The Effect of Loan Management in Relation to Banks Profitability

The Effect of Loan Management in Relation to Bank's Profitability

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Reference ID: PS-11337-TM

DEDICATION

This research material titled “The Effect of Loan Management in Relation to Bank's Profitability” is dedicated to God for his enabling grace, and to all computer enthusiasts who contributed to make life a pleasant experience during my research documentation.

ACKNOWLEDGEMENT

I extend my sincere gratitude to all those who contributed to the completion of this project. Special thanks to my Supervisor (Name of your Supervisor), the Head of Department (Name of your HOD), the Lecturers in the department of Banking and Finance (BF), Book Authors and Profound Scholars of existing or related project material on “The Effect of Loan Management in Relation to Bank's Profitability” for their invaluable guidance, support, and expertise throughout the journey.

I am also grateful to your study area (mention any funding organizations, if applicable) for their financial assistance. This research would not have been possible without the encouragement and assistance of some stakeholders (mention any mentors, teachers, or colleagues). Additionally, I would like to acknowledge the understanding and patience of my family and friends during this endeavor. Your unwavering support has been a constant source of motivation. Thank you all for being part of this meaningful endeavor.

TABLE OF CONTENTS

PRELIMINARY PAGES


CHAPTER ONE

INTRODUCTION


    CHAPTER TWO

    LITERATURE REVIEW

    • 2.1 Introduction
    • 2.2 Conceptual Review
    • 2.3 Theoretical Framework
    • 2.4 Empirical Studies

    CHAPTER THREE

    RESEARCH METHODOLOGY

    • 3.1 Introduction
    • 3.2 Research Design
    • 3.3 Population of Study
    • 3.4 Sampling and Sampling Technique
    • 3.5 Validation of Research Instrument
    • 3.6 Method of Data Collection
    • 3.7 Method of Data Analysis
    • 3.8 Questionnaire Administration
    • 3.9 Ethical Consideration
    • 3.10 Statistical Analysis

    CHAPTER FOUR

    DATA ANALYSIS, RESULT AND DISCUSSION

    • 4.1 Introduction
    • 4.2 Presentation and Analysis of Data
    • 4.3 Re-statement of Research Questions
    • 4.4 Test of Hypotheses
    • 4.5 Discussion of Findings

    CHAPTER FIVE

    SUMMARY, CONCLUSION AND RECOMMENDATION

    • 5.1 Introduction
    • 5.2 Summary of Findings
    • 5.3 Conclusion
    • 5.4 Recommendation
    • 5.5 Suggestion for Further Study

    REFERENCES

    APPENDIX A - “QUESTIONNAIRE”

    ABSTRACT

    This study analyzes “the effect of loan management in relation to banks’ profitability” A cases study of First Bank Nigeria Plc Enugu state. This study reveals why banks are into loans and how the loans granted by banks could affect the profitability of the bank and also how it is being managed.

    The methodology of the study, percentage statistics was used in analyzing responses from questionnaires which was distributed to bankers, bank auditors and customers in other to know how the management of loans makes profit for the bank.


    The Effect of Loan Management in Relation to Bank’s Profitability

    CHAPTER ONE


    Introduction

    1.1 Background of study

    In any economy especially developing ones like Nigeria, the role of banking sub-sector, is a very crucial one. The principal economic function of banks is making loans available to fund consumption and investment spending by business, individuals and units of government. They mobilize funds of surplus economic units and then convert such funds as credit facilities to the deficit units. Proper management of loans and advances is therefore required; however due to the fact that it is the most profitable of bank operations and accounts for about 45% of banks assets; it is also the most risky of the bank business.

