EFFECTIVE MANAGEMENT OF LOANS AND ADVANCES

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EFFECTIVE MANAGEMENT OF LOANS AND ADVANCES

ABSTRACT

This research work on effective management of loans and advances in Nigerian commercial banks is aimed at guiding financial managers in the lending and credit administration of banks in the effort to effectively carry out on their functions. Secondary sources of data were the principal instruments used; the data used were presented, analysed and computed in tables for easy references. This study shows that effective management of loans and advances is the only way for banks to ensure liquidity, profitability as well as their going concern. Therefore appropriate ways and techniques for effective lending are stipulated and explained in the course of this study for easy assessment. Because it is a known fact that banks can only survive when its lending and credit administration is well managed, therefore this work ended with major findings, which include; poor management of loans and advances giving rise to high incidence of bad and doubtful debts. The frequency, volume of loans and advances handled in commercial banks can drastically affect its efficient and effective management.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Commercial banks are “retails banking institutions” that accept deposits and make short term credit to the government, individuals as well as corporate bodies. Some of their functions include accepting deposit through current and savings accounts, granting of loans and advances, equipment leasing, loan syndication, financial advisory services, trade and expert financing, other investments and foreign remittance. The relationship between banks and other financial institutions in terms of functions, limits and modus operation are spelt out in the bank and other financial institutions decree 25 (BOFIA) of 1991, which also permits merchant, development banks and insurance companies to grant long and medium term loans. Commercial bank loans and advances form one of the most lucrative and profitable business embarked upon by banks and as such requires effective management to ensure good performance as well as return as at when due. Therefore, the success or failure of commercial banks in achieving their profit objectives depends, to a large extent, on how well the loans and advances are managed.

1.2 STATEMENT OF THE PROBLEM

It has been noted earlier, that granting of loans and advances by commercial banks is one of the most risky businesses ventured into by commercial banks. This risky nature of loan and advances is usually as a result of the inability of borrowers to pay up their debts as when due and this problem leads to bank distress. The following fundamental problems arise from poor administration of commercial banks loans and advances:

i. High rate of defaults has resulted in the reduction of granting of loanable funds which in turn has contributed to the under-development of the Nigerian economy through reduced economic activities.

ii. The targeted earning of shareholder can be negatively affected due to bad non-performing loans.

The increasing defaults and poor management of commercial bank loans result from the ineffective maintaining of loan proceeds in order to ensure that it is in line with the procedures.

1.3 OBJECTIVES OF THE STUDY

The special objectives for the study are to:

i. Know the benefits of efficient and effective management of loans and advances in commercial banks.

ii. Determine the cause of the present poor management of loans and advances in Nigeria commercial banks.

iii. Assets the extent and depth of the poor management of commercial banks loans and advances in Nigerian economy.

1.4 RESEARCH QUESTIONS

1. What benefits are derived by commercial banks through efficient and effective management of loans and advances?

2. What are the causes of the present poor management of commercial banks loans and advances in Nigerian economy?

3. To what extent and depth of poor management of commercial banks loans and advances affect the Nigerian economy?

1.5 RESEARCH HYPOTHESIS

The following hypotheses are formulated based on the above stated objectives.

HO: Poor management of loans and advances do not give rise to incidence of bad and doubtful debts.

HI: Poor management of loans and advances give rise to high incidence of bad and doubtful debts.

HO: The frequency and volume of loans and advances handled by commercial banks cannot drastically affect its efficient and effective management.

HI: The frequency and volume of loans and advances handled by commercial banks can drastically affect its efficient and effective management.

1.6 SIGNIFICANCE OF THE STUDY

Banks are important in all economics, banks they facilitate development. The most important aspect of this research work is to know how to properly and effectively handle the business of lending and all the principle involved. The knowledge of the effective management of loans and advances in commercial banks are a sure way to the continuity and growth of such a bank. Also, effective management of loans and advance prevents bank distress and liquidation. Financially, this research intends to make a positive contribution to the body of knowledge of finance and banking in Nigeria.

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