Problem And Prospect Of Credit Creation By Commercial Bank (A Case Study Of Zenith Bank Plc)

Description

TABLE OF CONTENTS

TITLE PAGE

CERTIFICATION

DEDICATION

ACKNOWLEDGEMENT

TABLE OF CONTENTS

CHAPTER ONE: GENERAL INTRODUCTION

1.1 Introduction

1.2 Statement of the Research Problem

1.3 Aim and Objectives of the Study

1.4 Scope and Limitations of the Study

1.5 Research Methodology

1.6 Sources of Data

1.7 Significance or Justification of the study

1.8 Organization of the Study

CHAPTER TWO: LITERATURE REVIEW

2.1 Literature Review

2.2 Functions of the Various Departments

2.3 Central Bank and Credit Creation of Commercial Banks

2.4 Procedures for Creating Credit Facility

2.5 Reason for Credit creation by the Commercial Banks

2.6 Credit Management in Commercial Banks

2.7 Step in Credit Management

2.8 Principle and Practice guiding Lending at Zenith Banks

2.9 Credit administration and Securities acceptance to Zenith Bank Plc

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Brief Historical of The case Study

3.2 Restatement of the Research Question and Hypothesis

3.3 Procedure for Processing Collected Data

3.4 Research Methodology

CHAPTER FOUR: DATA ANALYSIS ANDTESTING OF HYPOTHESIS

4.1 A Brief Introduction of the Chapter

4.2 Presentation and Analysis of Data According to the Research Question

4.3 Problems encountered by Zenith Bank of Nigeria Plc as regard credit created

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Findings

5.2 Observation

5.3 Summary

5.4 Conclusion and Major Findings

REFERENCES

 CHAPTER ONE

GENERAL INTRODUCTION

1.1 INTRODUCTION

A commercial bank can be defined as an institution that accept deposits from customer and repay cash on demand. It can also be defined as financial institution that accepts deposits and other valuables from the public for safe keeping with the sole aim of making profit.

The idea of banking system was introduced in Nigeria 1892 with the establishment of an Africa banking co-operation. Another one was established in 1894 which was named British West Africa Bank. The British West Africa bank was later changed to chase merchant bank to become Standard Bank of Nigeria. In 1899, bank of 1917, Nigeria bank comes to existence but later, it was taken over bank of British West Africa in 1912. In 1917, it was the establishment of Nigeria Barclays bank.

The first indigenous bank came into existence in 1929, which was named Industrial and Commercial bank. Also, in 1931 witnessed the establishment of Nigeria Merchant Bank. Although, it was later closed down due to lack of funds, bad management coupled with large scale corruption.

Furthermore, the national bank of Nigeria was established on a sound footing but, due to greater post war activities, the bank was closed down. In addition between two survived bank which are; Africa Continental Bank (ACB) and Agbomogbe Bank which is now called Wema Bank Plc.

It was a booming era between 1957 and 1952 because eight banks were established but 1954, seven banks were closed down only Merchant bank survived. It was not long that the only surviving bank out of the seven that closed down in 1954 had its license withdrawn by the state government as a result of mismanagement, one misuse of government fund.

All banks in Nigeria were either owned by the state government or. federal government but this trend did not continue to the policy of privatization and commercialization embarked upon during Babangida’s Administration in 1989.

Commercial banks play very important roles in the allocation of fund to individuals and business organizations in the society.

One of the principal functions of commercial banks is the creation of credit facilities which is the process of distributing and disbursing of fund to potential user, at favorable terms and condition and making sure that the funds are effectively utilized to ensure the anticipation benefit to borrowing and lending banks.

Credit facilities are being enjoyed by the account holder i.e. individual and business organization respectively. It can be listed that traditional function of banks is financial inter mediation i.e. their real is concerned with the monetary aspect of the economy which involve the mobilization of fund from savers scattered in the society and there are transfer as a credit to investors.

There are average business entrepreneurs who could not or were able to raise enough funds from their trade for expansion purpose or from other sources like through friends and others.

Their last result therefore, is to source for fund from the commercial bank which play little to the plight of the borrower.

