CHAPTER ONE INTRODUCTION 1.1. Background To The Study Since the major of banking management is to maximize shareholder wealth, banks' managers must examine cash flows and assume risks because of directing their financial resources in various areas of usage. Given that giving credit is one of the key sources of income for deposit money banks, credit risk is one of the most serious hazards they face. As a result, the banks' profitability is influenced by how they manage the risk associated with that lending (Li & Zou, 2018). The power of credit risk management to affect a bank's financial performance, existence, and growth is why it is so important. As a result, the banks' profitability is influenced by how they manage the risk associated with that lending (Li & Zou, 2018). The power of credit risk management to affect a bank's financial performance, existence, and growth is why it is so important. The bigger the number of accounts receivables and the longer they have been unpaid, the higher the financial expenses of keeping them up to date. Around the globe, depository institutions perform a crucial job in bringing financial stability and economic growth by mobilizing monetary resources across multiple regions (Accornero et al., 2018). The commercial plays an intermediary role by collecting the excessive amount from savers and issuing loans to the borrowers. In return, banks can earn a high interest rate (Khan et al., 2020; Ghosh, 2015). Banks tried to increase their financial performance (FP) by issuing loans while playing their intermediary role; banks have a high chance of facing credit risk. Accornero et al. (2018) found that the country’s banking industry mostly collapses due to high credit risk. Sometimes, it leads to the failures of the whole financial system. Credit risk is expected to be arises when a borrower cannot meet their obligation about future cash flows. Commercial banks’ FP is affected by two factors: one is external and the other is internal. Bank-specific factors are internal and able to control factors of the commercial banks. Ofori- Abebrese et al. (2016) pointed out that adverse selection and moral hazards were created due to mismanagement of internal factors. The abovementioned financial problems are turmoil period in the banking/financial sector. Credit control starts with the transaction and continues until the transaction is completed and paid in full. It's just as important as completing the trade. In reality, unless the money is received, a sale isn't deemed finalized (Aspal, Dhawan&Nazneen, 2019). As a result, goods lending principles should focus on ensuring that the borrower can make scheduled interest payments in full and within the required time frame, to the extent possible; otherwise, the profit from interest earned will be reduced or even wiped out when the customer eventually defaults (Belas, Smrcka, Gavurova & Dvorsky, 2018). Credit control is largely concerned with debtor management and debt finance. Credit control's goals can be summarized as preserving the company's debtor investments and optimizing operational cash flows (Ekinci, & Poyraz, 2019). According to Francis & Hasan, (2015), Policies and procedures must be applied for granting credit to customers, collecting payment and limiting the risk of non-payments. To improve their performance on money deposits, banks must pay close attention to credit provision, since credit risk management is a vital feature and a hot topic among the difficulties they encounter. Risk management is critical not only for the banking sector's long-term viability, but also for its expansion. The local currency as well as the economy as a whole gain stability as a result of the sustainability and growth (Ghenimi & Chaibi, 2017). Poorly handled credit risk can lead to liquidity risk, which can lead to commercial bank insolvency. The presence of risk in the financial sector is also linked to the products that they sell. Those include balance sheet products such as short term and long term loans, as well as off balance sheet such as letter of credits along with other guarantees. Inspite of all the risks, loans however, constitute greater proportion of credit risk as they generally, account for 10 15 times the bank’s equity (Kitua, 1996; Hassan, Khan&Paltrinieri, 2019). Hence, banking business may likely to collapse if there is slight deterioration in loan quality. 1.2. Statement of the Problem Deposit money banks (DMBs) make loans from customer deposits, and these loans are a primary source of revenue for the majority of banks. DMBs' intermediation function, on the other hand, comes with significant risks for both banks and deficit units. Banks are now working really hard to entice the large number of consumers who do not currently bank with them. This has resulted in an increase in both surplus and deficit units in banks. Many banks have handed out loans and advances that could not be recovered in order to increase income and get a significant proportion of the market, resulting in a massive increase in Non-Performing Loans (NPLs) in their accounts(Khan, Siddique, & Sarwar,2020),. For banks and other stakeholders, this has become a concerning issue. Credit control and Bank Performance of Listed Banks in Nigeria, published in 2015, found that the ratio of non-performing loans and bad debt has no substantial negative impact on bank performance in Nigeria. While the secured and unsecured loan ratios, as well as the performance of the banks, were not substantial (Uwalomwa, Uwuigbe & Oyewo, 2015). The Effect of Credit Risk on Banking Profitability: