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CHAPTER ONE

INTRODUCTION  

1.1    Background of the Study

Essentially, banks originally emerged as deposit takers. They eventually metamorphosed into intermediates of funds and thereby started assuming credit risk. Credit, thus, became the business of banking, and the primary basis on which a bank’s quality and performance are judged. Empirical studies of banking crises all over the world have shown that poor assets quality (predominantly loan) has been the most frequent factor in bank failures.
Stuart (2005) emphasized that the spate of non-performing loans, is as high as 35%. Table 1 shows the ratio of non-performing credits (NPC), to total loans and advances (L and A) in Nigerian Commercial Banks between 1999 and 2009. Umoh (1994) traced the rising non-performing loans’ ratio in banks’ books to poor loan processing, undue interference in the loan granting process, inadequate or absence of loan collaterals, among other things, which are all linked with poor and ineffective credit administration. In essence this paper focuses on the concept of credit, evaluation of credit and recovery processes. The paper is divided into five sections, comprising the introduction, review of literature, evaluation and rating of credits, liquidity and credit management and finally, conclusion and recommendations.
1.2    Statement of the Problem          
Liquidity and credit management have implication on bank profitability and the authorities’ depositors and shareholders. It could trigger off mass cash withdrawal thus plunging the bank into deeper crisis. In analyzing the credit and liquidity management of First Bank of Nigeria Plc, I shall examine its assets quality, which includes its performing and non – performing loans. In addition efforts would be made to look into the bank’s capital adequacy ratio and its shocks of risk assets different measures of liquidity and solvency.  
1.3    Research Hypothesis          
The following hypothesis is developed and tasked to ensure a more effective and result oriented research work.
Hypothesis 1
Hi: the liquidity of Commercial banks could be determined efficiently from the effectiveness of its credit management.
Ho: the liquidity of a universal bank could not be determined efficiently from the effectiveness of its credit management.
Hypothesis 2
Hi: lending and investment operations of Commercial banks depend widely and extensively on its liquidity.
Ho: Lending and investment operations of universal bank does not depend widely and extensively on its liquidity.  
1.4    The Purpose of the Study          
A bank is considered liquid it has sufficient cash and other liquid assets in its portfolio together with the ability to raise fund quickly from other sources to enable it meet its payment obligations and financial commitment in a timely manner, therefore the main purpose is to highlight how liquidity and credit management in this Nigeria Banking Industry is being discovered and the extent to which First Bank of Nigeria Plc is guided in the management of its lending functions.  
1.5    Scope or Delimitation of the Study          
Commercial banks act as intermediaries by collecting deposits and paying interest on them and granting loan charging the borrowers interest at the higher rate. Improving these services to borrowers and the depositors the main goal of the bank is to make profit. Apart from granting loans bank also generate profit on investments. In order to maximize their earnings every bank attempts to structure its assets and liabilities such a manner as to yield the highest returns, subject to some constraints.
A bank is considered liquid if it has sufficient cash and other liquid assets in its portfolio, together with the ability to raise fund quickly from other sources to enable. It meets its payment obligation and financial commitments in a timely manner. This study therefore aims to cover the extent to which First Bank of Nigeria, Plc is guided by the above enumerated theories in t he management of it lending functions and know now it has been able to survive over years in spite of the global liquidity problems to supplement his effort the lending practices and procedure of the bank will also be evaluated.  
1.6    Limitations of the Study          
The research was faced with many problems in the course of collecting information relating to this project, as many staff is not willing to divulge related information. The directions at various departments dealing with credit management and liquidity in first bank refuse to disclose detail information relating to liquidity and credit management. Access to departmental ledger account was denied through verbal information relating to questions, asked was given another limitation was the inability to cover various branches of Nigerian banks, which are throughout the federation. This was mainly due to the financial and logistical difficulties that such exercise of this would entail.  
1.7       The Significance Of The Study
Liquidity is defined in its broadest sense as the ability to meet cash quickly and at a reasonable cost. Credit management is the way universal bank, lend money out to borrowers. However, this study tends to reveal the problems that one involved in the liquidity is essentially that of having sufficient fund to meet at all times this demand of money that may be made on a bank. Bank must be maintain adequate liquidity in order to provided for and line in deposit for and other liabilities, to satisfy unforeseen increased investment in particular desirable earning assets when such opportunities arises the liquidity requirement of any bank out of the bank. It is the responsibility of management to measure these requirements and to anticipate them on a current and continuous manner.    
1.8    Definition of Terms
Functions of Commercial banks the services offered by Commercial banks are numerous and they include;
a.      Mobilization of savings: - Commercial banks perform a very important function to all sectors of the economy by providing facilities for the mobilization of savings and making the available for investing purpose by the process of granting credit facilities to other customers. In this may those funds are made available to business to enable them expand their productivity capacity and to individuals and household to facilitate consumption.
b.      Extension of credit facilities:- According to read (1984). He establishes that the primary function of Commercial banks is the extension of credit to commuting borrowers. In making credit available, Commercial banks are rendering great social service through their actions production is increased capital investments are expanded and higher standard of living is realized. Banks make it possible for industries to produces a larger quantity of goods, which may remain the stock as inventory before eventually being sold or reprocessed into another from. A good example is the food industry where the quantity produced may be far in express of what can be consume immediately.
c.      Transfer of fund:- Commercial banks serve as medium for transfer funds they facilitates payment by enabling business, government and consumers to transact without cash, cheques and credit cards which are used for bulk purchases as measured by naira amount of transaction cheques drawn and deposited at the bank merely indicated transfer of fund from one account to the other.
d.      Creating money:- Commercial banks create money used to expand productive facilities otherwise there would be a short down of economic activity generally as business would be forced to wait until sufficient profits are made before they could expand. However, the money create activity of Commercial banks is kept under the control by the monetary to ensure that it is not excessive.
e.      International trade services:- all Commercial banks are involved in the financial aspect of international  trade and services required supporting this important part of the country’s economy, such include bill for collection, documentary credit and open account which are investment used in import and export trade.

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