1.2          STATEMENT OF THE RESEARCH PROBLEM

The commercial banks in credit creation face some difficulties due to high level of illiteracy, which lead to many losses of funds. There is thus, a continued deterioration of the acuity of risk assets held by them. Commercial banks are generally the life wire and cornerstone of all economic and any nation and no economy within this present dispensation can survive without commercial bank.

The major factors that led to failure and distress of many commercial banks in Nigeria of recent is government frequent interventions. Despite the huge and various policies of the government on credit creation, the Nigeria economy seems not to have shown any meaningful development in terms of credit utilization.

The research work is there after embarked upon to address the various problems associated with credit creation in commercial banks and how those banks can reduce the incidence of bad debts and poor management of credit facilities. If this situation is not  properly addressed, the ability of the commercial banks in meeting their customers financial needs and contribute to economic growth may not be achieved.

1.3          AIMS AND OBJECTIVES OF THE STUDY

The aims of this research are to know the purpose of creating credit by the commercial banks which include the following:

1. Increasing the purchasing power of the people.
2. Increasing the volume of money in circulation.

iii.            It enhances industrial expansions.

1. It helps a business man in his day to day activities.
2. It helps in development of agricultural sectors.
3. It helps in financing both foreign and home trade.

1.4          SCOPE AND LIMITATION

This study will be concerned with the procedure of creating credit facilities, the administration and problems encountered by commercial bank on credit creation and also with collection procedure.

Zenith Bank Plc as a case study, the bank was established in 1917 and since its establishment in 1917, the bank has stood out strongly as a resilient institution which has served as variable in the financial intermediation process in Nigeria Financial System. So, Zenith Bank was visited to collect the necessary material and interview a cross section of their customers.

The cost of writing material aid other stationeries are also one of the constraints, facing the researcher.

Another limitation was sufficient for collection of data in writing the project work and combining it with academic work. Also the, reluctance of some respondents to let out certain “secret’ about the organization is reason for limitation to case study.

1.5          RESEARCH METHODOLOGY

Research methodology is processes of finding out a solution to a problem through a research work problems are identified and recommendations are suggested.

According to Osuala (1982) ‘Research is the process of arriving at dependable solution to problems through the planned and systematic collection analysis, and interpretation of data”.

Data is information often in numerical form which has been collected for statistical purpose. In this study, the word data is used to refer to fact, figures or pieces of information pertaining to Zenith Bank of Nigeria Plc.

1.6          SOURCES OF DATA

The basic sources of data employed in carrying out the research work are both from primary and secondary data model to achieve the objectives of the study.

(i)            The Primary Data: This consists of data collected by the researcher through oral interview with the staff members of credit creation department of Zenith bank plc, Unity Ilorin branch. Personal interview is one of the primary data collection techniques used in research methodology.

Interview, enables direct contact between the researcher and the respondents.

(ii)           The Secondary Data: This is the main source of data collected for the purpose of the study. This include the review of the amount report at Zenith Bank of Nigeria, Plc.

The secondary data shows the numbers of credit created per annual, this was collected from the credit creation department of Zenith Bank Plc, Ilorin Unity branch. It shows a general upward increase in the number of numbers of credit creation.

1.7          SIGNIFICANT OR JUSTIFICATION OF THE STUDY

The significant of this study is to examine the impact of credit management. It intends to show the risk of return relationship that gives services through credit creation. This study will highlight the purpose of various types of credit which the commercial bank gives. Basically, through this study prospective credit user will understand the types of credit which commercials bank grant.

Zenith Bank of Plc, will examine with a view to provide way by which bad debts crisis can be minimized and lending structure strengthening and consequently show the macro-economic implication associated with credit creation management in commercial bank.

The recommendation of this study will be of immerse advantage to the banking industry in particular and the Nigeria economy as a whole. This study may also be referred to in the nearest future by researchers who may be willing to go into related study in which it can be used as a source in the literature review.

