IMPACT OF INTERNAL CONTROL ON BANKS CRED

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IMPACT OF INTERNAL CONTROL ON BANKS CREDIT MANAGEMENT (A STUDY OF FIVE BANKS IN BAYELSA STATE)

BY

KINGSLEY GBEKE KALAGBOR Ph.D DEPARTMENT OF ACCOUNTING

FACULTY O F BUSINESS STUDIES IGNATIUS AJURU UNIVERSITY O F EDUCATION

PORT HARCOURT RIVERS STATE. NIGERIA

EMMANUEL OBI

DEPARTMENT OF ACCOUNTING FACULTY OF BUSINESS STUDIES

IGNATIUS AJURU UNIVERSITY OF EDUCATION PORT HARCOURT

ABSTRACT

This study primarily aims at finding out the impact of internal control on banks credit management offive Banks in Bayelsa state of Nigeria. The study established for itself three purpose; To ascertain the extent to which internal check enhance bank customer credit reporting, To examine the extent to which authorization/approval enhance security of bank credits and To ascertain the extent to which performance evaluation enhance reduction in non-performing bank credits. Three research questions and three hypotheses stated in line with the objectives of the study was used to guide the researcher. Related literatures on internal control and bank credit management were reviewed. The survey design was adopted for the study and questionnaire was used in collecting data. The population of the study was made up of fwe banks in Bayelsa State. The random sampling technique was used in selecting the sample size of the study. Pie chart was used to analyze the research questions while Chi-square statistical tool was used in testing the hypotheses. The findings revealed that Internal control has a great impact on banks credit management. It was therefore recommended that Banks should have a clearly-established internal control system.

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KINGSLEY G. K. P h . D & EMMANUEL O. 6 8

INTRODUCTION

The major function of every m a n a g e m e n t in a n y organization is to see to the success a n d smooth r u n n i n g of s u c h o r g a n i z a t i o n . In o r d e r to achieve that, m a n a g e m e n t is saddled with f o u r m a j o r m a n a g e r i a l functions: planning, organizing, leading a n d controlling. Controlling which h a s to do with the process of regulating o r g a n i z a t i o n al activities so t h a t actual performance conforms to expected o r g a n i z a t i o n a l goals a n d s t a n d a r d s is seen a s one of the major f u n c t i o n s of m a n a g e m e n t even though it's the fourth (4th) stage of the f u n c t i o n s of m a n a g e m e n t .

The level of success recorded in any organization d e p e n d s m a j o r l y on its control system, be it the internal or e x t e r n a l . R e g a r d l e s s of the thoroughness of the planning done, a p r o g r a m or decision still m a y be poorly or improperly implemented without a s a t i s f a c t o r y control s y s t e m in place. Controlling lets manager(s) tell if the organization is on t r a c k for goal achievement or not.

Controls serve other important roles i n c l u d i n g h e l p i n g m a n a g e r s cope with uncertainty, detecting irregularities, identifying o p p o r t u n i t i e s , handling complex situations, a n d decentralizing a u t h o r i t y .

There are several major s t e p s usually identified in t h e b a s i c control process. These are, in order, determining t h e a r e a s to b e controlled, establishing the appropriate s t a n d a r d s , m e a s u r i n g p e r f o r m a n c e , comparing the performance against s t a n d a r d s , recognizing p e r f o r m a n c e if s t a n d a r d s are met or exceeded or take corrective a c t i o n s a s n e c e s s a r y if not, and adjusting e i t h e r / o r s t a n d a r d s a n d m e a s u r e s a s n e c e s s a r y . Of course it would be impossible to control all activity in a n organization. Consequently, it is important for the m a n a g e r to decide w h i c h activities should have the control process applied.

The above notwithstanding, the a s p e c t of control w h i c h r e q u i r e s more attention in a n organization is the internal control s y s t e m which is the determinant of the progress of every organization i n c l u d i n g the ba nki ng sector.

The need for proper internal control s y s t e m s in organizations, especially banks, c a n n ot be u n d e r m i n e d , d u e to t h e fact t h a t t h e b a n k i n g sector, which h a s a crucial role to play in the e c o n o m ic d e v e l o p m e n t of a nation is now being characterized by m a c r o e c o n o m i c instability, slow growth in real economic activities, corruption a n d r i s k s a r i s i n g from credit m a n a g e m e nt (Olaoye, 2009).

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THE BUSINESS MASTER 6 9

(he risk u n d e r control or major b r e a k d o w n s within a n existing system pose a t h r e a t a g a i n s t the s u c c e s s of the b a n k i n g sector.

