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1.1 BACKGROUND TO THE STUDYThe United States Supreme Court (Austen) in 1899, defined a bank as an institution, usuallyincorporated with power to issue its promissory notes intended to circulate as money (known asbank notes); or to receive the money of others on general deposit, to form a joint fund that shallbe used by the institution, for its own benefit, for one or more of the purposes of makingtemporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin,bullion, credits, and the remission of money; or with both these powers, and with the privileges,in addition to these basic powers, of receiving special deposits and making collections for theholders of negotiable paper, if the institution sees fit to engage in such business.According to Jenkins (2009), Credit management is monitoring risk within a company's orlender's operations. He also stated that credit risk management is an essential component ofsuccessful business ventures, as it controls and guides a profitable business through transactions.As further stated, Jenkins opined that credit risk management has arguably existed since thebeginning of banking and that the underlying principle of lending is risk mitigation anddetermining a borrower's ability and propensity to repay is essential to a well planned lendingexercise. As banking and finance have evolved, so has credit risk management. He alsoemphasized that, credit risk management is an important part of any business, take for instance,in a small business, a person (the owner or sole proprietor) assesses the investments and loansthe company is committing to a client. The owner must think of the long-term implications andlook critically at the soundness of each investment and loan as the company's financial healthdepends on safe and profitable investments.1

According to International Credit Insurance and Surety Association (ICISA, 2011), they statedthere is no clear definition of what credit management is. They stated that, it is usually regardedas assuring that buyers pay before the debts or loan fall due, credit costs are kept at minimum,and inefficient or non performing loans are managed in such a manner that payment is receivedwithout damaging the relationship with that buyer and that a credit insurance company does allthat. They also asserted that, either directly or in conjunction with a company’s department thatis in charge of credit, an approved credit management policy can offer assurances to a financingbank, which would in turn facilitate financing..According to Steven (2010), credit is a trust which allows one party to provide resources toanother party where that second party does not reimburse the first party immediately (therebycreating a debt), but instead they decide either to repay or return those loans or resources (orother materials of equal value) at a later date. The loan or resources provided may be financial(e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Accordingto Steven (2011), he also stated that credit encompasses any form of delayed payment. Credit isgiven or issued by a creditor often referred to as a lender, to a debtor, often referred to as aborrower.Macaver and Ehimare (2006) as cited in to Padmanabham (2012), credit risk refers todelinquency and default by borrowers, i.e. failure to pay back the agreed amount as at when dueor non-payment by those owing the firm. The need to include delinquency derives from theimportance usually attached to the time value of money in financial analysis: one naira receivedtoday is worth more than one naira received in the future. While delinquencies indicate delayedpayment, 2

default denotes non-payment, and the former, if not properly curtailed, could lead to the latter.The exposure to credit risk is particularly large for financial institutions, such as commercial andmerchant banks. When firms borrow money, they later expose lenders to credit risk. As aconsequence, borrowing exposes the firm’s owners to the risk that the firm will be unable to payits debt and thus be forced into bankruptcy, and the firm would generally have to pay more toborrow money because of credit risk (Macaver and Ehimare (2006) as cited in Harrington andNiehaus, 2009). Nonpayment of loans has several undesirable consequences. It causes areduction in the value of the business of the bank that granted the loan and destabilizes the creditsystem that is why the credit risk management system has been put in place to help mitigate theproblems that accompanies lending.



1.2 STATEMENT OF PROBLEMS:Money lending process alone cannot be in most cases reliable and as such, credit analysis may beincomplete or based on wrong data thereby making it difficult for the institution to recover theaccurate amount of loan or credit given out to the obligor.Another problem associated with most financial institutions due to lack of an effective creditmanagement platform is that, most loan officers may ignore the true financial position orcapacity of the obligor and grant such obligor loans that may not be repaid back as at when theyfall due. This would result in a massive decline in the profitability margin of the organization.A major problem that arises due to lack of a well implemented credit management platform isthat most mangers give out loans or credits indiscriminately; they do not consider the obligorscapacity to repay back the sum given him. Examples of such obligors that benefits from thesemanagement act includes; friends, well-wishers, neighbors, relatives etc.3

Some bank customers are unable to adequately determine the amount of loan facility required tofinance a project. These results in customers sometimes asking of the borrowers mismanage thefunds disbursed to them. Materials and human resources at their disposal and are not capable ofproducing good results which in turn will make repayment of loans impossible.



1.3 OBJECTIVES OF THE STUDY:The following listed below are the objectives that are going to be guiding the study;1. To find out if there is a significant relationship between non-performing loans andperformance of banks in Nigeria

Introduction:

The study tends to verify if there's any relationship with credit managements and banks performance which took into consideration the study of 10 listed banks in Nigeria and their 5years financial statements.