Effectiveness of loan recovery strategies in commercial banks in Nigeria
1.1. Background of the Study
One important factor which can significantly affect the economic development of a country is the health of its financial system (Abiola and Olausi, 2014 ). The experience of the recent financial crisis illustrates the importance of the role played by the bank failures in the disruption of economic activities globally (Abedisi et al, 2012). One important issue in this regard is the credit risk which has been of significant concern for the regulators of banking and the authorities (Das and Ghosh, 2007). The reasons for the recent bank failures are largely suggested as the inclusion of toxic assets in the loan portfolio of commercial banks (Onaolapo, 2012).
The management of credit risk in an adequate manner is considered as very important for the growth and survival of financial institutions, especially the banks (Rufai, 2013).One primary risk source to the safety and soundness of a bank is identified as the loan portfolio. The process of satisfactory administration of the loans, advances or other facilities of credit ensuring the compliance of these with the rules and regulations and guaranteeing the repayment of the credits in the due date is included in the term credit risk management ( Imeokpararia, 2013). How effectively the strategies for the loan recovery are thus very important in the long run success of the banking organizations, in this regard (Imeokpararia, 2013 ). The following video defines and sheds further lights on the nature of commercial banks and their activities:
In Nigeria, the reports suggest 11 among the 24 banks as stressed which denotes weak health of the financial system in the country (African Report, 2009). Moreover, studies show the main problems associated by the Nigerian banks as the practices of credit risk management, which are very poor and the corporate governance practices, which are very weak ( Okey, 2010). Credit disbursement has emerged as a main strategy for survival among the banks of Nigeria mainly after the 2005 consolidation programs in 2005 ( Onaolapo, 2013 ). This has necessitated the requirement of the practices of credit risk management especially the loan recovery strategies as perfect for stabilizing the health of the financial system in Nigeria. Studies, however, show many problems associated with the loan recovery strategies that have resulted in the significant rise in the non performing loan in the commercial banks in Nigeria (Rufai, 2013).
Given the above background, it is very important to examine the different loan recovery strategies, their effectiveness and their influence in improving the performance of the banking sector in Nigeria in detail. In this study, the case study of Guranteed Trust bank is done in this regard.
1.2.Statement of the Problem
The main debt recovery strategies recommended for the success of the debt collection in African banks include the repayment plans for customers facing financial problems with flexible terms, hardship programs for borrowers who repay loans late , strategies like extension or reduction of interest payments or fees in the case of expected problems associated with the customer payments and communication channels creation for customers for open discussion of their issues(African Economic Outlook,2005). In spite of the different reform measures adopted by the Nigerian financial system for effectively managing the debt recovery strategies mentioned above, many banks were found to be affected by poor credit risk management practices, reflected in the significant amount of the non performing loans in the banking system in the country( Rufai, 2013 ). Given this, it remains very relevant to examine the main problems associated with each of the above mentioned recommended debt recovery strategies in the Guaranteed Trust Bank in Nigeria and their effects on the performance of the bank in detail. The next section discusses the research objectives for the study in detail.
1.3. Research Objective
The aim of the study is to examine the effects of the credit risk management and the loan recovery strategies on the performance of Guranteed Trust Bank and the relationship between the interest income and bad debt of the Guaranteed Trust Bank.
The specific objectives of the study are the following
(1) To examine the problems associated with the four recommended debt recovery strategies of Guaranteed Trust Bank
(2) To examine the effects of the debt recovery strategies on the profitability of Guaranteed Trust Bank
(3) To examine the links between the interest income and bad debt of the Guaranteed Trust Bank
(4) To provide recommendations on improving the effectiveness of the debt recovery strategies and the credit risk management in Guaranteed Trust Bank
The research questions of the study are the following
Whether the problems associated with the debt recovery strategies have any effect on the profitability of Guaranteed Trust Bank?
If so, what are the effects in this regard?
Whether there exists any relationship between the interest income and the bad debt of the Guaranteed Trust Bank
1.5. Research Hypothesis
The research hypothesis of the study is given as follows
First hypothesis is that the effective management of debt recovery strategies dies not have an effect on the profitability of the Guaranteed Trust Bank. The alternative hypothesis is that effective management of debt recovery strategies does have an effect on the profitability of the Guaranteed Trust Bank.
The second null hypothesis is that the interest income does not have an effect on the bad debt of the Guaranteed Trust Bank.
The second alternative hypothesis is that interest income does have an effect on the bad debt of the Guaranteed Trust Bank.
1.6. Scope of the Study
This study is based on the case study of the Guaranteed Trust Bank, 5th Avenue, Festac town, Lagos, Nigeria. The case study of Guaranteed Trust Bank is considered here since it is one of the leading public limited banks in the country that provides many products and services to the customers including retail banking, loans and advances granting , leasing if equipment, corporate finance, activities of money market and operations like foreign exchange. The debt recovery strategies of this bank and their associated problems are examined in detail. The effects of each strategy on the profitability of the bank are examined based on the data collected from the primary and secondary data sources. In addition, it is examined in detail the trends in the bad debt of the bank and the influences of interest income on the bad debt of this bank.
Abedisi AS and A Oyedijo( 2012) : Strategic Importance of Credit Risk Management to Shareholders’
Wealth-Sustenance in Nigerian Banks: An Empirical Analysis, Economica, 8(1), 131-148.
Abiola, I and A S Olausi(2014) : The impact of credit risk management on the commercial banks performance in Nigeria, International Journal of Management and Sustainability, 2014, 3(5): 295-306
African Economic Outlook , (2005) : African Economic Outlook, PP. 273. Retrieved from: www.oecd.org/dev/aeo
Imeokpararia, L(2013) : Loan Management and the Performance of Nigerian Banks:An Empirical Study, International Journal of Management, 1(1).
Onaolapo, A R( 2012) :
Analysis of credit risk management efficiency in nigeria commercial banking sector,(2004-2009), Far East Journal of Marketing and Management, 2(1), 39-52.
Rufai, A S(2013) : Efficacy of Credit Risk Management on the Performance of Banks
in Nigeria A Study of Union Bank PLC (2006-2010), Global Journal of Management and Business Research
Administration and Management, 13(4).
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