This study attempt to appraise an evaluation of credit and bad debt management in commercial bank. A comparative study was conducted on the incidence of bad debts in Zenith Bank (2008 – 2013) the researcher choice of this period of study was informed by the relative stability in the banking industry particularly Zenith Bank, banking operations were significance affected by the focal and monetary policies of the government during this period. Inferential statistical techniques were used to test null hypothesis which reveals that incessant increase in interest rate is a strong and statistically important factor that causes bad debt in Nigeria commercial banks. It was concluded that the subject, credit and bad debt management is indeed topical not only because it touches on nerve of bank profitability, but also because of the need to focus more attention on its importance in the surviving gain. It was recommended that banks management should establish sound lending policies, adequate credit administration procedures and an effective and efficient machinery to monitor leading function with establish guidelines, reduce interest rates on lending.


Title page                                                                  i

Certification                                                              ii

Dedication                                                                 iii

Acknowledgment                                                       iv

Abstract                                                                    v

Chapter One: Introduction

1.1   Background to the study                                            1

1.2   Statement of Problem                                                 4

1.3   Research Questions                                                   5

1.4   Objectives of the Study                                               5

1.5   Statement of hypothesis                                             6

1.6   Significance of the Study                                            7

1.7   Scope of the Study                                                     8

1.8   Limitation of the Study                                              8

1.9   Definition of Terms                                                    9

Chapter Two: Review of Related Literature  

2.1   Introduction                                                              11

2.2   Reason for Bank Credit                                              11

2.3   Canons of Good Lending                                            14

2.4   Causes of Bad and debtful debts                                 17

2.5   Method of analysis in credit management                    20

2.6   Implication of financial rations                                    22

2.7   Risk analysis from financial statement                        30

2.8   Credit scoring system                                                 31

2.9   Rational for government participation in commercial   

banking                                                                    33

2.10 The 5Cs of credit                                                       34

2.11 Credit rating and analysis of debt                               38

2.11.1       Formulating polices for credit control                  39

2.11.2       Lending and profit generation                             40


Chapter Three: Research Method and Design 

3.1   Introduction                                                              44

3.2   Research Design                                                        44

3.3   Description of Population of the study                         44

3.4   Sample Size                                                               44

3.5   Sampling Techniques                                                 44

3.6   Sources of Data Collection                                          45

3.7   Method of Data Presentation                                      46

3.8   Method of Data Analysis                                             46


Chapter Four: Data Presentation, Analysis and Interpretation   

4.1   Introduction                                                              48

4.2   Presentation of Data                                                  48

4.3   Data Analysis                                                            48

4.4   Hypothesis Testing                                                     53


Chapter Five: Summary of Findings, Conclusion and Recommendation

5.1   Introduction                                                              59

5.2   Summary of Findings                                                59 5.3         Conclusion                                                                61

5.4   Recommendations                                                     62

References                                                                 64

Appendix I                                                                 65

Appendix II                                                                66

Appendix III                                                               70



1.1   Background to the Study

Financial resources are not equitable distributed among the different economic units. This led to the existence of financial institution especially commercial and merchant banks whose jobs include the efficient transfer of the deficit unit through saving investment mechanism in attempt to achieve this objective bank mobilize from people who have loan and advance to investors who have viable project but do not have sufficient funds to meet their investment commitment.

Under normal circumstances, the technique employed by banks in case of credit analysis should be able to provide them with perfect knowledge of a viable project that will be less risky with a view of curbing loan losses. In other words, the techniques employed by the banks should help them determine the level of risk involve in any project before giving out loan to their customers.

Unfortunately, in practice no such techniques can not be found in the leading decision of risk and uncertainty, and decision are in most cases based on principles, which are too subjective to provide some judgment this is the more reason why bankers, in terms of lending they are unavoidable extent loan and advance which remain uncollected and as such changes against the operating income of the bank.

Bad debts destroy loan and advances, which are one of the main earning assets of the banks when bad debts grow out of acceptable margin .it creates serious liquidity and profitability problems. Under such circumstance the bank will find it difficult to cover its operating cost and also pay dividend to its shareholders that have invested their money in the banks.

Banks, as economic organization lend in order to meet the credit need of the economy and generate sufficient revenue to satisfy the profit maximization objective of shareholders.

However, a bank cannot achieve this objective without keeping its asset bases ‘at reasonable level of liquidity with a view of meeting depositor withdrawer needs and at the same time maintaining full public confidence.

When facility extended in the credit creation process sink, a loan that is not repaid according to schedule cannot be used as a basis for further credit, the deadline in credit creation makes it difficult for new firms to grow while existing ones find it more difficult to expand. Consequently, in order m have true and fair position of their performance; banks need to raise their level of provision for bad and doubtful debts over the year. For example the size of bad debt for the entire banking industry is at December 1990 is put at eight billion naira without doubt this development has a lot of implication for the industry in form of jeopardizing individual banks survival and threaten nations economic stability and growth by causing a decline in out put, employment and capacity utilization in industries.



