Credit Management in Nigeria Commercial Banks

Credit Management in Nigeria Commercial Banks

The chapter reviews related literature on assessment credit management in Nigeria Commercial Banks under the following headings:-

  • The role of commercial banks in Nigerian Economy.
  • Causes of Non-performing accounts/ credits
  • Techniques though which banks can minimize occurrence of non-performing credit.
  • The purpose are importance of the prudential guidelines on the operations of commercial banks in Nigeria.
  • The positive impacts of the prudential guideline on Nigerian Banking industry and the economy.


Onyido (1994) Described Commercial banks as the most dominant financial institution in the intermediation of short-term funds. He stated that by financial intermediation is meant the mobilization of financial resources from surplus spending units for production investment and the generation of assess or securities, in the process of supporting this view, Emekekwe (1990) described commercial banks as the most numerous of the financial institutions, and are not popular with the citizens. He said that they accept deposits (390mgs, 2:2 account and current) from customers and in turn creates and destroys money from their deposits.

They are often referred to as retailers of fund because they deal in small monetary aggregates by making their facilities available even to the smallest conceivable banks play a leading role as more regulated than nay other sector of the economy. He stated that this attribute has been as a result of the crucial intermediation played by the operators. Mande (1974) stated that in modern societies, the intermediation function is performed by the financial institutions notably by commercial banks. He added that commercial banks provides credits which arises out of the need to bridge the gaps between the surplus and deficit economic units such that the highest level of satisfaction in achieved. Corley (1970) and Adeniyi (1985) supported Mandel when they stated that credit is a crucial factor in he broad process of any economy and that by lending, banks, provides a valuable services to the community as they serve to channel money from those who have idle forms to those who can put money into constructive use.


Dandy (1975) enumerated the following as possible factors that may give rise to non-performing accounts:-

  1. Excessive lending on security values
  2. Bad management of borrowers bank accounts
  • Incomplete knowledge of customers activities.
  1. Bad judgement
  2. Extraneous factors such as reliance on trade customers, over trading, optimistic balance sheet, misrepresentation and dishonesty of the customer.

Nwankwo (1980) agreed with the factors but added that in a Nigerian situation, most borrowers regard bank loans and over-draft as their own share of the “National Cake” and therefore do not bother to repay them.

The customers abscond with the loans to other banks to repeat the same process with success due to banks security, fluid society and absence of central intelligent agency. He also agreed that another possible cause of classified account in Nigeria is the diversion of loans and advances to purposes other than the one for which they were granted.

Pitcher (1979) in his own view emphasised that placing much reliance on security could result in classified account. He stated that undue emphasis on security apparently inhibits attempts to develop more sophisticated methods of monitoring the credit on how and when repayment will be achieved. It also restricts unfairly the flow of banks credits to soundly managed enterprises which could borrow funds successfully if only they possess good collateral.


Mather (1955) identified three basic principles that should guide all banks sending viz, safety profitability and suitability. Others include the character and integrity, management accounting and technical skill of the borrower as well as his capacity for hard work and his experience in the particular field for which the finance is required and the possibility of the proposed investment generating sufficient projects to ensure repayment of advances.

Richardson 91985) in his own contribution noted that beyond the need to observe the basis bank lending principles lies the need for effectives loan in management is the need for urgency in appreciating when a loan begin to look doubtful and to arrive at a decision to take appropriate action. This view supported by Osayameh (1986) when he opined that accounts do not just got bad over-night. Usually, some danger signals may be shown for sometime during which is the duty of the banker to show considerable interest in managing.

As Dandy 1975) puts it “Many sickly accounts can be nursed back to health by careful handling at the right time”.

He was of the opinion that the banker should not wait until a panic and crisis situation is reached. This view calls for a continuous review of the accounts and business of the customer in his support for effective management.

Ebohadeghe, (1991) emphasized that the prudential guidelines and other associated regulations can only assist, but cannot be a substitute for good management of banks. It is the ultimate responsibility of the directors and management to ensure that survival and viability of their banks.

