1.1 Introduction
Credit policy refers to the guidelines and principles established by a financial institution to regulate the granting, monitoring, and recovery of loans and advances. It defines the conditions under which credit is extended, the procedures for assessing borrowers' creditworthiness, and the mechanisms for controlling credit risk. In the banking sector, an effective credit policy is essential for ensuring that loans are granted to qualified customers and that the risk of default is minimized (Rose and Hudgins, 2013).
Bad debt, on the other hand, represents loans and advances that have become unrecoverable due to borrowers' inability or unwillingness to meet their repayment obligations. In the context of banking operations, bad debts are commonly reflected as non performing loans and constitute a major threat to bank profitability, liquidity, and overall financial stability (Sinkey, 2012).
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, limitation of the study and definition of terms.
1.2 Background of Study
Historically, credit policy and bad debt management in Nigerian banks is closely tied to the evolution of the banking sector in the country. According to Sanusi (2011), formal banking in Nigeria began in 1892 with the establishment of the Bank of British West Africa, which primarily served colonial trading interests. Over time, indigenous banks emerged, and by the post-independence era, banks had begun to play a more active role in national economic development through credit provision and mobilization of savings. Adeyemi (2011) reported that weak regulatory oversight and inadequate risk management practices contributed to the vulnerability of banks to bad debts. The Central Bank of Nigeria (CBN), established in 1958, gradually introduced guidelines aimed at standardizing lending practices, including the formulation of credit policies and loan monitoring procedures (Adeyemi, 2011).
The effectiveness of banks in achieving their financial objectives is largely influenced by the quality of their credit management practices. According to Rose and Hudgins (2013), credit policy provides the framework for evaluating, granting, and monitoring loans to ensure that banks minimize the risk of default. Properly structured credit policies guide banks in selecting creditworthy borrowers, determining loan terms, and implementing recovery mechanisms to protect their assets.
It has been reported that bad debt continues to pose a significant challenge to banks in Nigeria, limiting their profitability and threatening the stability of the financial system (Sanusi, 2011). Poor loan recovery and non performing loans are cited as major factors that undermine the capacity of banks to provide sustainable credit to the economy. Banks that fail to implement effective credit policies are particularly vulnerable to the accumulation of bad debts, which ultimately reduces liquidity and shareholders' value (Owojori, Akintoye, and Adidu, 2011).
Several scholars have asserted that the Nigerian banking sector, despite regulatory reforms and periodic restructuring, still faces systemic challenges in credit management. According to Adeyemi (2011), weak internal controls, inadequate risk assessment, and lack of adherence to established credit policies contribute significantly to loan defaults. He further stated that these weaknesses impede banks' ability to maintain healthy loan portfolios and sustain long term profitability.
It has also been affirmed that effective credit policy implementation is directly linked to the reduction of bad debts and improved financial performance. Sinkey (2012) contended that banks that adopt comprehensive credit appraisal, continuous monitoring, and timely recovery measures experience lower incidences of non performing loans. Similarly, Ezeoha (2008) reported that banks with strict adherence to credit guidelines are better able to manage credit risks and maintain stable financial positions (Ezeoha, 2008). Union Bank of Nigeria, one of the oldest and most prominent commercial banks in the country, has been actively involved in extensive lending activities. However, reported cases of loan defaults and non performing loans indicate gaps in the practical enforcement of credit policies (CBN, 2020).
Researchers have asserted that studying credit policy effectiveness in such banks is critical to understanding the factors that influence bad debt management and overall financial stability. This study is set against the backdrop of these challenges, seeking to explore the effect of credit policy on bad debt management in Nigerian banks, with particular focus on Union Bank of Nigeria.
1.3 Statement of Problems
Investigation revealed that the effectiveness of this function is strongly influenced by the quality of credit policies adopted by banks. Weak or poorly implemented credit policies have been associated with rising levels of bad debts, which continue to threaten the stability and profitability of Nigerian banks (Adeyemi, 2011). As bad debts increase, banks face reduced liquidity, declining earnings, and erosion of shareholders' funds, which undermines public confidence in the banking system (CBN, 2020).
Union Bank of Nigeria, like many other deposit money banks, has been involved in extensive lending activities aimed at supporting economic development. However, the persistence of bad debt cases raises concerns about how effective its credit policy is in managing credit risk. Poor adherence to credit policy standards, political influence, inadequate risk assessment, and weak internal controls are factors that have been identified as contributing to bad debt accumulation in Nigerian banks (Owojori, Akintoye, and Adidu, 2011).
Furthermore, a well structured and strictly enforced credit policy is expected to improve loan quality, enhance recovery performance, and reduce the incidence of bad debts. When credit policies are properly aligned with risk management practices, banks are better positioned to identify creditworthy customers and minimize loan defaults. The challenge therefore lies not only in having credit policies but in ensuring their effective implementation and monitoring within the banking system. It is against this backdrop that this study seeks to examine the effect of credit policy on bad debt management in Nigerian banks, with specific reference to Union Bank of Nigeria.
1.4 Aim and Objectives of Study
The aim of this study is to investigate the effect of credit policy on bad debt management in Nigerian banks, using Union Bank of Nigeria as a case study. To achieve this aim, the study has the following objectives:
- To examine the effectiveness of Union Bank's credit policy in controlling bad debts.
- To evaluate the impact of loan appraisal and monitoring procedures on bad debt management.
- To identify the challenges in implementing credit policies within the bank.
- To propose strategies for improving credit policy enforcement to reduce loan defaults.
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:
- How effective is Union Bank's credit policy in controlling bad debts?
- What is the impact of loan appraisal and monitoring procedures on bad debt management?
- What challenges does the bank face in implementing credit policies?
- What strategies will improve credit policy enforcement and reduce loan defaults?
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.
- H0: There is no significant relationship between credit policy implementation and bad debt management in Union Bank of Nigeria.
- H1: There is a significant relationship between credit policy implementation and bad debt management in Union Bank of Nigeria.
1.7 Significance of Study
It is believed that at the completion of the study, the findings will assist bank management in designing and implementing strategies to improve loan recovery and financial performance. The study will also create awareness among bank customers regarding responsible borrowing and the importance of meeting repayment obligations.
Furthermore, customers will be educated on responsible borrowing practices, which will promote financial discipline. In addition, investors and shareholders will benefit from enhanced financial stability and profitability of banks due to better credit management.
Lastly, academic researchers and students will have a reference for studies on credit risk and banking operations in Nigeria.
1.8 Scope of Study
The study focuses on the effect of credit policy on bad debt management in Nigerian banks, with Union Bank of Nigeria selected as a case study.
The research is limited to the operational branches of Union Bank in Lagos State, covering employees involved in credit appraisal, loan monitoring, and recovery processes. The study considers bank policies, regulatory guidelines, and the practical challenges of implementing credit management strategies within the selected branches.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- 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.
- 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).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Credit Policy: A framework of rules and procedures set by a bank to guide loan approval, monitoring, and recovery. It is designed to minimize credit risk and ensure financial stability (Rose and Hudgins, 2013).
Bad Debt: Loans or advances that have become irrecoverable due to the borrower's inability or unwillingness to repay, often recorded as non performing loans (Sinkey, 2012).
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