CHAPTER ONE
INTRODUCTION
1.1 Background Of The Study
In every economy, there exist facilities for the creation, custodianship and distribution of
financial assets and liabilities (Mohammed 2002). These facilities make up the financial system
in any economy of which banking is a sub-sector. Banks are global phenomena, a universal
institution. In fact, banks intermediate between surplus and deficit economic units, thereby,
acting as machinery for the allocation of scarce financial resources. (Mohammed, 2002).
Consequently, banks occupy a primary position in the economy as it is the forum of the money
market and the central nervous system of the economy. The banking industry worldwide,
structural changes. These changes are meant for the improvement of services for the betterment
of it operators and for the benefit of the customers, shareholders as well as the economy at large.
Banking as a service industry is organized to make profit for the shareholders vide provision of
banking services and supply of financial needs to individuals and cooperate bodies. In order to
achieve this, banks accept deposits from customers and give out loans to others. According to
(Sayer, 1970:175), ―banks seeks to make themselves as attractive as debtors and as efficient as
creditors that they can earn a substantial gross income from the difference between the interest
they charge as creditors and the interest they pay as debtors‖.
The researcher embark on this study in order the effect that will be experienced by banks if they
manage their credit well since this is the main source of their profit and given that if they seek to
maximized profit, they have to seek to know what can increase or decrease their profitability in
the complex economic environment that we find ourselves in today.
After the era of the batter system of trade, people began thinking on how to pull from the area of
surplus to the area of deficit. Individuals came together and formed savings groups. People savedtheir excess and those in need come and borrow the money but recovery of the money was
difficult because these groups did not have administration to follow up this loans and there were
no formal or legal procedures in granting these credits. People then began to form a formalized
legal financial institution which today is called banks.
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The researcher has observed that due to popularity and trust that the banks in Bamenda town
have for some customers, they give them loans without proper credit management being carried
out. Some of these customers take the money for social life issues which at the end of the day
yield no profit to them and repayment becomes a problem which results most at times to loan
delinquency on the side of the bank which affect their profitability at the end of the day.
1.2 Statement Of The Problem
One of the major problems confronting the banking industry today is the increasing incidence of
loan defaults and consequent loan losses which manifested on the profitability of the banks. Due
to increasing incidents of huge bad debts in the Bamenda banking industry, insider’s abuses,
management’s competence have been called to question. It must be noted that bad debts due to
the inability of the bank’s management to recover loans granted to customers.
The incidence of huge bad debts resulting in no profitability and subsequent bank failure in thebanking industry has not only attracted the attention of monetary authorities but the public at
large. There is a growing concern of increased bank failures and the bank distress if the problem
is not urgently addressed. This fear may not be out of place when viewed against recent
developments in the industry. Sound credit management is a prerequisite for a financial
institutions stability and continuing profitability, while deteriorating credit quality is the most
frequent cause of poor financial performance and condition. According to (Gilman 1997), the
probability of bad debts increases as credit standards are relaxed. Forms must therefore ensure
the management of receivables is efficient and effective. Such delays on collecting cash from
debtors as they fall due has serious financial problems, increased bad debts and affects customers
relations. If payment is made late, then profitability is eroded and if payment is not made at all,
then total loss is insured. On that basis, it is simply good business to put credit management at
the front end by managing it strategically.
1.3. Research questions
1.3.1 Main research question
What is the effect of credit management on the profitability of banks in Bamenda?
1.3.2 Specific research questions
I. What is the effect of credit appraisal on the profitability of banks in Bamenda?
II. What is the effect of credit risk control on the profitability of banks in Bamenda?III. What is the effect of credit monitoring on the profitability of banks in Bamenda?
1.4 Objectives of the study
1.4.1 Main objective
To determine the effect of credit management on the profitability of banks in Bamenda
1.4.2 Specific objectives
I. To examine the effect of credit appraisal on the profitability of banks in Bamenda.
II. To verify the effect of credit risk control on the profitability of banks in Bamenda.
III. To investigate the effects of credit monitoring on the profitability of banks in Bamenda.