MANAGEMENT OF BAD DEBTS IN MICRO FINANCE BANKS

PROJECT INFORMATION

Format: Ms Word /  Chapters: 1-5 /  Pages: 45 /  Attributes: Data Analysis

CHAPTER ONE INTRODUCTION 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 ever grants 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 guard lines 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.