Mather (1955) was of the view that financial ratios help the banker to access the degree of risk, emphasis being placed on earning capacity and operating efficiency. He thus grouped financial ratio into five categories are as follows:-

  1. Liquidity ratios which provide measures of firms ability to meet his short-term obligation as they fall due.

These include

  1. Current ratio =   Total current assets

Total current liabilities

  1. Average ratio, which are measures of extent to which firms operation are financed with debt capital. This include:-                           Total liabilities

Debt Equity ratio = New worth (Shareholders Equity)

  • Efficiency ratios, which are used to measure the capability of the management to utilize the firms assets. This includes
  1. Average period of credit granded

Average debtors   x   52 weeks


  1. Average period of credit taken

Purchase creditors   x 52 weeks

Purchase                           1

  1. Stock Assets Turnover:       Net sales


  1. Fixed Assets Turnover:     Net Sales

Net fixed assets

Profitability ratios which indicate the overall profitability of the enter price these include:

  1. Gross profit margin:     Gross profit   x   100

sales             1

  1. Net Profit margin:         Net profit     x   100

Total assets         1

  1. Return on Equity:         Net profit tax and preference dividend


Equity related ratios are of primary concern to common stockholders. They measure the values and earnings of the firm common stock. The include:

  1. Price earnings ratio   =         Market price


  1. Dividend yield           =       Dividend paid


Osayarned (1986) was however of the view that there are some problems associated with financial statements. For instance financial statements are usually historical and by the time the banker sees them, they are already out of dates.

Besides, the audited figures shows only assets and liabilities that can be measured in financial terms unqualifiable items are not presented.

For all these reasons, he maintains that audited financial statement from which ratios are drawn are inferior to management accounts for the purpose of credit analysis.

Chasen (1985) defined management accounting are the application of accounting techniques to the provision of information designed to assist all levels of management in planning and controlling the activities of the firm.

Pitcher (1979) in an attempt to further explain the definition described planning as the selection of objectives as the means of achieving actual results against planned results with a view to ensuring satisfactory performance.

The feed back that it produces helps in the review of plans. Unlike financial accounting, management accounting is a continuous process of looking backwards and forwards. It is primarily concerned with supplying people inside the company with up to date relevant information of immediate past and projections for the future since they are not for external consumption, Pitcher believes that if the banker is sufficiently in good terms with his customers in order to be able to request and be given such information.

His ability to monitor commitment with a view to ensuring repayment from cash flow would be greatly improved.


It is necessary to establish why the guidelines were issued and what they were intended to achieve.   In his contribution, Umoh (1992) stated that the guidelines were intended to ensure prudence or due diligence in credit port- folio classification, provisioning for non-performing facilities, credit port-folio disclosure and interest accruals as non- performing credit facilities. He went further to say that, It was necessary to have prudence so as to ensure reliability in published accounting information and operating results by financial institutions plus some measures of uniformity in credit port folio disclosures and interest accruals.

Hall (1991) supported the above views and added that the terms of the guideline can therefore be seen to be quite comprehensive and conservative giving precise rules in many instances where previous management could exercise discretion. He noted that income recognition and provisioning are not to be governed by international standards and the uniformity of treatment will greatly enhance effective comparison of balance sheets and accounts with in the industry.

Umoh (1992) also observed that prior to the issuance of the guidelines. It was common to find financial institutions declaring paper profit which resulted from interest accruals on non-performing facilities being taken into the profit and loss account.


According to Umoh (1992) the total required provision for performing credits rose substantially. This ultimately affected profit and loss account by way of reducing profit or increasing losses. In addition to having produced for higher levels of provisions, bankers were required by the guidelines to mandatory suspend interest due but unpaid on classified assets such interest were to be transferred to an interests suspense account to be only recognized on cash basis as against the previous practice of including such interest in revenue. The implementation of the measure directly reduce profits but which were now more realistic than before the guidelines. He stated that the implementation of the guidelines has succeeded in bringing home the message that lending should rely more on desirable qualitative characteristics of borrowers than on collateral requirements. He added that the guidelines have enabled banks for the first time to classify credit facilities extended to governments and the agents as any other delinquent facility. Before the guidelines, the most such facility could be classified as sub-standard and without any provisioning. Thus the guideline have allowed banks to recognize the risks inherent in credit to government and its agents for what they are and to take steps to provide for such credits. Banks are also required for the first time to make provisions for unreconciled items. This has tended to put pressure on banks to reconcile early and this in line with sound banking practice. He agreed that the implementation of the guidelines has also enabled banks to detect much earlier, acts of fraud, forgeries and financial malpractices relating to loans and advances granted under the suspicious inconsistencies.

Since any non-performing facility would be classified after 90 days, it follows that any fraudulent act under the guise of loans and advances would be detected within three months as it would become a subject of investigation as soon as if is found to be non performing.