A Case Study of Bangladesh in 2015 indicates that Non-Performing Loan to Gross Loan (NPLGL) and Loan Loss Reserve to Gross Loan (LLRGL) have a robust negative and significant effect on all profitability measures. The analysis also finds a negative and significant effect of Capital Adequacy Ratio (CAR) on Return on Average Equity (ROAE). It also reveals that the effect of the implementation of Basel II is significantly positive on Net Interest Margin (NIM) but significantly negative on ROAE (Abu, Sajeda & Mustafa, 2015). With respect to the issues raised, it can be said that the effect credit control has on a bank’s financial strength (profitability) cannot be undermined. However, the study carried out by Ogboi et al. (2013) on the topic “Impact of Credit Risk Management and Capital Adequacy of the Financial Performance of Commercial Banks in Nigeria” showed that sound credit risk management and capital adequacy impacted positively on the banks financial performance with the expectation of loan and advances which was found to have a negative impact on bank’s profitability. In the study “Loan Management and the Performance of Nigeria banks” there is no significant relationship between effective loan management and the performance of banks (Lawrence, 2013). This implies that, banks in Nigeria experience high profit irrespective of the huge credit risk exposure, conflicting with views shared by other researchers. The Prime concern of this study is to determine whether credit control has an effect on the profitability of Nigerian banks using data from 2006 to 2020 knowing fully well that fall within the period of global economic depression. 1.3 Objectives of the Study The general objective for this study is to establish the Impact of credit control on deposit money banks in Nigeria. The specific objective of the study includes: i. To investigate the impact of loans and advances on the profitability of Nigerian deposit money banks. ii. To determine the impact of nonperforming loans on deposit money banks' profitability in Nigeria. iii. To determine the impact of loan loss provisions on deposit money banks' profitability in Nigeria. 1.4 Research Questions The researcher seeks to answer the following questions in respect to the selected banks to fulfill the aforementioned study objectives. i. How do loans and advances affect the profitability of Nigerian deposit money banks? ii. How do non-performing loans affect the profitability of Nigerian deposit money banks? iii. How do loan loss provisions affect the profitability of Nigerian deposit money banks? 1.5 Statement of Hypotheses The following are the null hypotheses that will be tested in this study: H0 1: In Nigeria, loans and advances have no significant positive impact on bank profitability. H0 2: Non-performing loans have no significant positive impact on bank profitability in Nigeria. H0 3: Loan loss provisions have no considerable positive impact on bank profitability in Nigeria. 1.6 Significance of the Study Credit control supports or underlies a bank's profitability, therefore good credit control lowers customer default rates and helps banks stay on top of the loan-generating market. Credit risk, which arises from inadequate management, is one of the leading causes of bank failure; the study will assist bank management in increasing profitability. Furthermore, the degree to which credit is managed has an impact on deposit money banks' progress and long-term viability, as well as the economy as a whole. The purpose of this research is to discover the effect of credit control on the profitability of banks in Nigeria. The customers and investors need to know whether their deposits are managed or utilized efficiently, so it is an eye-opener. The research would serve as an incarnation of knowledge to individuals, management and practitioners in the banking and non-bank financial industry. The result would also be useful in academic field. 1.7 Scope and Limitations of Study This study is limited to the effect the Credit control has on the profitability of only the deposit money banks in Nigeria from 2006 to 2020 and therefore the findings, analyses and recommendations cannot be linked to the whole banking industry in the Nigeria. Perhaps researching into other banks will yield dissimilar outcome. Cross border study can bring a different dimension as a result of difference in structures and supervisory guidelines. Our study intends to focus on all the existing Deposit Money Banks in Nigeria. Thus, the Union Bank plc and other banks will not be included in our study. The major limitation of the study is authenticity of the data employed, because the data is from secondary source. The researcher still doubt the validity of the data used. 1.8 Limitations of the Study The researcher in the course of carrying out the research was faced with the following problems and constraints. a. Time factor: Time shortage posed serious challenges, since it was indeed very short considering the enormity of the research work. b. Lack of information and data due to unavailability of materials and other vital information. Libraries are either out of stock or scanty in their content of relevant materials. c. Financial problem was also a deterrent in carrying out the research since the available fund was not enough to sustain the vast research proposals, it was also a challenge in that regard. The world private firm or sector and audit had undergone frequent usage in the country that this research deserve special mention and explanation.
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