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Appraisal of Credit Management and the Incidence of Bad Debts on Commercial Banks in Nigeria: A Case Study of First Bank of Nigeria PLC, Abakaliki Branch





Commercial Banks play a vital role in the development of the Nigerian economy. They mobilize funds from the surplus spending units in the economy, in the form of bank deposits and lend such funds to the deficit spending units, in form of loans and advances, for investment. These funds are applied to different commercial and industrial projects, which has improved greatly the volume of goods and services produced in the country, thus resulting in a major increase in the nations Gross National Product (GNP).

Commercial Banks also play a key role in the money transmission process. According to Ezirim (1998: P; 5) “They provide financial advice and services to individuals and corporate bodies and participate in government schemes such as the National Economic Reconstruction Fund (NERFUND), and the World Bank Small and Medium – scale, Enterprises (SME) Loan Scheme”. While banks engage in a larger number of other financial services and render a wide range of service to customers, direct lending is the primary function performed by them, the one in which they have a natural advantage over almost all other financial institutions.

Commercial Bank Place much emphasis on direct lending because it contributes materially to their profitability by providing a higher return than most bank assets and by being a key element in the creation and maintenance of depositors relationship.

There are significant difference in approach between the acquisition of bank loan and the acquisition of securities for liquidity or investment. According to Howard (2005:197), “The purchase of securities is generally conducted impersonally; objective measure as relative interest rate, credit quality marketability and maturity on the other hand, often tend to be influenced by more subtle and subjective factors such as evaluation of the borrower’s character, the history of the borrower’s relationship with the bank and the possible influence on prospective new business”. These differences emphasizes the need to understand the basic concept and type of lending and have well formulated loan policies and practices.

Moreover, the techniques employed in allocating savings by commercial banks should provide bankers with a perfect knowledge of the expected outcome of lending such that funds will be allocated only to finance projects in which the probability of full payment is certain. It is however a fact that in reality no such tool exist in the decision tool kit of the lending bankers and virtually all lending decisions are made under conditions of uncertainty. The conditions of risk and uncertainly associated with lending decisions, dictates that the concepts of risks analysis be employed to facilitate sound decision making and judgment. The point still remains that in as much as risk cannot be completely eliminated, it could however be reduced to the barest minimum.

At present, lending decision by commercial banks are based less on quantitative data, but more on principles too subjective to provide sound and unbiased judgment. Apparently aware of the inadequacies of this decision base, lending bankers have often taken solace in tangible securities, thus considering lending against it more as an insurance against bad debts.

In the view of Nwankwo (2002:275) “A debt is classified as being bad debt when the lender has existed all possible means of recovery after the debt has become due for repayment and is not repaid. The repayment of such debt does not only become delayed but also doubtful and indeed uncertain”. In this regard therefore, credit is considered a technical function for management in dealing with such matters as the authorization of loan, investigation of credit management is indeed considered highly important to commercial banks, since how it is operated has a direct relationship with the bank’s liquidity and growth.

The increasing trend of provision for bad and doubtful debts in many commercial banks is a major source of concern and worry to both management and equity owners of such banks. Bad debts create an awareness of inability of banks to recover loans from debtor and this destroys the primary and economic importance of this bank, which is the credit creation process of banks since a loan not repaid cannot act as new deposits for further lending. Besides the problem of loan recovery is lack of confidence on the banking industry by depositors. In as much as banks cannot keep its assets at an acceptable level of liquidity, it would be unable to meet possible demands from depositor, hence public confidence cannot be maintained for when debts go bad, it destabilizes the bank’s liquidity position since funds expected to meet depositors demands are not received.

These problems of profitability and liquidity are major constraints to the internal growth of banks and the nations economic development. With regard to these problems, a prudent banker should lead cautiously and manage loans effectively with the view of minimizing the incidence of bad debts.

In this study the researcher shall survey the possibility of minimizing bad debts through improved lending standards and effective control and monitoring of approved loans. In addition, suggestions will be made towards successful means and channel of loan recovery. For this purpose, the researcher shall appraise the credit management and Incidence of bad debt in First Bank of Nigeria PLC, Abakaliki.


