Credit Management And Bank Lending In Nigeria

Credit Management And Bank Lending : (A Case Study Of Hallmark Bank Ltd In Nigerian)

Credit Management And Bank Lending : (A Case Study Of Hallmark Bank Ltd In Nigerian)


According to Adekanye, (1983, P.11 – 14), the history of commercial banking in Nigerian can be trace more adequately to he 19th century . It was then that a shipping company named ELDER DEMSTER started banking system so as to facilitate its business transaction in Nigerian.

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Nwosu (1981, P.4) revealed that what could be te4rmed conventional banking begging in Nigeria. When African banking co-operation of South Africa was invited by Demster to open a branch in Lagos. In the year latter, the bank of British West Africa (now first bank of Nigerian Plc) was incorporated in Britain and latter absorbed the African banking co-operation in 1984. It remained the only bank in Nigerian then until 1917 when the colonial bank opened its office.

Britain and French was the third bank (1949) to be established (now called the united bank for African Plc). All this threw bank were owned by expatriate with their head office in the metropolitan country.

Nwosu went further to highlight that on the domestic front, there was a boom in the banking business. Most indigenous bank which spray up between 1929 and 1956 include the national bank of Nigerian (1933) , the Agbonamagbe bank (now |WEMA bank (1945), the African continental bank 91947 and many more. Literature revealed that this bank could not compete favourably with the expatriate bank and so they collapse between February 1951 and may 1952 barely fifteen months, a total number of eighteen indigenous bank were registered and indeed commenced business operation. Among this bank, only three could stand the test of that period namely, the national bank, the Ogbenmabge (WEMA) bank and the African continental bank (1947).

Literature revealed that the banks could not compete favourably with the expatriate banks and so they collapse. Between February 1951 and may 1952, barely fifteen months, a total number of eighteen indigenous bank were registered and indeed commenced their business transaction. Among this bank, only three could stand the test of that period, namely, the national bank, the Ogbomangbo (WEMA) bank and the African continental bank.

Since the introduction for the structure adjustment programme (SAP) in 1986, there has been a tremendous increase in the number of banking operation in Nigeria from 29 in 1986 to 56 in 1990. This increase coupled be attributed to the innovation brought by SAP and the huge profit declared by the existing commercial bank and the liberalization of the criteria involve in the opining of new banks. The type of operation they perform characterizes the commercial bank.

The operation includes:

(1) FINANCIAL INTERMEDIATION: this comes as a bank acting as intermediary between those who has excess supply of loanable fund and who have demand for this fund. By acting as intermediary, the bank reduce the rigors of attendant to borrowers who would have had to go around looking for people who have excess supply of loanable funds. Through financial intermediation, the bank reduces the high cost of transaction increment in direct communication between people who have excess supply of loanable funds. The reduction of fund is as a result of economics of large scale employed by the banks.

(2) The bank creates credit: the bank has a lot of fund at their disposal. This include deposit and owners equity (share capital) the bank always try to minize holding of cash by lending through the creation of credit for its customers. By so doing, the bank is increasing the quality of money in circulation. Whenever the credit bank grants credit to people, they opened credit account on which the borrower can draw cheque. The borrowers thud acquires claims against the bank. The institution of banking depends on its ability to create the so-called token money for example, the money created in the process of lending to customers.

2.2 The History Of Lending And Concept Of Lending

The act of lending started in the early ages. Lending in this time consisted of loan to people in need of money for the purpose of consumption. The English merchant of this era kept their money in the tones pg London which was the seat of the commercial activity during this era. The modern banking system originated from the practice of the early goldsmith from the empirical evidence. The bank soon discovered that only 8 – 10 percent of the bank deposit was withdrawn at any giving time and the remaining 90 percent could be loan to customers in need of money.

2.3 Lending Principle And Practice

The lending practice of each bank is more of variance that is a replica of that of other bank. Adewumi (1983, P. 3 – 4) ague that one can nit generally with any measure of euthenics about lending practice in the banking industry. Also Shaprintal (1969,P.4) considered two lending officer sitting by side in the same bank react differently to the same loan request.

After a survey for the lending principle and practice, Adewumi has therefore observed that one can accept 20 different variety of lending practice in Nigerian. Thus for a general survey this kind of variety must be multiply for the number of countries considered. The problem of variety is further compounded by the change in the lending environment.

Inspite of the differences and variation in the principle and the practice of good lending, Mathis ( 1975, P.6) pointed out the need for sound lending principle thus; “ Sound principle and standard can be linked to an Ashore from which a boat swings with wide and tide while its position shift in response to changing circumstances, the boat never breaks its ties with the ground tackles.

Even the news of Mathis above, Matter (1972,P.4) noted the need for flexibility when considering lending for the prospective borrowers. He recommends three basic principles, which includes or should serve as a guide to the lending bankers.

(a) Safety: the safety of any loan or advance is of a paramount importance to banks. There must be a measurable certainty that the amount can be repaid from profit and cash flow generated form the operation of the company

(b) Suitability: the bankers should also certify the suitability of an advance even when the requirement of the bank certifies the all safety and risk consideration. It is absolutely necessary for the bank to ensure that the purpose for the loan is not in conflict with the economic and the monetary policy of the government.

(c) Profitability: profitability is one of the key elements in bank behaviour since the bank stay in business only as long as it makes profit from the business. More so the growth of the bank depend on the level of the profit it make. Generally, profit is defined as the different between the revenue and expense. The revenue must be greater than the expense before we can say that any profit has been made. In the case of a bank, profit will be the different between the income the cost of administration of its asset and liability. Profit in most case comes in form of cash. This cash increase the liquidity of every organization. Profit can therefore be said to be a sure of liquidity. on the other hand operating at a loss decreased the retained portions of the capital account. The lower he value of the capital account, the smaller the margin the asset and the liability and the greater the danger of insolvency. Insolvency arising from the cash value of the asset is lower than the total. The bank are not only interested in the profitability of their own business, they are interested in the profitability of their prospective borrowers. Before the bank grant loan, there are among other things evaluate the profitability ratio. The profitability ratio of a firm is the measure of its profit, in relation to the amount of sale it makes, asset and continuity of the firm. Proff margin of sale and the return of the total asset are some for the profitability ratios.