1.2   Statement of Problem

Credit management is at the centre of the operations of the banking industry. It accounts largely for the sadness of the industry as it represents the credit for the money spending activity and the bank of some organizations. Thus the survival or failure of the industry depends on credit management in the positive or negative aspects. A critical examination of the financial statement of most banks in negative will show that they would be technically in solvent, if they were required to reserve interest on non performing asset. The implication of this development is that bad debt is gradually bringing Nigeria banking industry to its knee; in fact, some of the banks are already in serious problems.

Since the case is so with burden of bad debts, this study is conducted to address the problem. “What is the extent of effectiveness of the credit and debts management schemes of commercial banks in Nigeria?”



1.3   Research Questions

The following question is formulated to address the problem formulated above

1.     To what extent do commercial banks provide for bad debts in their lending portfolio relating to creation?

2.     To what extent do commercial banks have enough credits facilities?

3.     To what extent do commercial banks manage bank credit effectively?

1.4   Objectives of the Study

The objectives of the study are:

1.     Determine whether commercial banks make sufficient provision for bad debt.

2.     Appraise the management of credit in commercial banks with a view to high lighting the adequacy, effective or otherwise in improving the performance of the Nigeria Banking Industry.

3.     Examine the ways of improving credit management in Nigeria Bank so as to reduce the incidence of bad debts to enable them play their role more effectively in the growth and development of the Nigeria economy.

4.     To make the necessary recommendations.

1.5   Statement of Hypothesis

The following hypothesis has been, formulated for the purpose of this study.

Hypothesis One

HO:   Commercial bank does not provide bad debts more than credit in their lending portfolio.

HI:    Commercial bank provide bad debts more than credit in their lending portfolio.

Hypothesis Two

HO:   Provision for bad and doubtful debt is not a function of the total loans and advent made by bank.

HI:    Provision for bad and doubtful debt is a function of the total loans and advance made by banks.

Hypothesis Three

HO:   The security required to secure customers loan account does not prevents them from going bad.

HI:    The security required to secure customer’s loan account prevent them from going bad.



1.6   Significance of the Study

If the upward trend in the yearly provision for bad and doubtful debts should continue unchecked, in face of increasing in competition among bank. It will certainly affect the future profit of the bank since bad and doubtful debt is charged against profit or loss unit of the bank.  

In fact, the destructive effects of bad debts on both the bank and general economy are better imagined than real.

It is against this background that the study will review the methods. Proportions and margins or lending to bad and doubtful debts with a view of establishing the relationship between these variables. So that both the government and bankers can realize the urgent need to work out appropriate strategies for tackling the huge bad debts that is threatening to destroy Nigeria Banking industry.

The study is relevant to the entire economy if it can lead to debt reduction; improve credit creation, thereby placing the banking industry in a comfortable position to extend credit for project that can make expected positive contribution to economic expansion.

Moreover, it is an addition to existing literatures in the field and a useful tool for future researchers.

1.7   Scope of the Study

The study is restricted to the management of credit and effect of bad is on the earnings of commercial banks. The study is designed to appraise the relationship between banks earnings and the level of bad debt.

The reference of the study is commercial banks. A case study of Zenith Bank. The time horizon ranges from 2008 – 2013.

1.8   Limitations of the Study

The major problem of the study is that the bank is reluctant to disclose and discuss the actual annual figures of loans and advance classified as bad debts for the fear that such information might be to the detriment of the bank.

Time Constraint: The academic time given was not enough for the researcher to met up and produce the necessary material that may contribute neaningful1y to this work.

Lack of funds: A research work of this nature will required some funds to meet the cost of assembling and relevance materials needed for the research.

Scarcity of data: This is as a result of inadequate relevant data in our cioo1 library.  

1.9   Definition of Terms

·                   Bank Loan: A specified sum of money lent by a bank to a customer, usually for a specified time and at a specified rate of interest.

·                   Bad and Doubtful Debts: Debts granted to a customer which cannot be recovered again (bad) and debts of which there repayment or recovering is doubtful to the bank (doubtful debts).

·                   Management: A social processed entailing responsibility for the effectiveness and economic planning and regulation of the operation of an enterprise in fulfillment of a given task or objective loan portfolio. The total amount of money available to a business enterprise which are to be given as credit to customer.

·                   Bank: This is an organization that provides various financial services for example keeping or lending money.
Loans: This is the money that an organization such as a bank lends and somebody borrows.

·                   Lending: This means to give money to somebody on the condition that they pay it back over a period of time and pay interest on it.

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