An Evaluation of Credit Management and the Incident of Bad Debt in Nigeria Commercial Bank


The need and criteria for lending have been extensively discussed in the literature mandrel (1974) described credit simply as the right of a lender to receive money in the future in return for his obligation to transfer the use of funds to another party in the interim. The facility is as old as man, though in the primitive society was known as “mutual aid”, because it was based on ancient of ensuring substance of all member of the comp unity. Credit, therefore, arises out of the need to bridge the gap between the surplus and deficit economic unit such that the highest level of satisfaction is achieved. In modern society, the intermediation function is performed by the financial institution notable among which are the Commercial bank.

In agreeing with this view, Corley (1970) and Adenyi (1985) stated. That credit is a crucial factor in growth process of any economy and that by lending bank provide a valuable services to the Community as they serve to Channel money from those who have idle funds to those who put their money in the construction use.

Furthermore, Archer and D’ Ambrose (1975) opined that Commercial banks are in business to make loans. They however added that loan should work out in such a way that it will not seriously endanger the loan portfolio and solvency of the bank. This view appreciates that though some danger may arise lending is, and should be a major activity of commercial banks.  The technique and complexities of lending have been changing with growth in the society

Perhaps that is why Mather, (1985) described banking as an art as well as a science. He went further to say that in addition to the wealth of technical and legal knowledge. A bank manager should develop the aptitudes to asses every request for an advance according to in measurable factor pertaining to the political borrowed.  He then identified three basic principles that should guide all bank lending Viz, safely, profitability and suitability.

In addition to the principle enunciated by Mather other important guiding factor includes the character and integrity management accounting and technical skill of the borrowers as well as his capacity for handwork and his experience in the particular field for which the finance is required and the possibility of the purposed investment generating sufficient – profit and ensure repayment of advance.

The importance of these traditional cannons of lending not withstanding. Pitcher (1979) criticized undue reliance/emphasis on them by the lending banker.  He agreed that the character of the borrower must be undoubted especially where the security is adequate to cover the maximum amount to be advanced. He how ever, wondered whether honesty is simple enough to ensure the success of and enterprise in these difficult and demanding condition of our time. The answer is obviously No! far instance, all the integrity in the world be of little help to the managers of a company that is rapidly sinking into oblivious. Perhaps because they did not adopt their products to meet the need of a changing market or take appropriate corrective action to counter a misappropriate risk in overhead cost and fall in trade.

Therefore, we could not belt agree with him pitcher, when he advocated that the banker should also consider the capital and capability of the customer and also enlist the aid of management accounting and other techniques of credit analysis to improve their lending decision but loan complication and risk of loss are hardly divorced from lending operation. Even with the highest degree of care still proportion of the total loan and advance made by the banker would usually become sticky. This is why even the bet managed banks provide for bad and doubtful debt in their normal course of business.

The best option for a banker wishing to avoid bad bed could be not to lend. They obvious answer is No, since interest earned on lending constitute a greater proportion of bank earning. Agreeing that bad debt are emotive words to bankers, Dandy, (1985) Enumerate some factors that may cause bad doubtful debt to arise these factors include:

  1. Excessive lending on security values.
  2. Bad management of borrowers bank account
  3. Incomplete knowledge of customer activities
  4. Bad Judgment.

Extraneous factor such as over – trading, over reliance on trade customers. Nwankwo (1999) agree with the above factors, but went further to state that in the Nigeria situate most borrowers, regard bank loan and overdraws them own share of the national cake and therefore do not bother to repay them. The customer absconds to other banks to repeat the same process with success due to loan secrecy, and absence of central intelligence agency.

Another possible cause of bad debts in Nigeria is the diversion of wants to purpose other than the one for which there are granted. Bad debts incurred have adverse effect on the furthunes of the affected banks, it is achieved that the indigenous Nigeria banks and their shareholder have not been favourable well with the foreign counter parts in terms of profitability because of high incidence of bad debts.  They have to do something to reduce the frequency and mini their effects. The researcher cannot but agree with pitcher.  This is because our experience in the modern society cannot substitute for good lending judgment since it will not make a bad loan good but can make a good loan better.

Many sickly account can be nursed back to health be careful handling at the right time. The banker should not wait unit a pain arises situation is reached.  This view which has been expressed earlier in this chapter calls for a continuous review of the account and business of the customer. An analysis of the financial statement of the customer is always helpful.

Financial statement constitutes an important source of information for appraising the financial health of a business venture. For the purpose of comparison, the audited figures are expressed as rations.

Ratios computed form audited figures of two consecutive years immediately proceeding the request for loan will help to determined the credit worthiness of the customers, and his ability to repay the loan. In short the ratio helps the banker to assess the degree of risk been taking emphasis being placed on earning capacity and operating efficiency Mather (1976) grouped financial ratio into five categories as follows.

  1. Liquidity ratio: They measure the ability of the firm to meet its obligation as they become due
  2. Leverage ratio: Which are measure of the extent to which a firm’s operations are financial with debt capital.
  3. Efficiency ratio: Which are used to measure the capabilities of the management to utilize the firm assets.
  4. Profitability ratio: When indicate the over ratio profitability of the enterprises.
  5. Equity related ratio: Which are of primary concern to common stockholding.


This is a measure of short-term solvency. It indicate by the extent to which assets that are expected to be converted to cash in a period roughly equal to the maturity of the claims cover claim of the creditors. The two commonly used liquidity ratio are the current ratio and the quick ratio.