(d) Profitability margin on sale: This is defining as the net profit after tax divided by the sale. The ratio tells us how much money we make on every unit of sale. The higher he profit margin on sale, the better the firm is said to be doing. However, before were can draw any conclusion as to the profitability of a firm, we have to make inter firm comparison.

(e) Return on the total asset: their relate o the total asset: This explain how profitable the total asset employed in a business are, if the percentage of the profit to the total asset is low, the bank do not normally lend money to such business.


The character of the borrower id a paramount factor to be considered in any lending decision. It is a total factor, which is sometime considered to be superior to the other Cs for lending. It is highly subjected to the extent that it rests on ethics.

Character is said to encompass other virtues like honesty, liability, and integrity, trust worthiness, morality and courage. The extent to which the borrowers pose this good virtue would determine whether or not a loan decision would be in his favour.


Capital is an essential requirement for nay business. It is importance that bank customers or borrowers do not have mistake in their own business before going to the bank for loans. This is because customers who have none of his money to lose Is likely to be more careless than one who have capital (probably his life saving) Is tied to the business. Capital is the measures of credit that may be granted to those have the right to borrow.


Capacity Is the foregoing analysis of the synonymous with the ability or he capacity of the customers to generate income sufficient to liquidate or meet the loan or advance repayment on the arrangement.. it tell ho a business had been in the past and will possibly be in the future.

The, management of the business that lack the know – how and the determination to succeed, no matter how favorable the environment is, would find himself failing before long. This is while it is necessary to establish the capacity of the borrower before making loan available to him.


This means any security (other than the personal security such as the guarantee) taking by the bank when I make an advance to a borrower or customers and what it is entailed to claim in the event of default.

Valentine and Mason (1981,P.14) noted that when a customer has agree to lodge an item of value to a proposal advance, the manager has to consider the following facts if the security on that is:

(a) Of value which is easily acceptable and relatively suitable

(b) Easily marketable and releasable

(c) Acceptable in the bank as security

(d) What it is described to be

(e) Readily available to be transferred to the bank

(f) Adequate core to advance

(g) Being changed freely and voluntarily if it is a third party security.

(h) They further sated that security is not taken with the initiation of obtaining repayment by its realization for no banker is willing to be repaid in that way. It is taken in case the normal source of repayment fails which unfortunately doe at times.

2.4 Constraint To Commercial Bank Lending

According to Lively (1991, P.5) in many countries, there has been recently been an involving constraint on the ability of bank to expand their balance sheet. This assertion is more relevant to the developing country like Nigeria. The following factors among other impose, constraint on the commercial bank.


Since lending objective are design to ensure growth and profitability. The economic environment determines the growth and the profit opportunity that can be tapped. If the economy is dispensed, ever bank tend to protect first and foremost its loan portfolio, hence, bank at such time pursue programmes of consolidation rather than the expansion of their portfolio.

Oseyeme (1986, P. 5 – 6).


By far the greater constraint to lending is the volume of bank deposit base .if there is an appreciable deposit base; there is usually more loanable fund to meet the request of various borrowing customers. Conversely, if the deposit base is low, new lending can hardly take place. This is the main reason while most Nigerian bank endeavor to impose on their deposit base by designing exploitation strategy e.g. saving scheme, marketing of financial service, the success of wealth depend on the economic environment (Oseyameh, Ibid, P.4).


The liquidity ratio prescribe by central bank monetary circular create a limitation also on the credit operation. For instance, the cash reserve requirement, each commercial bank shall continue to maintain with the central bank of Nigerian a ratio of its total demand deposit. Liability has been received since 1980.

Further, the prescribed, the prescribed minimum liquidity rate for the year 1987 and 1990 stood at 27.5 percent and 30 percent respectively for the commercial banks. Naturally, the appropriation of this fund curtails the aggregate of deposit available for lending purpose since the renovation of the  time.:” the dictionary of modern economy” say credit is a wide term used in connection with operation or state involving lending generally short term – to give credit is to finance directly or indirectly , lending or financing is direct when say a bank extend an order of facility to a customers who then uses it . if it is an indirect lending or finance when a trader or a producer supply goods on credit for repayment at a repayment at a latter time or date . Again to have a credit is to have a facility to acquire goods without the immediate payment or to drawn a finance from a financial institution . it is this latter definition that we shall adopt in this work. Inspite of the knowledge that lending is a highly risked business, commercial still devote part of their total resources into making loan and advance to their customers. Thus Adewumi (1984,P.4) considered loan and advance as the most profitable asset for the employment of bank funds and the most risky asset in the bank portfolio., he opined that there is no other area of operation n which bank can suffer a sizable lose as quickly as its lending operation and there is no better way in which bank can contribute to the growth and development of the economy than by prodding productive investment which result in the promotion for the welfare of the people . He concluded that lending is instrumented in the creating and maintaining contract establishment with the borrowers. It is also instrumental in the broadening the market for other bank service.

Ademiyi (1988,P.8) describe credit as a crucial factor in the growth process of any economy and as such it should be supplied adequately be the credit agencies of which the commercial bank as a group is the guard. He delineates investment, commercial and consumers and three types of credit.