1.8          ORGANIZATION OF THE STUDY

This simply gives the use of a clue to know how the researcher report will be arranged for easy and proper organization; the research will be segmented into five chapters as follows:

Chapter one contains the background of the study, statement of the problem, justification of the study, scope of the study, research methodology, source of data and organization of the study.

Chapter two centers on related Literature having direct bearing to the study by different authors. This will be reviewed with emphasis on theoretical background of the study and the state of knowledge and research on the topic.

Chapter three which is the methodology, focuses on the data collected and statistical tool used in analyzing the data.

Chapter four presents the result of this study based on the result, the test of hypothesis and the interpretation. It also reveals the analysis of data collected.

Chapters five contains the summary of. the work and concludes this study and make recommendations for further research.

CHAPTER TWO

2.1 LITERATURE REVIEW

According to J. Kick Bark, the process of expansion might also occur because of improvement but a channel of communication between potential saving and potential real investment.

Capital investors while insuring the liquidity of the surplus units place deposits with banks.

This reasoning augurs well both for the Keynesian model of economics development with basis :r investment engineered growth and the pure classical micro economics developed which stress increasing voluntary saving.

Both complements each oilier in the sense that units with surplus funds provided bank deposits that could be used for credit creation through borrow red capital without waiting to save up equivalent amounts.

David D. Goachur bock of economic according to miss-contribution that bank deposit of come into existence when either a customer makes a deposit of cash at bank or a bank creates a credit(deposit) as the counterpoint to purchase of an asset(usually loan).

When a member of non-bank private sector puts cash into a bank deposit, which it may be assured in pr1 of We money supply but as the cash removes from circulation, the act in itself does not raise the total money supply. The effect is merely to swap one type of money asset for another.

The creation of money by banks occurs when they create deposit to lend customers. Basically, if an individual goes to his bank and succeed in obtaining loan, it is improper that he should be given cash directly. The usual occurrence is that the borrowers account is credited with the amount of loan. This effectively a ledge early tends to the creation of bank money.

The borrower is then able to spend the fired by drawing cheque  against the bank’s created deposit, which is virtually as good as cash, due to the accepted norms of the modern financial system.

However, the bank cannot create deposit without money as experience show that a portion of bank deposit (whether the original cash depends made by customers or the deposit created by the bank as the counter part to loan) are likely to be drawn in a cash at some stage.

There are criticisms options and ideas put forward for mode operation of commercial banks. There were many average business entrepreneurs that could not be able to reserve enough funds from their trade for expansion purpose or from other sources like through friends and others. Their last result is to get funds from commercial banks where they pay little attention to the plight of borrowers. It is also necessary to note that commercial banks favours short-term lending, so funds advances on overdraft are theory repayable on outstanding balance on a daily basis.

Commercial banks grant overdraft facilities to balance customers, large, corporate bodies and medium and small scale industries. It has been generally noted that the rate of interest charge differs from one bank to another.

This is so because the amount of money given out as loan and advance differ from one bank to another.

Examples of credit facilities include loan, advance, overdraft, commercial paper, bank acceptances, bill discount, guarantee and uses e.t.c.

Bank credit risk can be classified as:

1. Performing
2. Non-performing

Credit facilities are deemed to be performing of payment of both principal and interest when they are up to dare in accordance with the agreed repayment term.

A credit facility is deemed as non-performing when any of the following condition exists:

1. Interest of principal is due and un-paid for 90 days or more.
2. Interest payment equal to 90 days interest or more has been capitalized, reschedule or rolled over into a new loan before a credit facility already classified as non-performing when the borrower must effect cash payment such as outstanding unpaid does not exceed 90 days.
3. Substandard: credit facility can be regarded as substandard if unpaid principal or interest remains outstanding for at least 90 days but less than 180 days and are not occurred by legal title at least of perfected realizable collateral in a collection realization.
4. Doubtful and credit facility: can be called doubtful if unpaid principal and interest remains outstanding for a least 180 days but less than 360 days and are not occurred by legal title at least asset or perfect realization collateral in a process of collection realization.
5. Cost facility: are classified as lost where in paid principal or interest remained outstanding for 360 clays or more and are not scored by legal title least asset or perfect realization collateral or realization.