Internal control is a system s t r u c t u r e d within the corporation whose goal is to raise efficiency and effectiveness of activities. T he system a s s u r e s the conformity of activities within the laws a n d regulations a n d improve the reliability of financial reporting. Internal control system p o s s e s s e s vital importance for the institution to a t t a i n its u l t i m a te objectives. Internal control system allows b a n k s to foresee potential p r o b l e ms (including credit management) which may c a u s e financial losses a n d thereby prevent or minimize any f u t u r e losses (Hayali, Yusuf, Selin, Dizman &Gundogdu, 2012).

Credit m a n a g e m e n t provides information to on-the-job b a n k e r s regarding how to h a n d l e credit operations. Beginning with Credit policy, it covers the appraisal techniques for term loan, working capital & n o n -f u n d b a s e d loans a n d credit risk m a n a g e m e nt techniques with c a s e s s t u d i e s . Besides, it provides details about credit monitoring a n d also loan recovery tools (Marquis, 2015)

However, this study is aimed at verifying the impact of internal control s y s t e m s on b a n k s credit m a n a g e m e nt of some selected b a n k s in

Port H a r c o u r t of Rivers State, Nigeria.

T h e b a n k i n g sector is faced with challenges today including i m p r o p e r m e a s u r e s of credit management which is capable of leading the c o m p a n y into liquidation if not properly managed. Some of the p r o b l e ms t h a t s t r u c k the heart of the researcher include the problem of liquidity r a t e of b a n k s . Most b a n k s are liquidated d u e to poor m a n a g e m e n t of the credit s y s t e m which r u n s into bad debt. The credit system, if not the m a j o r is a m o n g the major sources of revenue of financial i n s t i t u t i o n s (banks) t h r o u g h the interest which they realize from c u s t o m e r s t h a t p a t r o n i z e s t h e m on the aspect of credit, hence, if not properly m a n a g e d l e a d s to liquidation of s u c h bank(s).

In most c a s e s credits results to bad debts d u e to lack of proper i n t e r n a l control system(s) in the banking sector. Where there is n o proper i n t e r n a l control system(s) to checkmate the credits issued by s u c h b a n k to a s s e s s the p r o c e d u r e s a n d processes involved in the retrieving of c r e d i t s i s s u e d , most credits issued will result in b a d debts. S u d d e n liquidation of c o m p a n i e s (including banks) often gives birth to a r e s o u n d i n g q u e s t i o n s u c h a s "what went wrong?" a breakdown of the i n t e r n a l control s y s t e m s are usually the c a u s e s , a n d this propelled this r e s e a r c h work in o t h e r to find a lasting solution to the a b e r r a n t .

C o n c e p t u a l Framework

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Internal control system in t h i s s t u d i e s is t h e i n d e p e n d e n t variable which could be m e a s u r ed o p e r a t i o n a l l y by internal check, authorization/approval a n d p e r f o r m a n c e e v a l u a t i o n . While b a n k s credit management is the d e p e n d e n t v a r i a b l e w h i c h is measured in terms customer credit report, s e c u r i t y of c r e d i t a n d reduction in non-performing credit.

The above could be s u m m a r i z e d in figure 1.1 below:

Internal Control S y s t e m

B a n k Credit Management

Internal Check

Authorization/

Approval

Performance

Evaluation

C u s t o m e r Credit

Report

Security of Credit

Reduction in

Non-Performing Credit

Source: Conceptualized b y t h e R e s e a r c h e r 2 0 1 6 Objectives Of The S t u d y

Basically, b a n k s a r e in p l a c e n o t o n l y to a c c e p t deposits but also to grant credit facilities, h e n c e t h e y a r e e x p o s e d to credit risk. Credit risk is by far the most i m p o r t a n t risk f a c e d by b a n k s a n d the accomplishment of their b u si n e ss d e p e n d s on a c c u r a t e m e a s u r e m e n t and efficient management of this r i s k to a g r e a t e r e x t e n t t h a n any other risks (Gieseche, 2004 a s cited in Kargi, 2 0 1 1 ) .

The objective of this r e s e a r c h i n c l u d e a m o n g o t h e r s the following:

1. To ascertain t h e e x t e n t to w h i c h i n t e r n a l check enhance bank customer credit m a n a g e m e n t of b a n k s in Bayelsa.

2. To examine t h e e x t e n t to w h i c h a u t h o r i z a t i o n / a p p r o v a l enhance security of b a n k c r e d i t s .