Kein (1970,P.29) distinguished between bank loan and investment. He is of the opinion that loan are generally made available to bank customers while investment are usually made indirectly through the various security market.. Loan according to him are the largest category for the bank asset and more than 50% of bank asset are in form of loan. In his view, the greater part of commercial bank lending has traditionary taken the form of commercial and industrial loan. This loan are extended to manufacturing, mining, whole sale trade, transportation, public utility, construction service concerned etc. in short commercial and industrial loan include loan to all type of business enterprise except loan to completing finance institution which are covered by other type of loan. Commercial loan may be secured or unsecured or of any secured loan. The collateral may consist of plant and equipment, inventory, account receivable and merchandise or even the stock bond holding of the borrowing firm.

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Ajaiyi (1980,P.7) looked at loan and advance from two perspectives. The first is from the angle of the commercial bank; the second is from that of the economy. He said as profit making is concerned, loan and advance is important item in which it is consistently accounted for about one third of the banks total assets. In respect to the economy, the injection of fund is important for the development of the industrial facilities and industries etc. he contend that the rate and the direction for the credit facility has implication for the growth of the money supply and price stability for the economy. From the forgoing review of literature, it is obvious that there is a consensus of opinion as to the important of credit to the economic development of a nation. Commercial banks are seen as well placed in extending credit facility to individual, firm and other institutional borrowers and hence the economy in general.

Management Of Lending

The management of lending occupies an important position in loan administration. Emphasizing its importance, Corns (1962,P.6) pointed out that bad loan are made in the so called good time – but good loan and bad are also made in time of economic prosperity not due to economic factor but for human element of management, instability of the borrower either through negligence or inexperience to cope with every changing business condition or through perverted judgment by the loan officers.

In appraising loan application, loan officer may be influenced by friendship, business, and political and family connections. According to Corms (1921,P.6) , a banker may be willing to build up the bank so be ambitious to exchange credit for additional credit in the hope that loan granted will be repaid at maturity .

However, Braceter (1984, P.11) noted that “ There should be an element of favour or blousing in either borrowing or lending. It is a commercial agreement freely entered into by both parties and any implication that the bank has hand to be pressed by them into agreement is misplaced”

Dodge (1982,P.82) also pointed out that total banking requires uniquely that you not only sell something but that you get it back. Getting it back ha become a lot difficult. Collaborating this view , Whiting (1975, P.5) opined that ;

“ it is easy to lend money but easy to get it back from the borrower and whilst the bank must be prepared to take some risk while lending and it doe not require to have some debt.”

In addition, Graham (1982,P.14) has empresses he view that low rate of economic growth, inflation and high interest rate and the squeeze on cooperate profitability has increased the ordinary commercial risk involve in lending in many part of the world.

Corns (1969,P.7) claims ‘” it is aromatic that generally all loan are good when made and if the loan are paid back at maturity, it was a good loan. Whether or not a loan is good or not in the final analysis, depends on the ability of the loan officer to correct and appraise evaluated facts.

Robinson (1962, P.12) who upholds the view that successful banker is a successful lender expressed the view that;

“ The toll use to manage lending is credit analysis, budgeting and supervision. Lending also has to be enlightened by a competitive but reasonable policy for interest changes on loan. Thus it is observed that an addition to credit analysis is budgeting supervision of the lending are the important aspect of the management in lending. To have a good loan, the lender must know its purpose and source of repayment.

O’Malia 91979,P.7) claims that ”Analysis then becomes the tool by which one measure the capability of his repayment. In a common sense view, one almost end up by asking if what the client is proposing is feasible and it past records supports it.

Robbetal (1983,P.10) agree with o’ Malia that to ensure in the safety term, the committed lending that we need a comprehensive approach to the lending decision based on a review of the significant areas, market strategy, finance operation, soundness of the management whereby we look at the past, present and the future performance.

In the literature of the theory of banking, it is an established fact that many factor have to be considered and review on lending all, which are not giving by the financial statement. However, this is not to underestimate the importance of the financial statement in the assessment for the credit worthiness of the potential borrower. In the financial analysis, we can express the lending generally and credit in particular require the exercise for judgment and thinking right.

Once a lending position have been approved, it may be assured that it is a] only necessary to review the facility annually. However the occurrence of an inspected event capable causing default calls for supervision (or monitoring of the lending)

Davidson (1986,P.7) who wrote about the dangers of monitoring only recognize problems, believed that the early recognition of the company weakness dose not happen in vacuums,. He stressed further that the bank must instill a certain frame of mind in its people and must have a system for monitoring all the credit even those it believed to be healthy.

2.6 Bad Debts And Credit Management

So far the writer has looked only at one of the key element of the study – commercial bank lending. Now the focus is formed on other key study – credit management. However, for the good understanding of the credit management, a review of the available literature review on debt, bad debt and most especially the first undertaken.

2.7 Concept Of Bad Debt And Doubtful Debt

It can be simply said that a debt is what is owned to another. A debt can also be described as an obligation to make future payment. A debt has been also defined as money, goods, service owing to another by the virtue of an agreement expressed or implied giving rise to a legal duty to pay. More technically put, a debt is a credit received by a borrower by a pure lender who may be formal or informal institution against the borrower promise to make future payment. Credit is usually given be the lender to the borrower in anticipation for the borrower abiding by the agreement in the transaction that he will satisfy his obligation to the lender. Due to one of quite a number of reason (which are latter discussed) the debtor might fail to meet his obligation thus creating a bad debt. However, competent manager is in his lending practice, there is a doubt that from time to time, a bad debt will arise on their payment of their advance and will become doubtful.

According to Nwachukwu (1993, P.10) average performance, measure as a provision for bad and doubtful debt total loan outstanding increased from 12.91 in 1992 to 13.34 percent in 1993 for the commercial bank.