Current ratio             =       Total Current Assets

Total Current Liability


Quick ratio                =       Total Liquid Assets

Total  Current Liability


Some creditors argue that under adverse condition stocks may not have sufficient liquidity.

Therefore, the quick ratio is a modified version of the current ratio, which measure the firms ability to pay off current liabilities without relaying on the sale of stocks.

Obviously, an important factor to watch closely here is the underlying quality of the debtors.


The debts equity ratio is the most important of the leverage ratio. It measures total claim supplied by the owners of the business as compared to the finance provided by the firm creditor.

Debts/Equity Ratio =          Total Liabilities

Net worth (Share holder equity)


All other debt ratios are complimentary to this one and are designed to measure the appropriateness of the capital structure.


As indicators of managerial efficiency in the use of the firms assets, efficiency ratios are very useful in judging the performance of the firms. The help to explain and improvement or decline in the solvency of  a business and may also help to explain underlying changes in profitability.

Some of the ratios include:



  1. Average period of credit granted

=       Average debtors x 52 Weeks



  1. Average period of credit taken

=       Average creditor x 52 Weeks


  1. Stock Turnover

=       Net Sales



  1. Fixed asset Turnover


Net Sales

Net Fixed Assets



          The profitability ratio are important to the banker, the creditors and the shareholders of a business. This is because if sufficient profit are not made, it would be difficult to meet operating expenses, pay interest charges on loan and pay divided to shareholder, profitability rations pay dividend to shareholders. Profitability ratio includes.

(a)     Grass Profit Margin       =       Grass profit x 100



(b)     Return on total assets    =       Net profit x 100

Total assets x 1


(c)      Net profit margin           =       Net profit x 100

Sale x 1

(d)     Return of Equity            =       Net profit after tax and Ref. Div



This measures that value and earning of the firms common stock. The includes:

  1. Price earning ratio = Market Price



  1. Dividend yield  =      Dividend paid



Some of the problem associated with financial statement include the fact they are historical and by the time, the banker see them, they are already out of data.  Beside, the audited figures only assets and liabilities that can be measured in financial terms, unqualifiable items are not presented.  There might be some element of (“Window dressing”) on the accounts to impress the banker and the taxman. Even when there is no window dressing, the account shows a shop short of the business at a point in time. Besides, the normal financial measured used at he moment is the one which relates assets to their originals cost and not their resale value or replacement cost. For this reason, audited financial accounts are inferior to management account for the purpose of credit analysis.


Lending by commercial and marchant banks is controlled of the government through he central bank of Nigeria. The central bank of Nigeria Therefore has the Primary responsibility for formulating monetary policy in the country. In this wise the Central banks proposed are made on integral part of the federal government annual budget which combines approved monetary and fiscal measures. The instrument are many an varied. Because of the institutional limitation on the effectiveness of the traditional instrument of monetary management the Central bank of Nigeria has devised other instrument in line with its development objectives. These instrument package as credit guidelines are issued normally under the popular monetary policy circular to all licensed banks.

These instrument are comprised of

  • Aggregate credit ceiling
  • Reserve requirement and interest rate structure.


Every year the government prescribed the rate of expansion of credit in the economy. Banks are not allows to increase their aggregated loan and advance beyond a certain percentage of the previous years aggregated figure.

When the bank exceed the prescribed unit the bank shall pay to the Central bank of Nigeria stipulated penalties on the excess as follows.

1st default –  ½% of the excess credit

2nd default – 1/16% of the excess credit

3rd default  –        1/8% of the excess credit

4th default    –        ¼% of the excess credit.


          This is an obligation under which Commercial banks are required to hold a certain proportion of their assets in liquid turn to ensure that they meet cash demand of their customers. There are three varieties of the requirements.

  1. Cash reserve requirement: This instrument required each banks to maintain with the Central bank of Nigeria Cash reserve of a certain ration to its demand deposit liabilities. The ratio varies according to certain classification banks.
  2. Liquidity ratio: This instrument requires each Commercial bank to keep a certain percentage of its assets in liquid firm. This ratio of specified current asset over current liabilities has remained at 25% over the years.
  3. Interest rate structure: Economist described interest rate as the rate at which the Community discount the failure. It is the cost of money to the borrower and a return on money to the saver to lender, under very recently interest rate structure in Nigeria has been managed by the central bank of Nigeria which fixed the ranges within which both lending and deposit rate could be mentioned. It has been argued that interest rate in Nigeria have been relating low and discriminating particularly in favour of the preferred sectors.

In addition to sectoral allocation, banks also specially directed to ensure that a given percentage of their loan and advanced go to indigenous borrowers.

Banks are also directed to ensure that a given percentage of deposit generating by their branches opened in rural areas banking scheme is give as a loan and advances to the rural Communities where the branches are located.

Any shortfall on the monthly prescribed minimum (particularly those to agriculture, residential housing and small scale industries shall be required to be deposited with the Central bank of Nigeria and shall neither count as part of the specified liquid assets attracting interest yield.

In event of a defaulting bank eventually meeting the requirement minimum, the refund of the already deposit shortfall shall not be automatic because the money shall have been transferred to the Nigeria Agricultural and co-operative banks the federal mortgage bank of Nigeria and Nigeria bank of Commercial and industry for On-lending to investors in agriculture housing development and small scale industries respectively.

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