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T H E B U S I N E S S MASTER 71

R e s e a r c h Q u e s t i o n

In o r d e r to achieve t h e p u r p o s e of the s t u d y , the following r e s e a r c h q u e s t i o n s w h e r e f o r m u l a t e d :

1. To w h a t e x t e n t d o e s i n t e r n a l check e n h a n c e b a n k c u s t o m e r credit m a n a g e m e n t of b a n k s in Bayelsa?

2. To w h a t e x t e n t does a u t h o r i z a t i o n / a p p r o v a l e n s u r e s e c u r i ty of b a n k credit?

3. To W h a t e x t e n t does p e r f o r m a n c e evaluation e n h a n c e r e d u c t i o n in n o n - p e r f o r m i n g b a n k credits

R e s e a r c h H y p o t h e s e s

T h e following h y p o t h e s e s were formulated a n d tested in this s t u d y . HOi: t h e r e is n o significant effect of internal check on c u s t o m e r credit

m a n a g e m e n t of b a n k s in Bayelsa.

HO2: a u t h o r i z a t i o n / a p p r o v a l does not significantly e n h a n c e security of b a n k credits.

HO3: p e r f o r m a n c e evaluation report does not significantly e n h a n c e r e d u c t i o n in non-performing b a n k credits.

LITERATURE REVIEW Internal Control S y s t e m

The s t r u c t u r e of modern ba nki ng system a n d the high expectation from the investors a n d the society at large h a s called for a more tightened internal control system. Internal control h a s been variously defined. According to Princeton (2008) Internal Control is a proc e ss affected by a n organization's s t r u c t u r e , work and authority flows, people a n d m a n a g e m e n t information system, designed to help the organization a c c o m p l i s h specific goals or objective". From the definition, t h e objective of a n y internal control should be directed towards the a t t a i n m e n t of the organizational objectives.

In t h e w o r d s of Okozie, (2010) "Internal Control is the whole s y s t e m of controls, financial and otherwise, established by the m a n a g e m e n t in order to carry on the b u s i n e s s of the enterprise in a n orderly a n d efficient m a n n e r , e n s u r e a d h e r e n c e to m a n a g e m e n t policies, s a f e g u a r d the a s s e t s a n d s e c u r e a s far a s possible the completeness a n d a c c u r a c y of t h e records". A s o u n d internal control system should provide t h e platform for recording and processing t r a n s a c t i o n s in s u c h a way t h a t it form a d e q u a t e b a s i s for the preparation of the financial s t a t e m e n t . An efficient internal control system involved a clear definition a n d se p a r a t i on of d u t i e s for various employees or g r o u p s within a company. The intent of s e p a r a t i n g the d u t i e s is to protect against f r a u d, waste, a b u s e a n d m i s m a n a g e m e n t of resources.

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Asuquo (2005) postulated t h a t "Internal Control is m a d e u p of i n t e r n a l checks, internal audit, a c c o u n t i n g controls a n d o t h e r f o r m s of c o n t r o l s such a s budgetary a n d physical control".

Internal Control Objectives

Internal control activities a r e designed to provide r e a s o n a b l e a s s u r a n c e t h a t particular objectives a r e achieved, or related p r o g r e s s u n d e r s t o o d .

There are seven detailed objectives t h a t a n internal control s y s t e m m u s t meet to prevent errors in the j o u r n a l s a n d records.

According to Aren &Loebbecke (2010), the client's s y s t e m of i n t e r n a l control m u s t be sufficient to provide r e a s o n a b l e a s s u r a n c e t h a t :

Recorded Transactions are valid (Validity): T he s y s t e m c a n n o t permit the inclusion of fictitious or nonexistent t r a n s a c t i o n s in j o u r n a l s or o t h e r a c c o u n t i ng records.

T r a n s a c t i o n s are properly authorized (Authorization): If a t r a n s a c t i o n t h a t is not authorized takes place, it could result in a f r a u d u l e n t transaction, a n d it could also have the effect of wasting or destroying c o m p a n y a s s e t s .

Existing t r a n s a c t i o n s are recorded (Completeness): The client's p r o c e d u r e s m u s t provide controls to prevent the omission of t r a n s a c t i o n s from the records.

Transaction are properly valued (Valuation): An a d e q u a t e s y s t e m includes procedures to avoid errors in calculating a n d recording t r a n s a c t i o n s at various stages in the recording process.