This means that in 1993 for example, thirteen out of one hundred Naira wort of loan in considered unrecoverable. In addition, Anayo, (1994,P.5) said across various commercial bank, provision for bad debt account as a proportion of net income has risen from about 50% to 90% from 1992 to 1993. This scenario indicates that the role of non-recovered loan and advance has been raised at an alarming rate. Some recent result depict a groper trend and suggest that this undesirable situation will probably continue unless positive steps are taken to arrest it by enhancing the quality of banking lending decision process. However, the ability of the commercial industry to attain to this objective required understanding of the nature of lending decision task under the condition of uncertainty. As well as the factor, which may influence the bank loan officer in the process of some decision aid that could enhance the degree of professionalism and thus the judgment accuracy of the bank loan officers.

Most bad debt pass through the doubtful stage prio to a real lost of money occurring and there is a lot of reason for the lending becoming unsatisfactory. Again in allowing the customer ample chance to get out of their difficulties, Oyerela (1989,P.5) stated that bank must learn the skill of preventing the worst possible situation from occurring. In order to do so, he must learn to reorganize early sing of a potential bad debt. The occurrence of situation where debts are not paid on time or they are not paid atall has given rise to the need for classifying bad debt into various categories and due to he various situation of the classifier. For reason of simplicity, it is often preferred to classified debt into good, doubtful and bad debts

Good debt is that debt which is certain that the payment will be made. The lender is sure of receiving both principal and interest. Bank are usually happy to have good debt in its book as they enhance the banks profitability and as well ensure the recycling of the recovered money into lending as loan and advance to the economy and thereby promoting the economic growth.

Bad debt is those debts which recovery within there normal period is not feasible. They are writing off as provision as made to accommodate them.

Doubtful debts as can be deduced from the name are those debt, which the recovery are doubtful. The distinction between doubtful debt and bad debt are usually not made until the end of each accounting period when income for the period is being evaluated. a final scrituning of the debtor account will usually eliminate all this account considered bad. Some of the remaining debtor will ultimately prove to be bad. The conservation conversions require that the risk of further debt becoming bad should be discounted. The normal practice been to make a provision for doubtful debt out of the current years income without seeking to identify particular debt that are been doubtful of their recovery. In most cases the doubtful debt become bad and they are not repaid.

The dictionary for accountant offers a more technical explanation for bad debt as follows:

(a) An uncollectable receivable.

(b) Specific receivable determine to be uncollectable either in whole or in part because of the debtor cannot pay or the creditor find it impracticable to enforce and is charge to profit and loss or he is charge to a reserve allowance in bad debt. More of such of reserve maintained.

(c) The account to which it is charge periodically, usually with an offsetting credit to a reserve or allowance to a bad debt, the estimate loss form uncollectable account base for example a percentage of (credit) sale for the period, a percentage of the outstanding account at the end of the period or the review of the individual account in each cases, any balanced remaining in the rest from the past periods taken into consideration is a provision for the bad debt.

Asechemic in his comment on the potential guideline for the license banks made the following consideration.

The fifth schedule of the banking decree of 1969 require a classification of doubtful advance of over 20,000.00 by the auditor into:

(i) Section A advance which has not been fully recovered because insufficient effort on the part of the bank

(j) Section B advance, which may either be fully or partly uncollectable by reason of the known financial position of the debtor.

(k) And section C advance which include those grant to the deceased and defiant companies

(Asechumie , 1991,P.1)

Central bank of Nigerian, which is the regulator of the commercial bank industry, is not silent on the issue of classification. In he prudential guideline issued on the November 7th 1990, the CBN introduced new but technical criteria for reorganizing debt in the banking industry. The classification was based o the performing and non-performing facility in the credit portfolio of the bank.

The Classification Are Explained Below:

(a) Performing facility: this are those which payment on both principal and interest are scheduled

(b) Non-performing facility: this are those whose either the interest or the principal are overdue for 90 days or more (ii) interest payment equal to 90 days, interest or more has been capitalised, rescheduled or roll over into a new loan.

(c) Sub-standard non-performing facility: this are those on which the unpaid principal or interest romaine outstanding for 90 and 179 days in the respect of the which the customers shows;

(i) Inadequate cash flow to service debt.

(ii) Under capitalization or insufficient working capital.

(iii) Absence of adequate financial; information or collateral denomination.

(iv) Irregular payment of principal or the interest.

(v) Inactive account where withdrawals exceed repayment and hardly over interest charged.

(d) Doubtful non-performing facility: this are those on which unpaid principal or /interest remains outstanding between 180 and 369 days and which are not secured by legal title to lease assets or perfected releasable collateral in he process of the collection of the realization.

(i) In respect of the which the customers;

(a) Show weakness in (d) above

(b) That the fully repayment o the debt is very uncertain.

(c) That the realizable collateral will be insufficient to cover the bank expense.

(ii) Lost non-performing facility are those:

(a) In which the unpaid principal and interest are outstanding for 360 days or more.

(b) Not secured by the legal title to lease asset of perfected realisable collateral in the course of the collection for the realisation.

(c) The respect of which the customers show the weakness in (d, iii) and which are considered uncollectable and are of such little value that continuation as a bankable asset is unrealistic.

The prudential guideline of the November 1990 has introduced some measures of technicalities in to the concept of the bad and doubtful debt in the Nigerian commercial banking industry. The prudential guideline are highly predicted on the just need for accountability and efficiency in the cooperate financial management of the commercial bank in Nigeria.

2.8 Causes Of The Bad And Doubtful Debt

Long J(1989, P.16) identify here main source of which the factor that lead to a lending facility becoming doubtful or bad debt and can be trace to be:

(a) The lending banker

(b) The borrower and

(c) The external force

(A) The lending banker can contribute to the creation of bad debt in the following ways:

(i) Absolute lack or insufficient knowledge on credit analysis. Ajayi (1980,P.79) emphasized this when they observed that “ the bank officer may not possess the technical know how to cope with the complexity of the various project introduced in all loan proposal. There is no doubt about the problem; it is how to secure specialized ones among them to reflect the various specialized needs of the customers.