2.2          FUNCTION OF THE VARIOUS DEPARTMENTS

The main structure of the Zenith Bank Plc consists of division. Within are administration division, finance division, operation division and corporate finance division.

ADMINISTRATION DIVISION

The administration division of Zenith Bank Plc comprises of two main departments while materials service department has three main sections, personnel department has four:

1. Materials Supply Services Department

This department is divided into the following sections:

1. Materials Supply
2. Premises
3. Public Relation
4. Materials Supply Section: This is in charge of provision and maintenance of machine and equipment for both new existing branches and head-office department. It is also in charge of purchasing and maintenance of motor vehicle for the smooth running of bank operation, printing and stationary procurement for the branches and head office.
5. Premises: Purchasing (leases of land/building for new branches and relocation of premises) maintenance repair of premises of the head office and branches commissioning of new branches.
6. Public Relation: Public relations practice is art and social science service that concerns the following care objectives.

Projecting and practicing positive corporation image

1. Monitoring changes
2. Analysis trends

iii. Predicting their consequences

1. Counseling organization traders
2. Implementing planned project.
3. Identifying the organization target public

This section, as a maintenance at all image or the bank. This section is expected to be established and maintain a good relationship based on mutual confidence with the public by keeping it informed of our corporate achievement and of all matters relating to that bank operating and activities.

The public relations section is divided into the following broad subsections.

1. Publicity and promotion
2. Press relation

iii.            Publication corporation advertisement.

1. Operation general service incorporating entertainment, travel, hotel and management.
2. Operational, postal noisiness, rates on adverts and bill boards.
3. Personnel Departments

Personnel department is divided into four sections namely;

1. Manpower planning
2. Employees services
3. Staff Training
4. Manpower Planning: it is a part of bank’s human resources objectives to make concerted to attract and retain in its services the best manpower available. This section ensures that this objective is re1ized; also this section is responsible for systematic planning prospect compatible with experience abi1iy and potential of sail.
5. Staff Training: In pursuance of its human resources objectives, the bank provides opportunity for continuous training programme. In house training is carried out at the banks staff training centre presently located at Abule Egba in Lagos state.
6. Finance Division

The finance division of the bank R divided into nine major parts for effective performance.

1. General account
2. Treasury aid financial
3. Insurance.
4. Inter-branch reconciliation.
5. Data processing.
6. Budget.
7. Clearing
8. Return
9. CBN Reconciliation.
10. General Account

Keeping of accounting records, head office accounts section keeps all the accounting records of the bank.

These include the following:

Rising of Entries: Keeping of all incomes and expenditure records relating to head office department and preparation of a profit and loss statement for the head office monthly.

Keeping of all records relating o the assets at the bank and maintaining a well detached fixed assets register.

Keeping of the records and monitoring of branches records for the purpose of preparing the banks accounts at any point in time.

5. Treasury and Financial Services

The treasury section of the finance division is responsible among others for generation of management information  in form of weekly statistics of the performance of that bank in various areas of the treasury operation.

Managing the cash flow of the bank with the view to ensuring that adequate liquid funds are available for the bank’s operation at any point in time, investing excess fund while trying to balance between the most liquid money market instrument and most profitable marketing for deposit both from public and other banks.

6. Credit and Marketing Department Advance and Recovery Section

This department has a section specially designed for recovering of details owned by the bank by its customers. It is the duty of this section to contact debtors on the payment of debts and also to lie with legal department.

7. Corporate Finance Section

This section is engaged in providing corporate finance services such as:

1. Participation, trade finance
2. Export finance

iii.            Equipment leasing

1. Advance to corporate client e.t.c

CREDIT

Lending is a primary function of banking. This is because banks can provide comprises the banks of its access provide major source of its earning and profit.

It is the primary duty of the credit and marketing department to ensure that the banks lending are approved and then administered in accordance with banks laid down credit policies and procedure and the government guidelines.