    The process of lending begins from when the loan is granted and managed to make sure that it is judiciously used and within the framework of the agreement so that it can be repaid back with interest. Therefore, a bank needs to be very careful in taking all the necessary steps to ensure that the loan and advances are given out only when it is almost sure that repayment will not be a problem. Most banks have failed and even more are faced with distress as a result of bad and doubtful debts and loss of loans, illegal manipulations of loans misguided lending policies or an unexpected economic downturn (Rose, 1996), Loan management could be defined as the managerial ability concerned with the planning, execution and controlling of bank loans and advances (Nwankwo, 1980). It is a broad spectrum of banking activities encompassing mobilization of surplus funds from owners and lending same to borrowers or deficits on agreed terms and at a profit.

    In addition, it also involves packaging and management of loans through their repayment and part repayment stages. The most widely acknowledged tool for effective management of loan is a well articulated and credible policy which serves as a guide to all those that handle the management of the loan and advances provided to the customers. If good loan management is not instituted, the good loans can turn bad (Adewunmi, 1983). One cannot generalize a measure of authenticity about lending practice because the bank’s lending practice is more variant than a replica of their banks. Moreover, lending practice depends on a number of varying factors such as the economic environment of lending, the experience and expertise of the banker, the “Tradition” and “culture” of the individual bank and the personality of the individual involved. “Two lending officers sitting side by side in the same bank may react differently to the same loan request” (Rose, 1996). Despite all these, a well formulated loan policy should have the general objective and modalities for loan management and guidelines for credit analysis. The popularly known and accepted cannons of lending are factors that are considered by banks in assessing a loan request.

    Reed et al (1980) views these factors as the ingredients that determine the lending officer’s faith in the debtor’s ability and willingness to pay obligation in accordance with the terms of the loan agreement. Many authors call it the “6 c’s of lending” which are

    • Capacity
    • Collateral
    • Condition
    • Capital
    • Character.
    • Cash flow

    Aside these principles, there are some factors and principles, which also affect the way and manner in which each bank manages its loans. They are called the “5p’s of lending”. These are:

    • Personal factor analysis
    • Purpose analysis
    • Payment analysis
    • Protection analysis
    • Perspective analysis

    These principles are important and if lenders follow them, the incidence of bad debts could be reduced to the barest minimum. Moreover, the principles are applicable to every type of lending, from the personnel borrowing to the borrowing to buy aircraft and ship.

    Personal factor analysis:

    Here, the borrower’s attention should shift the human resources, who are to coordinate the various factors of production in achieving the desired purpose of the loan. Unfortunately, bankers do not give much attention to this, perhaps because human beings are the most difficult factor to predict.

    Purpose analysis:

    A loan purpose, which is not consistent with the borrower’s funding needs, should not be granted n matter the attraction of profitability of the proposal. Company’s funding needs should fall into any of the following categories;

    • Support or acquire assets
    • Replacement of liabilities
    Payment analysis:

    This is the core of the credit analysis because, it is the essence of any other analysis specifically here, and we would talk about the payment source, the direction, volume and timing. This can only be done if the banker’s understands the dynamics of the customer’s transaction flow. The lender should familiarize himself with the customer’s operating cycle. It requires the examination of the past cash flow as a basis for projecting future cash flows. If there were any significant changes in the cash flows, it would be because there were significant developments such as mergers, acquisitions or reinvestment.

    Protective analysis:

    A good lender would need to protect him against unforeseen events. He could not be the only to take all risks. He should ask for receive a good collateral to support his lending. Collateral should be analyzed as to its ownership, control, location and market ability. These four factors can affect the reliability or usefulness of the collateral as a source of protection.

    Perspective analysis

    Here the borrowers should be concerned with the future outlook of the transaction to be financed. The lending bank should evaluate the risks that have been identified and what can be done to militate them.


    1.2 Statement of the problem

    The bank’s ability to generate significant profit from loans and advances is constrained by the regulatory authority (CBN). In view of this, the bank must as well achieve their objective of profitability through the institution of sound credit appraisal framework in their lending operations.

    The problem encountered in loan management is due to the default in the repayment of this loans, inexperience staff to manage this loan and invaluable collateral provided to cover this loans been given out, non performing credit and so on.

    Hence, the problem of this study revolved around loan management and review process as it affects the profitability of first Bank of Nigeria, since poor management of loan portfolio could adversely affect bank’s profitability.