Transactions are properly classified (Classification): T he p r o p e r account classification according to the client's c h a r t of a c c o u n t s m u s t be m a d e in the j o u r n a l s if the financial s t a t e m e n t s are to be properly s t a t e d . Classification also includes s u c h categories a s division a n d p r o d u c t . Transactions are recorded at t h e proper t i m e (Timing): T he recording of t r a n s a c t i o n s either before or after the time they took place i n c r e a s e s the likelihood of failing to record t r a n s a c t i o n s or of recording t h e m at the improper a m o u n t . If late recording occurs at the end of the period, the financial s t a t e m e n t s will be misstated.

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THE B U S I N E S S MASTER 7 3

Regardless of the m e t h o d u s e d to enter t r a n s a c t i o n s in the s u b s i d i a r y records a n d to s u m m a r i z e transaction, a d e q u a t e controls are needed to m a k e s u r e s u m m a r i z a t i o n is correct.

Classes Of Internal Control

The Institute of C h a r t e r e d A c c o u n t a n t s of Nigeria (ICAN, 2 0 0 6 a , b) categorized controls into three m a j o r classifications:

P r e v e n t i v e controls: T h e s e are controls that predict potential problems before they occur a n d m a k e a d j u s t m e n t s . They also prevent a n error, omission or malicious act from occurring. Examples of preventive c o n t r o l s includes: Using well-designed d o c u m e n t s to prevent errors. E s t a b l i s h i n g suitable p r o c e d u r e s for authorization of t r a n s a c t i o n s . Employ only qualified personnel. Segregate duties.

D e t e c t i v e controls: T h e s e controls are designed to detect a n d report the o c c u r r e n c e of a n omission, a n error or a malicious act. Examples of detective controls includes: duplicate checking of calculations. Periodic p e r f o r m a n c e reporting with variance error message over tape labels. C o r r e c t i v e controls: These controls help to minimize the impact of a t h r e a t , identify the c a u s e of a problem, correct errors arising from t h e p r o b l e m . They also correct problems discovered by detective controls a n d m o d i f y t h e processing system (s) to minimize f u t u r e o c c u r r e n c e of the p r o b l e m . Examples of corrective controls are: contingency planning back u p p r o c e d u r e s r e r u n procedures.

A d m i n i s t r a t i v e Control: This consists of the p l a n s of a n organization a n d all of the coordinate methods a n d m e a s u r e s adopted within a b u s i n e s s to promote operational efficiency and encourage a d h e r e n c e to p r e s c r i b e d managerial policies. Example include the formal organization c h a r t concerning who reports to whom, d e p a r t m e n t a l budgeting p r o c e d u r e s a n d reports on performance (e.g. variance analysis report). F i n a n c i a l or A c c o u n t i n g control: Accounting control comprises of the p l a n of organization a n d all of the coordinate m e t h o d s a n d m e a s u r e s a d o p t e d by the m a n a g e m e n t to e n s u r e that all t r a n s a c t i o n s are a u t h o r i z e d . Safeguard a s s e t s , a n d Check the accuracy a n d reliability of its a c c o u n t i n g records a n d d a t a .

A good a c c o u n t i n g control helps maximize efficiency a s p e r f o r m a n c e c a n be compared through information generated in p e r f o r m a n c e reports. It also helps minimize waste, unintentional errors, a n d f r a u d .

I m p o r t a n c e Of Internal Control

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changing too. A s u c c e s s f u l system of Internal Control m u s t t h e r e f o r e be responsive to s u c h c h a n g e s.

A good, efficient a n d effective s y s t e m of i n t e r n a l control a i m s at preventing intentional a n d u n i n t e n t i o n a l e r r o r s a n d f r a u d in t h e operations of a company. It also a i m s a t early detection of e r r o r s a n d irregularities t h a t may be committed by t h e employees. T he s y s t e m of internal control enables the organization to meet its objectives m o r e effectively. If the system of control is effective, a n d t h e e x t e r n a l a u d i t o r evaluates it so, t h e cost of a n audit will be reduced to the a d v a n t a g e of the organization.

Challenges Of The Internal Controller In The Nigerian B a n k i n g Industry

The internal controller is often looked at a s "the Police m a n " of t h e organization who m u s t e n s u r e that all the laws, rules a n d r e g u l a t i o n s a r e duly complied with. He is expected to discharge his f u n c t i o n s with highest level of dexterity, accuracy a n d sincerity. In t h e c a u s e of discharging his functions, he is faced with a lot of challenges. S o m e of the challenges are discussed below.