(ii) Lending decision which is based not on sufficient data and failing to verify sweet talk on the part of the lending banker

(iii) Averted interest in lending to a particular customers

(iv) Delay or lastly disbursement of funds

(v) Improper fixing of repayment schedule

(vi) Lack or insufficient supervision of the project after the disbursement of the credit facility

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(vii) Inadequate or lack of security

(viii) Delay in processing and approval of facility

(ix) Fraud

(B) The customer:

The borrowing customer can contribute to a borrowing facility becoming doubtful or bad debt in the following ways

(i) Inadequate valuation of the viability of a project before embarking on it

(ii) Poor management of the funded project

(iii) Owner reliance on a partial sources of supply

(iv) Diversion of the released fund into other unprofitable or non-revenue yielding ventures

(v) Entering a business at the wrong time

(vi) Excessive drawing on the facility

(vii) Sheer unwillingness to pay

(C) External factor include:

(i) Government action- often the fiscal and monetary policies for the government adversely affect both bank and their customers. Barger (1964,P.7) agued that most economic measures introduced by the government not only distort the repayment schedule of bank lending but also even force some of the borrowing customers into liquidation. Adewumi (1984, P. 3) barked this argument when he said that at times also debt owned by the government to the contractor are unduly delayed before payment.

(ii) Change in the customers behavior or taste or fashion which lead to a fall in the demand of goods and service

(iii) Worldwide economic depression

(iv) Natural disaster

The outline factor and others such as lending on political or personal group which are more prevalent in private and government controlled banks are the factor which has been recognized to course doubtful and bad debt in the financial institution.

2.9 Credit Management

Credit management is vital because the lack of it can course a bank a great deal of money and harm its ability to meet up with its obligation as they fall due. (Pitcher, 1977,P.40). Loan and advance are known to constitute one of the most important component of the aspect of portfolio of a commercial bank hence the volume of loan is expected to be a function of demand as well as the supply conclusions as reflected in the bank lending rate and other non- free related factor. Mordi (1986, P.8). Credit management involves the necessary, management put in place by the bank for the repayment of the loan facility that is granted to customs. The prices of credit management begin right from the moment a loan proposal proposition is submitted, though when decision is taken on it and when necessary up to when lawsuit or litigation is entered into. This may require very careful scruitinization for the loan proposition and giving adequate consideration to all the facts of the request.. If a decision is taken to grant the request, collateral must have been taken after due consideration must have been given to the cannons of lending. If the banker is not satisfied with the proposition, he should say no to the customer. Even though this decision might be hard and might even result to a strained relationship, which ultimately seems to be the best for all the parties concerned.

The central bank advised that where all measure applied to recover loan failed, the debt should be written off, by way of debiting the banker profit. This measure should be resorted to as the last option. Measures have been put forward by authorities in the field on method that could be adopted in the debt collection. This method and procedure are concerned in the next section as Adekanye (1983,P.13) rightly put it: “ Recovery of loan is about the most difficult and hazardous task facing a banker. It is the most uninteresting and energy sapping in the banking sector. This is because the banker now deals with difficult and unfriendly customer who is either prepared or willing to pay the loan except very drastic step is taken.

Where the problem of a doubtful debt is darkled at an early stage and the customer is willing to co – operate; it may be possible to formulate a policy for the survival of the business.

According to Cohen et al (1978,P.9). There is the nursing program, which include;

(i) Converting and overdraft facility to a medium term loan and rescheduling the repayment and installment to suit the customer business activity. Where the customer main problem is that of capacity to manage the business activity, thus measure should alleviate.

(ii) Where the account is static because the customer feels that his lodgment will be swallowed up by the existing debt. The situation is envied by reviewing the account and allowing the customer to withdraw a substantial percentage of his lodgment to enable him to keep the business going.

(iii) Where the security taken I very adequate and it has been formed out that additional fund will help to turn around the situation as (i), the bank may rise additional fund, balance sheet by discounting until the customers position is improved. Other combination of rescue programme could be embarked upon depending on the particular circumstances.

However the credit officer must bear in mind that the sole purpose of any nursing programme is the recovery of the bank expense, so where this is not feasible, it will be better for the manager to fleet the business as a game concerned.

2.10 The Confrontational Measures

The measure of debt collection is employed only when the business is regarded as game concern. Classifying a business as a game concern implies that the bank loss some confidence in the customer and according to Babadele (1987,P.6) once the confidence of the bank in a customer is loss, it is difficult to re- establish as such bank should not consider damaging and existing relationship with the customer. Its paramount is to recover its exposure.

Udonmana (1987,P.5) advice that where the manager has decided to treat the business as “A game concern” the debt should be vigorous. This is because the longer the recovery period of a bad debt, the stammer will be the likelihood of recovering it. It is advice however that the cost of pursuing any confront national measures of debt recovery must be weighed against the likelihood of its success and the value for the debt being pursued. The latter should outweigh the former for such a measure to be justified.

Onyegbula (1989,P. 5) suggested a number of confrontational measures of debt collection; this include

(i) The closure – (realization of the security). Where the security is a legal mortgage of tangible asset, this could be disposed off via unction sale of building or equipment of via the stock exchange in the case of stock and share guarantee could be involved.

(ii) Use of lawyer to pres for repayment (often the lawyer claims 10% of the recovered fund.

(iii) Use of debt collecting firms.

(iv) Where the debenture is held, the bank will appoint a receiver or a liquidator to either run the company until the funds are fully recovered or to liquidate the company.

(v) Where the security to be realized is inadequate or not in existence. The bank may take action against the defaulting customer. Where the faculties were giving a clean basis on the undefended list.

