MANAGEMENT OF BAD DEBTS IN MICROFINANCE BANKS IN NIGERIA ( A CASE STUDY OF SIX SELECTED MICROFINANCE BANKS IN ANAMBRA STATE)
BACKGROUND OF STUDY
An attempt will be made in this introductory chapter to give a general outline of bad debts in micro finance banks.
Schall and Harley (1987) in Anolve (2001) defines finance as a body of facts, principals and theories dealing with raising and using funds, it is said to be operating in the area of finance banks and other financial institutions that provides financial services.
Both debts can be defined as those debts which are not recoverable. Fit is a credit review which are not recoverable. It is a credit review borrower from a pure lender who may be a formal or informal financial institution against on borrowers promises to make future payments. When a company grants credit to its customers, there are usually a few customers who do not pay. The account of such customers are called bad debts and are at expense of selling on credit. You might ask why do merchants swell on credit if bad debts result? The answer is that they sell on credit in order to increase sale and profit. They are willing to take a reasonable loss from bad debts in order to increase sale and profits. Therefore, bad debts, loses are incurred in order to increase the full or partial recovering is considered doubtful and uncertain.
In Nigerian context, there has been increased bad and doubtful trends of debts in the banks, however, banks and their shareholders, government officials and most Nigerians have shown a lot of concern to bad debts. In this country by making pronouncement and insisting on the need to arrest the situation by proclaiming that who evergrants an irrecoverable loan will be made to repay.
The regulatory and supervisory guard lines for Micro Finance Banks in Nigeria (2005) defines Micro Finance Banks(MFB) as any company licenses to carry on the business of providing micro finance services that are needed by the economically active poor, Micro, Small and Medium Enterprises to conduct on expand their business provision of Micro credit is one of the vital function of Micro Finance Banks.
Generally, a Micro credit is granted to the operator of the micro enterprises such as peasant farmers, artisans, fishermen, rural women, etc. The definition also apply to credit delivered to the poor. Like in other business to bankers aim is to maximize profit for the interest of the shareholders and unlike in other. The bankers aim to maintain liquidity for interest of the deposit. These two aims cannot follow the same direction when a bank tries to be specifically liquid by investing on at most short term securities which means undertaking loss or lost or risk. At this point, the changes of bad debts occurrence will fall to its lowest minimum.
On the other hand, when bankers try to maintain profitability by investing on its least long term securities which undertakes more risks, investments certainly will be fortail liquidity because almost all the investments will take not less than one year to be repaid. At this point, the case of bad debt occurrence will rise to higher maximum. When a bank strikes a balance between profitability and liquidity, there is every tendency of this bad debt occurrence. The management of bad debts resulting from commercial banks and advance reflecting on degree of risk associated with lending has necessitated the adoption of this project.
STATEMENT OF PROBLEMS
In 2005, The Federal Government, through policy guardlines established Micro Finance Banks (MFB)in replacement of community Banks, But most huge amount of money they lose through bad debts. The implication is that there is no more confidence on some bank customers who have calculated scientific ways of defrauding the banks.
Liquidity in banking sector also makes banking unable to meet repayment obligations severe cases, there are introduction of technology insolvency. These situations were brought about by the following among others.
1. Indiscriminate and unprofessional lending practices.
2. Poor Management which finances long-term loans assets with short term inabilities.
The problem therefore is to attempt to examine the debt management techniques of the named banks and suggest ways for a healthy and efficient debts portfolio management.
PURPOSE OF STUDY
The purpose of this study is to ascertain the procedure for management of bad debts in Micro Finance Banks (MFB), especially the purpose of the study is to:
1 Ascertain the effective credit and bad debts management on Micro Finance Banks
2 To identify the danger signals on bad debts and doubtful debts in Micro Finance Banks
3 To examine causes of bad debts on Micro Finance Banks
4 To ascertain the implication of huge bad debts on Micro Finance Banks
SIGNIFICANCE OF STUDY
The study will go a long sway in considering bad debts, how it can be managed and come out with good recommendation, which will help in reducing due incidence of bad debts and its effects on. In general, (Micro Finance Banks of Anambra State) The study will provide the following vital reference points.
1. Bank officials: It will provide them with information on tending policy and how to manage their credit effectively and how they can control their credits effectively and how they can control incidence of bad debts in their institutions.
2. Student Banking And Finance: The study will definitely provide students with enough material knowledge on debt management.
3. Banking Public: This study provides the banking public with information on banking public and credit advances.
SCOPE OF STUDY
The scope of this study or research will enter on the investigation with the problem into the debt management with particular reference to micro finance banks in Anambra state. This work is limited to Micro Finance Banks in order to ensure us get authentic information or data as regards the operation of debt management.
