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PROJECT TOPIC- IMPACT OF CENTRAL BANK OF NIGERIA CREDIT GUIDELINES ON COMMERCIAL BANKS LOANS AND ADVANCES

PROJECT TOPIC- IMPACT OF CENTRAL BANK OF NIGERIA CREDIT GUIDELINES ON COMMERCIAL BANKS LOANS AND ADVANCES

CHAPTER ONE

INTRODUCTION

  • 1 Background to the Study

A Central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries. In contract to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation’s legal tender (Arthur and Sullivan, 2013). Examples include the European Central Bank (ECB), the Federal Reserve of the United States, and the People’s Bank of China and Central Bank of Nigeria (CBN).

Central banks around the world play similar functions some of which may include – implementing monetary policies, determining interest rates, controlling the nation’s entire money supply, the Government’s banker and the bankers’ bank (Lender of Last Resort), regulating and supervising the banking industry, setting the official interest rate – used to manage both inflation and the country’s exchange rate – and ensuring that this rate take effect via a variety of policy mechanisms and managing the country’s foreign exchange and gold reserves and the Government’s stock register (Wikipedia, 2012).

The banking industries in any economy in the world are the most important sector because of their ability to mobilize funds from the savings to the deficit sector of the economy. They mobilize the largest amount of fund because of their ability to accept deposits of any kind from the public, government and its agencies as well as create credit through granting of loans, overdraft and project financing which are all element needs for economic performance to enhance economic growth and development (Onoh, 2002).

The role of the banking industry in development process cannot be over-emphasized as they play so many functions. The most important banking industry in Nigeria is the commercial banks. In order to make profit, commercial banks invest customer deposits in various short term and long term investment outlet, however core of such deposits are used for loans. Hence, the more loans and advances are extent to borrowers, the more the profit they make (Salamon, 2012).

According to Pandey (2013) the main sources of working capital for commercial banks remain customer deposits and the major outlet is loans and advances. These loans and advances do not only provide profit for the banks, they also create credit and interest rate risk for the banks as well as increase the volume of money in circulation. Credit risk comes as a result in the default of payment by the borrower which thus leads to loss on the part of the banks. Interest rate charged on borrowed funds that went sour due to economic policy also affects banks profit ability hence, the implementation of banking regulation such as credit policies by Central Banks around the world to control and regulate banking activities. Credit risk policy is all about identification of and mitigation against dangerous situations or obstacles (risks) likely to stand against the ability of someone that has been trusted to borrow money today and pay back tomorrow (Chris, 2011).

Credit analysis simply is an undertaking to put all prescribed facts and figures together with a view to determining whether or not the credit applicant or loan applicant is suitable for the facility. Each of these constituent of credit management is heavily loaded with operational activities. Looking closely at these clarifications, credit management truly has three major components: credit analysis, credit administration and credit risk management or measurement. Credit policy and procedure manual of an organization must clearly reflect these pillars in order to be effective. Each pillar is loaded with enormous amount of activities so that it is capable of standing alone as department with sufficient staff.

PROJECT TOPIC- IMPACT OF CENTRAL BANK OF NIGERIA CREDIT GUIDELINES ON COMMERCIAL BANKS LOANS AND ADVANCES

1.2   Statement of the Problem

It has been observed that in the past, and perhaps till now, most banks in Nigeria do not have clearly defined and adherently implemented credit lending policies. What exist is more or less “discretion or good judgment lending” a practice which has fueled unacceptable incidence of bad debt stock, leading to stresses and depletion on liquidity position of the banks. However, the Central Bank of Nigeria (CBN) has continued to issue prudential guidelines, which became effective from May 1, 2010, addresses various aspects of banks’ operations, such as risk management, corporate governance, know your customer (KYC), anti-money laundering, counter financing of terrorism, loan los provisioning, peculiarities of different loan types and financing different sectors of the economy, among others.

In the new risk management guidelines, the CBN directed banks to prepare comprehensive credit policy duly approved by their Board of Directors, and that the policy should among others cover loan administration, disbursement and appropriate monitoring mechanism and should be reviewed at least every three years. The new guideline stipulated that the tenure of external auditors in a given bank shall be for a maximum period of 10 years from date of appointment after, which the audit firm shall not be reappointed in the bank until after a period of another 10 years.

Despite the various past guidelines, the banking industry has continued to witness various form of distress and liquidity problem which has been caused by high investment in speculative businesses, mismanagement, high toxic assets, poor loan repayment supervision, fraud and corruption among bank staffs, dynamic nature of the Nigerian economy etc. This therefore raises the question of how effect CBN guidelines, supervision and monitoring have been to ensure that Nigerian banks adopt efficient credit management policy. Also from the fore-going it shows that bank management have not respected the bank credit policies especially the five “Cs” thus, the causes of distress in the banking industry. Hence the relevance of this study which aims to take a further assessment of the credit guidelines on commercial banks in Nigeria.

1.3   Research Questions

The following research questions were formulated to guide the study:

  1. What is the importance of credit guidelines in the banking industry?
  2. To what extent had CBN credit guideline impacted on banks loans and advances?
  3. What are the challenges of credit management in Nigeria?

1.4 Objectives of the Study

The main objective of the study is to ascertain the impact of Central Bank of Nigeria credit guidelines on commercial banks loans and advances. Specifically, the study sought to:

  1. To examine the importance of CBN credit guidelines in the banking industry.
  2. To evaluate the extent to which loans created by Nigerian banks are influenced by CBN credit guidelines.
  3. To identify the challenges of credit management in Nigeria.

1.5   Research Hypotheses 

PROJECT TOPIC- IMPACT OF CENTRAL BANK OF NIGERIA CREDIT GUIDELINES ON COMMERCIAL BANKS LOANS AND ADVANCES

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