Olude (1998,P.5) warns, where solicitor are appointed to handle drive. They should be given precise information (instruction) and to how far they can proceed without future reference. It is also necessary to keep in contact touch with the solicitor to ensure that they are setting in line with their arrangement. Latter of threat alone have to be known to have led to the recovery of bad debt. However where this latter of threat are not followed seriously action, the customer soon get accustomed to them and become indifferent, he begins to regard such latter as mere routine and no result can be archive in this situation latter of threat.

The latest way of bad debt recovery is the promulgation of the failed bank decree and setting up of the failed bank tribunal, which tries all matters relating to unrecovered loan or debt being owned to banks. The tribunal present customers and staff of the banks concerned who owe the bank and staff who have in one way or the other issue loans without much verification.



The study is intended to examine credit management with emphasis on the control of bad debt in the banking industry focusing mainly on the hallmark bank limited. this chapter examine the methodology issued adopted in the research work, generally it highlight the areas of coverage , sample plan , description of data analysis techniques and limitation of study.


In order to archive the objective of this study the areas of coverage shall be limed to only the credit management and lending by the hallmark bank. Owerri, Imo state., the headquarter, the home of the headquarters of hall make Plc . So the headquarter of responsible for controlling the activity of the bank all over the nation.


Do to the constraint, money and other resources there is a need to have a sample plan in order to avoid bias. For the purpose of this study, the sample plan shall cover the following.

1. Sample unit

2. Sample size

3. Sample method

4. Sample procedure


The sample unit for the purpose of carrying out the study shall be the hallmark bank limited located at Bc Okigwe road Imo state from which the sample shall be determine.


Population of the universe as determine by Taylor and Kinner (1983:67)(is the aggregate of the an element from the sample mainly selected, Churchill has agued that sample element are cozen because it Is assumed that they are representative of the population other universe. The sample size of the study is the hallmark bank limited with headquarter located at plot Bc Okigwe road Imo state while the under sample will be determine from the branches of the banks in all over the nation.


The methodology used by any researcher has an important role to play, as the result of such research will depend greatly on the suitable research approach. According Ahieze (1981:8). There are to r3search stargazes; either of them can be adopted in a social study. One this is the survey and which is the presentation sample of the population that is been study and the result generated. The other is the case study approach, which involve the study of open group at a pint in time and imaging at a conclusion in relation to the problem studied. The main focus of a case study as Kenly (1984:10) stated is to learn all about the organization been studied. The case study approaches involve the investigation of one or a set of problem in a particular organization. The author in this case adopted the case e study approach in the research, he felt that the case study will be the most appreioprate because it will facilitate the writer conduct of an intensive investigation into the dept problem of the organization under review and hence will not only assure a detailed qualitative and a quantitative data for analysis but also will provide a valid solution.


The writer shall generate data but from primary and secondary source in order to meet the information requirement of the study. Secondary data are data, which are copied from other people’s wok. the include information gathered from books , journals, company work, magazines and newspapers . the secoandr5y data needed in this text research will be generated from review of textbook, journals and annual report of the hallmark bank limited and this will cover the period ( 1991 – 1997).

According to Prancis (1985:9) primary data are those obtained for the solution of the specific problem at hand. The primary source of data for this study will generate form the use of questionnaire distributed to the credit official and managers of the sample branches of hallmark bank limited.


In the bid to answer the question which t eh author has asked in the introduction. In the consequents hypothesis so developed, the writer shall use the following statistical techniques.

1. Sample percentage and table

2. The chi-square formular giving as

= X2 = (F0 – Fe)


Where F0 = frequency observed

Fe = frequency expected

X2 = computed value for the chi –square

This formular will be used with the application of Yates’s correction method given as =

X2 = (F0 – Fe + 0.5)


The degree of freedom

= (k –1)

Where K = No of column (Nourish. P.B201)

The student T – distribution which K – 1 degree of freedom is used to test the hypothesis of no significant relationship between the independent and dependent variables.

Kandelle coefficient of concordance measures of degree of agreement among the cordial valuables when ranked. It is designated by W, which gives thus:

W = s

½ 2K2 (N2 = N

Where S= sum of square of the observed

Deviation from the Meriof Ri

That is S = ( Ri – Ri2)

K= number of set ranking e.g. the number of judges

N = number of entrance (objective or individual ranks)


The under will test the significant of W using the formular

= X2 = K (N – 1) W

X2 = the calculated or the observed value

K = number of set of ranking, e.g. the number of the Judges

N = number of the entire or the object individual ranked

If an observed value is equal to a greater than the absolute table value of the particular level of significance, the Ho; may be rejected at that level of significances. Specifically, the statically techniques listed above will be used to test the following null hypothesis which will include:

1. There is no significance relationship between the profit of the bank and the total loan and advance granted by the bank

2. There is no significance relationship between the level of bank deposit and the amount of loan

3. There is no significance relationship between the level of risk on the loan proposal and level o loan granted by the bank

4. There is not significance relationship between the bank perception of different type of secure and the amount of loan that is granted.


The researcher work is subjected only to the study of a particular commercial bank and not to the banking industry as a whole. it studying the entering the credit management of th3 case study of the bade in the bank and how it affect the performance for the bank. Although the research is successful there are some difficult encounter on the course of the study on obtaining necessary information. For instance in some occasion, it was impossible to get in touch with some for the bank officers.

Francis D.P (1987) statistical method for accounting student who should supply the information needed. Not withstanding when some of their officer are approached. It was sometime not easy to obtain some vital information, which they consider very confidential. This to a large extent has affected the pace of the research moreover; there were financial and time constraint, which affected the nature of the study work.

Obviously all this probable constituted an affect on the information collected probably the conclusion of the research.


An attempt is made to present and critically analyze the answer to question rose in the written questionnaire. This is done with a view to establish the relevant findings to the writers study. A total of thirty-five questionnaires were distributed to the senior officer and the branched managers of Hallmark bank limited spread all over the country and the twenty-two of the total number of questionnaire were returned. The writer’s analysis will base on the number for the questionnaire that is returned and other information derived form the annual report of the bank. A sample of the writer’s questionnaire is given in the appendix. We shall attempt a question by using question analysis of the question contained I threw questionnaires and also test the validity and otherwise of the writers hypothesis.