2.3          CENTRAL BANK AND CRLD CREATION OF

COMMERCIAL BANK

 

An individual bank’s ability to grant credit to customer depending largely on the policy’ embarked upon by the central bank of any country, which is the apex system and other factor.  Such factors include; possibility of draw to other banks, collateral security available and the level of deposit.

Central bank is defined according to the research department (1979) as apex of banking system in every country. It is the government representative in banking sector and it acts mainly as the banker to the government.

 

CONTROL OF COMMERCIAL BANK BY CENTRAL BANK

By control, it means that the central bank controls credit policy of commercial bank. The central bank controls the supply of money in circulation using some of the following measures:

1. The bank rate
2. Open market operation
3. Liquidity ratio
4. Directives
5. Special deposit
6. Moral suasion
7. Funding
8. The Bank Rate: This is the minimum rate at which the central bank discount or rediscount bills. Commercial banks rate of interest depends on the bank rate. This is the higher or the lower the bank rate, the higher or the lower the bank interest rate to check the economic activities by curtailing bank lending,.
9. Open Market Operation: It involves the sales or purchase of security and treasury bill according to the state economics at that particular time. When it is noted that if there is too much of money in circulation, leads to inflation, the central bank hence withdrawing part of the excess money supply.

On the other hand, when ‘there is too little money in circulation, leads to deflation, the central bank bill from commercial bank hence releasing more money mobbed into circulation.

1. Liquidity Ratio: By law, commercial banks are expected to keep put their deposit meet customers demands. If the central bank directs the commercial banks to part of their deposit to meet customers that is, a higher ratio, commercial banks such directives has the nations economy at any given time.
2. d. Directives: These are direct instructions from the central bank to restrict their lending.
3. Special Deposit: Commercial banks are required to deposit a given percentage of their deposits with central bank. The special deposit expected from the bank when there is inflation and it increases as the condition improves.
4. Moral Suasion: The central bank can appeal or suggest to commercial banks to check their lending habit in times of inflation.
5. Funding: It is the method of converting short term loans into a medium or long term loan. It is usually carried out when the central bank founds that condition have not improved enough for short term loan to be paid. The short term loan in this case is the treasury bill sold to commercial banks for the purpose of withdrawing excess money from circulation.

 

2.4          PROCEDURE FOR CREATING CREDIT FACILITY

Different procedures are followed in the creation of credit facility.  The facility may be a loan and advancement or an overdraft.

First, when applying for loan, the bank issues a form to customer. The form is called facility form; it contains all the necessary information needed  by the bank about the customers like; name, address, amount and purpose of loan, the name of guarantors and other helpful information.

After the customer must have filled the form and send back to the manager who .in turns sends it to credit control department for assessment and approval. Before the facility can be approved, the customer must have opened an account with the bank for a minimum of six months.

The account he operates should be a current account according to the bank’s policy. After this the bank makes it known to the customer their rate of interest and if it is agreeable to the customer the loan can then be approved, after providing the collateral security demanded from customer seeking loan or advancement from zenith bank plc such as share certificate and life policies or building which have more than or equals the value of the amount of loan requested for after all those conditions have been met, the next is to consider the time of repayment i.e. when it may be repaired by the customer.

Normally in Zenith bank plc, the term of repayment of a loan depends on the amount requested for. For a very large sum of money say from #200.00 the term of repayment may range from 2-5 years but for smaller sums, it may take for some months to within a year.

2.5          REASONS FOR CREDIT CREATION BY COMMERCIAL BANKS

As deduced from the interview conducted with the customers of the bank, diverse reasons were given to why they applied for loans and advances, some said they sought loan for transaction purpose e.g. to purchase a new car, a new house e.t.c. others say, the purpose of their requesting is for small scale business.

Another reason given, for the request of these is to finance future consumption which includes having the loan to meet contractual obligations like Insurance premium.

However, some elderly customers (between 45-65 years of age) revealed that they used to obtain the loan for medical treatment.

2.6 CREDIT MANAGEMENT IN COMMERCIAL BANKS

Credit management involves the initial investigation of potential credit customers and objectives process of channeling funds to ultimate users in favourable term and condition and ensuring that these funds are efficiently utilized to satisfy the anticipated profit to the borrowed and lending bank.