    1.3 Objectives of the study

    The effective performance of lending function of commercial banks has loans support and promote growth of new businesses and jobs within the bank’s trading territory and also promote economic liability (Rose, 1996). The prime objective of the study is to appraise the effects of loan management on the profitability of banks. However, the study also intends to;

    1. Examine the benefits of effective loan management on profitability of banks.
    2. Identify the relationship between an effective loan management framework and the profitability of banks.
    3. Show the extent to which the relationship in (1) favors the achievement of the profit maximization of the banks.
    4. To make the policy makers realize the importance of formulating sound loan management framework for the bank.

    1.4 Research Questions

    On the premises of the objective of the study with the aim of providing a solution to the problem identified earlier, the study attempts to provide answers to the following research questions.

    1. Is there any relationship between an effective loan management framework and the profitability of banks?
    2. Is there any relationship between loans and advances of the bank and its asset base?
    3. Does sound credit analysis the incidence of the bad debts in banks?

    1.5 Research hypothesis

    The following hypothesis are formulated and tested above:

    Ho: represent the null hypothesis while Hi, represent the alternative hypothesis.

    Hypothesis one
    • Ho: there is no relationship between an effective loan management framework and the profitability of banks.
    • Hi: there is a relationship between an effective loan management framework and the profitability of banks.
    Hypothesis Two
    • Ho: there is no relationship between loans and advances of bank and its asset base.
    • Hi: there is a relationship between loans and advances of banks and its asset base.
    Hypothesis Three
    • Ho: Sound credit analysis does not reduce the incidence of bad debts in banks.
    • Hi: Sound credit analysis reduces the incidence of bad debts in banks.

    1.6 Scope of the study

    This research work will cover the appraisal of customers request for loan and advances with associated requirements of First Bank of Nigeria Plc Enugu branch and how these credits have contributed to the profitability of the bank. This study will access the performance of First Bank loan portfolio between the years 2006-2009.


    1.7 Significance of study

    This study will assist the banks credit department to know the qualities the customer has to possess before loans and advances are granted to them. Furthermore, this study will enable credit department to understand the causes of their problems and losses of profit in the area of loan management, there by being in a position to increase their profit, since bad debts will be greatly minimized. Finally, this study will be a guide to prospective borrowers as to what the banks expect them to satisfy before any credit is given.


    1.8 Limitations Of Study

    There is no situation without its own limitations and this research work is not an exception. The major problem encountered by the researcher is the limited time given within which to gather and analyze data because this topic is based on what is happening presently in the banking system today. Also the researcher was also faced with the problem of finance as well as the unpreparedness of the respondent to disclose some information to the researcher. Also there is the problem of transportation from one place to another and also the study area. Other problems include physical problem such as the energy used in carrying out this work and because it was carried out when normal school activities were on, the researcher had to devote more time in order to meet up with the time limit for the submission of this work.


    1.9 Definition of terms

    Loan and advances

    It refers to primary earning of the bank which is created when banks lend funds to a customer and in return gets a promissory note from the customer promising to repay the interest and the principal outstanding.

    Loan management

    It is the art of managing loan portfolio with a view to identify non- performing facilities and reduces its exposure.

    Credit policy

    This will contain all the relevant issues relating to the credit administration of the bank.

    External constraint

    It refers to the general, social and economic environment in which a bank operates, that imposes restrictions on loan expansion.

    Internal constraint

    These are the internal constraints that are internal to the bank and which limits their operation in the industry.

    Profitability

    It refers to the ability of the bank to generate regulate a sustainable returns on its assets in the form of interest income, service income and investment income.

    CHAPTER TWO

    2.0 Literature Review

    2.1 Introduction

    This chapter focuses on the review of related literature. A literature review includes the current knowledge as well as theoretical and methodological contributions to a particular topic. It documents the state of the art with respect to the topic you are writing. It surveys the literature in the topic selected. In this research work the literature review includes the …

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