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Decision rule:

Accept Ho of tabulate X2 calculate x2

Reject Hi tabulated X2 calculated X2

Since the writer value of (i.e. X2 = 36) is greater than the absolute table of 18.6 at 6 degree of freedom, the writer therefore reject the null hypothesis and accept the alternative hypothesis (Hi), which seeks to explained that there is a significances relationship between the bank perception for the different type of security and the amount of loan that grant t their customers

In this case, we observed value (X2 = 155.76) is greater than the table value (0.05 of 14.9 at a 4 degree of freedom. the writer therefore reject the null hypothesis Ho and accept the alternative hypothesis Hi. this means that there is a significance relationship.


The writer has used various techniques in the analysis of the research data. This technique includes chi-square (Yates correction method), simple percentage, and test of significance and Kendall’s coefficient of concordance. With the aid of the techniques, the writer has been able to provide answer to the entire question rose in the purpose of this study and also test the entire hypothesis, which the writer set forth in the study.


The writer findings are generally outlined as followed:

(1) That hallmark bank limited has a definite loan policies

(2) Members of the board of director who are appointed by the shareholders are responsible for making the loan policies of the bank

(3) The test of the writer’s hypothesis first shows that there is a significant relationship between the profits of the bank the total loan and advance that is granted by it to its customers. This has an adverse effect to the profit. For example, the bank made a loss of 1994 part of loss was due to the provision for bad debt.

(4) A test on the second hypothesis gave the writer an insight that there is a high relationship between deposit and loans. The test of significances shows that the calculated (x2 = 11.7200 at 0.05 level of significances is greater than the absolute table value (tc = 5.991) which informed the writer to reject the null hypothesis and accept the alternative hypothesis that there is a significant relationship between the bank deposit and that amount of loan granted to its customers.

(5) The writer reject the null hypothesis in the third testing and accepted the alternative hypothesis which means that there is a significant relationship between the level of risk in a loan proposal and the amount of loan granted by the bank

(6) In hypothesis 4, the author rejected the null hypothesis and accepted the alternative hypothesis because the observed value is greater than the absolute table value. This means that there is a significant relationship between the bank perception of different type of security and the amount of loan granted.



Commercial bank is profit-seeking industry and as such they share with other business then same of expectation concerning the health of the economy.

It is in the light of that they make loan available and interest, which is a source of profit to them. Along side the growth of the credit sector is the growth pot the bad debt due among to poor credit management.

The Hallmark limited like most other bank has recorded a high rate of the incidence of bad debt and has over the years declared loss in 1994. The main purpose is to find out the cause of bad debt and suggest possible solution to the bank credit management.

In order to archive the objective, the writer set forth some hypothesis which were tested with the following

– Statistical techniques

– Simple percentage

– Chi-square ( Yates’s correction method and Kandells coefficient concordance .

The information requirements for this research were generated from secondary data and primary source through the use o questionnaire.

The writer in this study find out that Hallmark bank limited which is a essentially a private bank has been bedeviled by a lot of problem which are responsible for its poor credit management as revealed by the writers analysis.

It is shown that though the bank has adequate credit assessment and control mechanism, the analysis show that there is a significant relationship between the level of loan granted by the bank and the profit made. The bank granted a considerable amount of unsecured loan, which pared the way for high level for default, which characterized it.


The Hallmark bank limited which is a essentially a private bank has been bedeviled by a lot of problem which are responsible for its poor credit management as revealed by the writers analysis. It is shown that though the bank has adequate credit assessment and control mechanism, the analysis show that there is a significant relationship between the level of loan granted by the bank and the profit made. The bank has granted significant loan to the customers but in most cases, the loan are granted because of personal consideration and not according to the policy guiding the bank lending. The loans due develop high core and in which case the bank is helpless and this personal interest are manifested through the board of directors who are influenced by the owners of the bank who appointed them thus paving the way for high level default which characterized the bank. Though some of the shareholders and owner are members of the board of directors, they also have their selfish interest to protect. The bank as it is revealed doe not employ credit securing techniques in the assessment of loan proposal thus, it is possible that credit may have been granted to a non-profitable venture or to those individual which lack the management skill and techniques to appraise the market, economic and the political environment in which they operate and hence incapable of taken the decision in relation to this factor..

Most of them are not separate entities from their business and they lack the ability to promote their business to be result oriented..

The manage funds, human, and material resource of their disposal and they are incapable of producing result which in turn will make the repayment of loan borrowed impossible.

Although it is shown in the work that there is a significant relationship between the level of risk in a loan proposal and the amount of loan granted, evidence like the high provision for bad debt, high unsecured loan and the less should declared by the bank show the lapse in the management of the bank credit.

It is a common knowledge that the objective of any commercial bank or enterprise of which bank is one is to maximize profit but the melancholy performance of the bank proves contrary.

Nwankwo (1990) has shown that for every Naira on loan, about 64 Kobo could be uncollectable in the state owned bank had 40 Kobo in the non-state or private commercial bank. This points to the fact that commercial bank that is privately owned loss about 40% of loan given out to their customers. This does not put the bank in good position in term of credit administration and general performance.


In order to improve the performance of Hallmark bank limited, the writer recommends the following;

(1) The Hallmark bank limited be changed to a public limited liability company. This will mean selling it to the public with a view of allowing public participation with the view of creating a more competitive climate, high profit orientation, operational efficiency, prudent management, improve cost saving device and elimination of waste and so on.

(2) The bank should adopt a cooperate planning techniques. Proper planning will place the bank in a position to forecast and predict those business and behavioral element, which can cause default.

