit quality continue to be a dominant cause of bank failures and banking heads worldwide. Again, Financial Institutions have faced difficulties over the times for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit norms for borrowers and counterparties, poor portfolio threat operation, or lack of attention to changes in profitable or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties( Gil, 1994).