Hal (1991), while supporting some achievements of the guidelines, like compelling banks to review their credit portfolios at least once a quarter, at the same time, addressed the issue of some side effects.   He referred to the scale of classification with emphasis on non-performing facilities which he defined as those where principal or interest is due and unpaid for 90 days or more. This includes instances where interest is capitalized, rescheduled or rolled ever. He also pointed out other categories of assets for which provisioning are made according to the guidelines. These include other assets comprising items not separately shown for instance, cheque purchased, uncleared effects suspense accounts and inter branch accounts. Yet another provision is made for any likely loss in respect for off balance sheet engagements.

However, he noted that the implementation of the guideline has little or not allowance for the special conditions of the Nigerian environment and that this gives rise to a number of criticisms. For instance, is it valid to impose the international standard of 90 days as the provisioning stating point for areas of interest of principal payments. He noted that in united states, it may be reasonable to be completed and paid for within 90 days. However in Nigeria, because of bureaucracy and other factors, the business cycle is often longer with the result that a perfectly sound transaction may required provisioning. A similar case can be made for inter branch items which have to be provisioned if they are outstanding.   For more than two months, whereas widespread branch net work and attendant communication problems make such delays fairly common in this country.

He also question the rationale behind the treatment of security. The guidelines take little account of perfected security and then only if it is actually in the course of realization. Legal process in Nigeria are not doubt lengthy but it seems harsh, not yet been deemed necessary to begin the realisation process.

He further said that commercial banks have long been criticised for failing to assist small businesses and for not playing their full role in developing local ventures. The advert of the new provisioning guidelines in hardly likely to make they more enthusiastic to take on such risks., On the contrary, it will probably become even more difficult for small businessmen to borrow since the guidelines will prompt a flight to quality in the choice of lending to customers by banks.

Moreover, it will pose more problems in complying with government directives on lending to the agricultural sector and to rural districts once the track record of such lending implies higher than average risks the effect of which can no longer be hidden.

Also now banks that have proliferated in recent years will suffer huge detrimental effect since their lending levels generally are small and they will not accumulate non- performing debts of nay significance. Older banks, especially those of state owned or government controlled, suffer problem of having built up substantial portion of non-performing accounts. Thus, the implementation of the guidelines which was with immediate effect passed provisioning burden on banks for non performing debts built up over decades .

He stated that the resulting affect has been large losses being declared and shareholders funds being ended or completely wiped out, causing many banks having bee classified as distress.   There has been creation of crisis of confidence and in view of the size of the banks involved; the effect will destabilize the banking industry.

Hall, also noted that it is in recognition of this situation that the central bank of Nigeria issued a further circular letter. Thus, acknowledging the need to spread the burden of the new regulations, and allowing banks up to four years to absorb the provisioning short falls.



Union bank of Nigeria Plc is an off shoot of Barchlays Banl DCO (Dominion colonial and overseas). The information of this bank was not by chance event but was rather the fulfilment of a long cherished idea which developed and took shape over a period of years motivated step by step by a single master mind of a man called F.C Goodenough.

Goodenough felt is necessary to think about the new situation that must arise when the 2nd world war came to an end and conceived a plan as far back as 1999, of a banking organization which would span the globe under the name of Barclays.

Barclays’ bank DCO, came into existence by the amalgation in 1925 of three banks, the oldest of which was the colonial Bank established in 1836. This banks started in Great Britain and spread or established in other parts of the world by the colonial masters with the intention to help its overseas associates and its customers to make use of the services of Barclays and wherever possible.

The bank came into existence in Nigeria in the year 1917. It was established by the colonial masters in order to provide banking services for the British commercial interest and to facilitate colonial administration in the country. During this period the bank was primarily dominated by the “White” who occupied prominent positions of responsibilities within the bank. The war years ago brought about a reduction of European staff in most branches of the bank thus accelerating the promotions and in 1975 with the help of the general manger of the banks S.F. Cade, the bank helped a lot in the economic advancement of the country by making direct leading to Africans.

The Nigerian civil war affected the banks adversely by 30th May 1967 branch balance had been struck and from the date until the war was over. Head office of the bank at Lagos remained in dark about how the Biafra (Eastern) branches were faring.

With the end of the war, localization or indigenization of the bank became imminent and this took place in 1968 in accordance with a decree issued by the federal government on 16th October 1968 which declared that all foreign companies banks included, would be deemed to be incorporated in Nigeria with effect from 18th November, 1968. This gave birth to Barclays bank of Nigeria limited incorporated on 30th May 1969 with a capital at N6 million as wholly owned subsidiary of Barlcays Bank DCO.

This article was extracted from a Project Research Work Topic



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