(3) The bank management should make it a standing role to accept collateral to a reasonable extent to cover the loan being granted to her customer to reduce probably the event of bad debt upon repayment default. Consequent upon the rising emergence of bad debt in the bank and the association loss, members of the board of directors need to reduce to the minimum their interference in the process of loan administration.

(4) The entire credit system for the bank should be overhauled so as to establish the much need credit control system

(5) The bank management should adhere strictly to the principle of good lending. An adage said that prevention is better than cure. The aim of the lending policy is to ensure is many as possible the safety of the fund and hence it is a prevention policy and thus managers and the lending officer should adhere strictly to he cannons of lending ans ensure a good lending practice.

(6) The bank should ensure that the amount loan required by the potential borrower is adequate for the project they seek. Most importantly, they should know the purpose of the loan and ensure its flexibility and viability before extending loan to them. This will not only ensure that the project are profitable but also prevent under lending and over lending, which can cause bad debt.

(7) The bank draft should be use for professional evaluation for property being offered as the collateral security and perfecting the legal mortgage of the property. In case where the banks draft cannot do so. The bank should engage the service of a professional consultant instead of replying on the evaluation of the borrower.

(8) The bank with the support of the central bank should establish a borrowers Adsorb unit (BAU) or credit agency to store information on the borrowers and as such facilitate multiple borrowing form the bank for the purpose. It will also reduce the number of loan in addition to creating the right atmosphere for the survival of the bank. Such an adversary unite educate the bank customers on the method of keeping good accounting and employing the service of an external auditor.

(9) The bank should not grant credit and then forget about the customers and his business unit if the repayment measures. All loan granted should not be place under constrained supervision.

(10) The bank should hold frequent meeting with their customers to enable discover on time the danger trend. For instance, when the overdraft limits are extended, when the trading condition change or original agreement breached.

(11) There should also be a regular examination for the balance sheet and profit and loss statement of the business, monthly and quatery check on ratio of current asset to the current liability should be conducted.

(12) All change in the financial position for the business should be probed and reason established o enable the banker take new further precaution and make further arrangement to secure its position, the supervision should secure or inform its disbursement of fund at different stages of the project.

(13) The ability to conduct a fruitful interview in crucial to the success of the bank manager and the lending officer. Thus it is important that adequate training is giving to them in this area. Also updating there knowledge on appropriate credit analysis techniques will help hem to appraise profit proposal objective.

(14) Men of high level of integrity should be appointed officers of the bank who receive gratification of customer in order to file in false report about project viability should be identified and properly dismissed.

(15) Bank should arrange for a loan syndication (consortium). This is an arrangement through which ban come together to finance a specific project especially where the loan amount is larger. The guard against the risk of loss through default as a bank loss only its agreed share as the total amount and thus limits its loss

(16) Rescheduling of loan should be introduced. This will involve drawing up a new payment pattern, which will take a longer repayment period and give the borrower time to realize the some return with which to pay back.

(17) It is required finally that the bankrupts law be modified by the government to make it easier for bank to employ them for the purpose of debt recovery, from the forgoing. It is except that the incident of bad debt is on the up wing on the bank-lending portfolio and adversely affects the bank profitability, asset quality and efficiency.

It is hoped that the recommendation if adopted will go a long way towards minimizing the incident of bad debt in bank lending and induce better credit management procedure in HALLMARK BANK LIMITED.




Introduction tick good against which appropriate

1. What is the name for the address of the your bank.


2. What post in the bank do you occupy

(a) Area manager

(b) Branched manager

(c) Accountant

(d) Supervisor

(e) Specify

3. Dose the bank have definite laid down bank policy?

(a) Yes

(b) No

4. If the question 3 above is yes, how often is such policy received?

(a) Quatery

(b) Semi – Annual

(c) Annually and

(d) Others

5. Who is responsible for the establishment of or created policy and guideline in the bank?

(a) The managing director

(b) Chief executive

(c) The chairman

(d) Board of director

(e) The committee of senior managers

(f) Other

(g) Specify ______________________________

6. Is the appointment of the credit policy matter is affected by the ownership structure of the bank?

(a) Yes

(b) No

7. To what extent would say the amount o loan granted by the bank affect the banks profit?

(a) High

(b) Moderate

(c) Small

8. Given that commercial bank ply crucial role in mobilizing fund from surplus sector to definite. How do rank the following element to the amount of money granted as loans.

(5) = Very high, 4 = high, 3 moderate, 2 low 7 – very low

(a) Collateral

(b) Character

(c) Capital

(d) Capacity

9. Does your bank employ a credit securing techniques when considering a loan proposal?

(a) Yes

(b) No

10. Are your loan baked upon and are perfected by security to give full control of the bank?

(a) Yes

(b) No

11. Rank the following security in term of your perception of how it affects the amount of loan to intending borrowers

5) = Very high, 4 = high, 3 moderate, 2 low 7 – very low

(a) Landed property

(b) Life insurance policies

(c) Stock and shares

(d) Guarantee

(e) Lien

(f) Chamomiles


12. Do you agree that every loan should be covered by some of security?

(a) Yes

(b) No

13. What from of action dose the bank take to recover its money?

(a) Voluntary by the debtor

(b) Legal action not easy due to court injunction

(c) Reluctance of the bank to take appropriate action

14. How will you rank some of that factor that can course bad debt?

5) Very high, 4 = high, 3 moderate, 2 low 7 – very low

(a) Bad loan appraisal

(b) Business depression

(c) Diversion of loan

(d) Poor risk selection

(e) Over the lending to borrowers

15. Dose your bank employ the service of professional debt collector in the debt recovery?

(a) Yes

(b) No

16. Dose your bank have update data collection mechanism?

(a) Yes

(b) No

Credit Management And Bank Lending : (A Case Study Of Hallmark Bank Ltd In Nigerian)

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