The high rate of bad debts and doubtful debts on loan granted to banks customers usually has an adverse effect on the cash flow and impair profitability in the banking industry. It is believed that most debts go bad because of the inadequacy of loan management and recovery procedure of banks, therefore the problem of this study is to appraise the lending, recovery and credit management policies of the bank earlier mentioned with a view to fund out the cause and consequent solutions to them.


The objective of this study is to determine the causes of loan default, the lending procedures and criteria for granting loans and how to curtail bad debts in First Bank of Nigeria PLC, In order to highlight the effectiveness and adequacy of credit management policy in Nigeria commercial banks. Measures for checking or reducing default and means of loan recovery will also be emphasized.


The importance of good loan and credit management is becoming more apparent and it is hardly an exaggeration that the difference between success and failure in the banking industry is bank loans and advances. Efficient loan management is vital to the protection of assets and the achievement of adequate returns to investments. Though a lot of works have been written on the techniques of lending, and securing lending and the pitfalls awaiting the unwary banker, by comparison there appears to be very little in print on the subject of loan management and recovery.

Effective and efficient loan management recognizes that beyond the application of sound banking principles, whenever a loan is made, a major factor to consider is speed in appreciating when a loan is beginning to look doubtful and in arriving at a decision as to the appropriate action to be taken and the consequences of taking such actions. This will enable the bank to obtain full repayment including accrued interest or at worst, to mitigate the eventual capital loss. In the face of increased competition among banks, future profits are likely to be harder to come by and since bad debts are charges against profits, it is appropriate to review the methods, proportions, and margins of lending to bad and doubtful debts.

This study with significantly aid bankers in appraising their lending and control mechanism in a situation of fight monetary conditions.


In carrying out this study the following hypothesis are formulated.

Ho: Credit policies in use have not helped banks to reduce the incidence of bad debts.

Ho: The prudential guidelines have not helped bankers in loan and advance management.

Ho: The amount of certified debts has not decreased as a result of loan recovery procedure.


This study is intended to assess the adequacy or otherwise of banks and management efforts at minimizing losses arising from bad debts. It will explore the theoretical and practical aspects of bank lending policy and procedure. Only a bank is chosen as a case study, which is First Bank of Nigeria PLC Abakaliki Branch. Therefore the conclusion shall be used to generalize the activities of commercial banks since banks have similar lending procedures and criteria for granting loans. The survey shall be limited to Nigerian environment.

The major limitations of this study is the unwillingness of commercial bank official to disclose and discuss relevant information. There is also the constraint imposed by the available period of time within which the research is to be completed.


Bad debts: Bad debts are components of loans, advances and overdrafts granted to bank customers which the bank has exhausted all possible means of recovery after the debt has become due for repayment and is not repaid.

Commercial Bank: These are retail financial institutions that breach the gap between deficit and   surplus unit.

Credit: The word credit concerns money given out by one party to another being backed up with adequate security. In this project the meaning of credit is restricted to the extension of credit facilities example loans and advances.

Credit management: This is the skillful treatment, delicate contrivance or managing of sums of money placed at a person or corporate body’s disposal by a bank or financial institution.

Liquidity:  This means an immediate capacity of the banks to meet their financial obligations. The degree of liquidity depends on the ease with which their assets can be quickly turned into cash.

Loan: Money lent out to individuals, firms and companies

Profitability: Is the difference between total revenues and total expenses over a period of time.


Adekanye F. (1983) “The Elements of banking in Nigeria” F and A   Publishers, Lagos Nigeria.

Ezirim and Emenyeonu (1998) “Bank lending and Credit          Administration”           Martonitz Centre for Research and Development, Port Harcourt, Nigeria P.5

Howard D. C. (2005) “Management Policies For Commercial Bank”           Englewood cliffs” N. J. Prentice Hall, P. 197

Nwankwo O. (2002 “Bank Credit Analysis and Loan Administration”          Jones Communication publishers Enugu, Nigeria P. 275.

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