1. What are the major goals of credit and bad debts in Nigeria Micro Finance Banks?
2. What are the danger signals on bad and doubtful debts?
3. What are the causes of bad debts in Nigerian Micro Finance Banks?
4. What are the implications of bad debts in Micro Finance Banks?
CREDIT AND DEBIT MANAGEMENT
The place of banks in the national economy is a significant one, which acts as the prime mover of the economic life of any nation. The importance and significance of banks with respect to the economic and social development of a nation cannot be under-emphasized. Banks are known to perform many functions of deposits; mobilization and tending which is perhaps to most significant of their functions. Indeed the two prime functions portray banks as the agent who redirects funds from the surplus sector to the deficit sector while earning a comfortable margin surplus sector and then Selvey for their services as the intermediaries. Whole deposit mobilization can be categorized as a relatively executing activity. Lending is essentially a logical follow-up of deposit mobilization. The banks are responsible for the safety of funds entrusted to them, while also responsible for channeling the funds to the owners. The quality of the bank's fund lending decision significantly determines the bank's ability to effectively play the role it has assumed. Apart from the fact that lending is a significant function of the banks. For the above reason, loans and advance have been found to constitute the largest proposition of the bank's assets and assets possess the highest rate of return released to the other alternative investment. This is to determine the various techniques of methodologies of credit, the appropriate combination of these techniques so as to achieve success and minimize losses were not in banks credit and lending activities, this basic aim offers the opportunity to bridge the gap between savings and investment in the economy. Credit management also involves monitoring of operations of account at the branch bank have been taken for a ride in the past by “smart” customers, who give the impression that turnover was being done, granted by then, were all that was being done kite flying or cash recycling. Adekowary (1986) acquired that a customer who indulges in this practice usually has two or more accounts at two or more different banks or branches he draws a cheque on his account. The bank knowing fully well that there are no funds in that account with the bank, then draws all the uncollected funds out at bank “P” and immediately deposits in bank ”x” another cheque drawn on non-existence funds in his account by the bank “T”. This is a simple example of kiting, by this, it means a customer can fraudulently make use of bank funding without proper authority. Bank staff must therefore watch program operation on customers’ accounts closely and report unusual activities to their managers. However, some indication of kiting suspect as recently enumerated by Kotawa of (Savana Bank) as an experienced operating officer are;
The consistent increase in deposit amount Excessive account activities in relation to the type of account, that is high turnover with constant daily balance. Depositors usually concern with daily states of account A pattern of daily deposit made to cover cheque received for payment on the current day and finally Frequent purpose of the customers related to the company or other banks
OTHER QUANTITATIVE CREDIT MANAGEMENT TECHNIQUE This involves the control through loan disbursement and other drawn-down conditions. Olalusi (1989) argued that no loan should be disbursed to the customer when necessary agreement forms have not been duly completed by the customer or the security document has been signed yet. Osiayemia (1981) maintained that there are dangers Inherent in providing a personal or corporate body with much or two little funds at a given moment. The loan disbursement is therefore linked with the flow cycle of the customers hence an appropriate disbursement arrangement must be applied. Also to be applied are certain empirical disbursement criteria and consideration is a specific type of credit such as housing loan, agricultural loans, and overdraft for a specific purpose.
SECURITY CONSIDERATION IN DISBURSEMENT INCLUDES Loans should not be disbursed until customers satisfied all security formalities. The danger of allowing him to drawn down the loan while he is yet to comply with the security documentation cannot be over-emphasized. When drawn down has not been effected, customer is over willing to co-operate to finish the required documentation which is not always the case once he has the money. No disbursement should be allowed against anticipating approvals. Valid approvals need to be attained from the approving authority before disbursement is allowed because jumping the gun in loan disbursement is dangerous as the bank's position may be jeopardized by opting it in a fail accomplished position. Finally, all disbursement should pass through the customer’s current accounts.
DANGER SIGNALS ON BAD AND DOUBTFUL DEBTS Dangers' signals are usually not lacking though sometimes they descend like a sudden foundation without prior notice with experience instinct for sensing and spotting troubles. The following points will serve as a useful question;
Excessive rigidity in the accounts for example difficulty in obtaining cover for cheques, dividing monthly saving low or non-existence turnover on the account. Evidence of delay in payment of trade accounts Long debt in producing financial statement particularly audited account Heavy borrowing from other sources Inability to meet loan installment Increase in a number of the cheque being hopped at customer instances or returned from lack of funds Poor quality of current assets Failure to honor banks, inculcate to come for discussion particularly in the customers used to make enforcement calls at the Bank in the first.
CAUSES OF BAD DEBTS IN MICRO FINANCE BANKS In the Nigerian context, there have been increasing trends of bad and doubtful debts in the banks and bankers and their shareholders and also the government officials are begging to show concern on this issues by making pronouncements insisting on the need to correct the situation. However, for effective coverage on organized reviews the causes of bad debts in microfinance banks are as follows;.