2.7          STEP IN CREDIT MANAGEMENT

Credit Planning

This involves the process of goals and objectives made and method of fore stalling and defaults in future credit marketing. Commercial banks go on promotion roles and they interact with customers and educate them on the available assistance they enjoy in terms of good loans and advances, they also embark on advertising opportunity that bound in their banks so as to win more customers.

2.8          PRINCIPLE AND PRACTICE GUIDING LENDING AT ZENITH BANK

In spite of the fact that lending depends on a variety of factors e.g the levels of deposits, collateral security available, possibilities of cash to other bank experience e.t.c.

Zenith bank still has some principles guiding their ability to create credit facilities e.g. purpose, character and security.

There are some of the advances granted by the bank loan to different kinds of account holders e.g

1. Sole proprietor account
2. Partnership account

iii.            Companies account

1. Industrial account

Some of the principals guiding is:

1. Safety: This is the most important of all the principles as far as credit is concerned. As a result of the importance of safety, banks pay much attention on the character and integrity of the borrower. The borrower must be able to prove that he or she will pay back the money granted to him as at stipulated time from cash generated by him i.e. borrower. The borrower must be able to provide acceptable security which will serve as something to fall back on in case of default.
2. Suitability: This means that the borrower must be able to provide an acceptable assessment so as to ensure that the purpose of the loan does not conflict with the economy and monetary of the monetary policy (1985).

“Banking lending is highly” regulated and controlled by the central bank of Nigeria. This is done by the issue of the annual credit allocation guiding the banks lending.

1. Profitability: It is an established fact that the main purpose behind the establishment of banking business is profit maximization. Therefore, any facility credit must be expected to yield profit to the bank. The banks make profit as a result of changing interest of loan advance granted.

2.9          CREDIT ADMINISTRATION AND SECURITIES ACCEPTANCE TO ZENITH BANK PLC

Credit administration is the way by which credit is being administered and it involves the processes mentioned below:

1. Granting of loans
2. Receiving of loans

iii. Monitoring and execution of loans

 

1. Granting of Loans

Before the loan is granted the applicant has to apply for the loan by obtaining a form called FACILITY FORM. This facility form will be issued to him/her and it contains information like name, address of applicant, amount and purpose of the facility. The type of facility whether it is a loan, advance or over draft and also the name of the guarantor is written in the form and found to be eligible the loan will be granted to the applicant.

1. Receiving of Loans

The loan can only be recovered after the term of payment is due. When the time of payment elapses, the guarantor will be called upon to pay up.

iii. Monitoring and execution of loans

After the loans have been granted, the banks monitor the applicant and see that the loan granted to applicant used on legal project. A bank does not grant credit facilities for any project that are illegal e.g. smuggling.

SECURITIES ACCEPTANCE TO ZENITH BANK PLC

As mentioned earlier, every lending proposition must be good that the idea of security is secondary. The branch manager of Zenith Bank Plc, only ask for security in case the business plan suffer a set back.

In Nigeria, law makes it mandatory to obtain security before loan and advances can be granted by the banks. The banking amendment act in 1972 provides that in manager or other official of licensed bank shall grant any advances loans or credit facility to any person unless it is authorized in accordance with the rule and regulation of the bank. These are the current laws that commercial banks must comply with before granting a credit facilities.

1. Banks and other financial institution decree 1991 (BOFID)
2. Prudent guidelines for licensed bank 1990.

Zenith Bank accepts the following securities in creation of credit facilities.

1. An assessment of a life policy.
2. Stock and share certificate
3. Guarantee
4. Assessment of Life Policy

This is one of the securities acceptances to zenith bank i.e. accepting an assurance company is registered under the insurance act of 1976 which become effective on 27th December 1991.

2. Stock And Share Certificate

This is also acceptance to zenith bank as a security for loan to be granted. The mortgage of stock and share can be either legal or equitable. A legal mortgage is effective by taking steps to transfer the share to be registered in the name of the bank. Zenith bank plc cannot accept its own share as a security.