1. Independence: The greatest challenge of the internal controller is t h a t of independence. In the words of Clive De Paula (1983) "the internal controller, in addition to his technical knowledge, m u s t be above all things a m a n possessed of both strength of c h a r a c t e r a n d tact. He m u s t not be easily led a n d influenced by o t h e r s b u t , knowing what his duty is, he m u s t do it in spite of direct or indirect pressure". Although the law clearly e n t r u s t t h e responsibility for internal control on the b a n k s directors, t h i s responsibility is f u r t h e r delegated to a professional who is a staff of the b a n k . Being a staff, he looks u n t o his b o s s for promotion, recommendation and growth within the b a n k . T he q u e s t i o n is -will you have the gut or courage to report his b o s s w h o h a s contravened the CBN guidelines or CAMA. In theory, yes h e s h o u l d report. But in practice, some internal controllers m a y not likely try to do so. In a n attempt to report some act or violation s o m e internal controllers have lost their j o b s a n d some have m i s s e d their promotion a n d some are looked at a s s a b o t e u r s of the organization. This calls for proper protection of the i n t e r n a l controller.

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According to Institute of Chartered Accountants of Nigeria - Rules for professional conduct for members (2000), "Integrity implies not merely honesty but fair dealing and truthfulness".

Therefore any report signed by the Chief internal Controller should be capable of beings relied upon. But this is not the case.

We have had several cases of internal controllers who accepted gratifications a s an inducement to waive reporting failure to comply with laws or regulations and sometimes not to report discovered cases of fraud and misappropriation.

3. Qualified manpower: The duties of the internal controller are important arm of internal control and therefore such office should be manned by professional accountants.

Prior to 2006, we have had cases where nonprofessional accountants are sent to man the internal control unit. The staff of the internal control department should also be professional accountants who are competent. Section 358 of the Companies loans to directors, management staff and political interest. Insiders' conversion of banks resources to purposes other than b u si n e ss interest. Granting of interest waivers on non-performing insider credit without CBN prior to approval. Diversion of b a n k s earnings through the use of subsidiaries to deny the b a n k s of legitimate earnings. The internal controller is expected to report all these to the appropriate authority but due to circumstances beyond his control he may not report them. Where such are reported, his report may be suppressed.

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KINGSLEY G. K. Ph.D & EMMANUEL O. 7 6

tax authority. This is always done in collaboration with the internal controller.

The Concept Of Credit

According to Gopi (2012), the word "credit" comes from the Latin word "credo" which means "I believe". Hence, credit is based upon belief, confidence, trust and faith. The loan is based upon the confidence of borrowers future solvency and repayment. Hence, credit m e a n s ability to command the other's capital in return for a promise to re-pay at some specified time in future. Besides, credit is the combination of "ability to borrow" and "willingness to borrow". In fact, credit is a n individual's borrowing capacity, often being considered a s an "economic good" to be produced, managed and marketed.

Credit is the trust which allows one party to provide money or resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), b u t instead a r r a n g es either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known a s a borrower.

Types Of Credit

There are many types of credit, including b u t not limited to b a n k credit, commerce, consumer credit, investment credit, international credit, public credit and real estate.

Trade credit: The word credit is used in commercial trade in the term "trade credit" to refer to the approval for delayed p a y m e n t s for p u r c h a sed goods. Credit is sometimes not granted to a person who h a s financial instability or difficulty. Companies frequently offer credit to their customers a s part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

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Credit management is the process of controlling and collecting payments from customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial risks.

According to investorsword.com credit management is a function performed within a company to improve and control credit policies that will lead to increased revenues and lower risk including increasing collections, reducing credit costs, extending more credit to creditworthy customers, and developing competitive credit terms

Process of Credit Management

The process of credit management begins with accurately assessing the credit-worthiness of the customer base and his/her business viability. This is particularly important if the company chooses to extend some type of credit. This includes gathering data on the potential customers current financial condition, including credit track record that discloses the character of a customer in meeting obligations as well as collateral value. The current ratio between income and outstanding financial obligations will

also be taken into consideration.

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Overview Of Nigerian Banking S e c t o r

Banking Industry in Nigeria s t a r t e d d u r i n g t h e colonial era with the establishment of Colonial B a n k s with t h e p r i m a r y a i m of meeting the commercial needs of the Colonial G o v e r n m e n t . T he historical development of Banking in Nigeria is linked w i t h t h e increase in the intensity of international trade between Nigeria a n d Britain. It is worthy of note that the establishment of b a n k a s s i s t e d in facilitating, trade transactions. This was b e c a u s e Nigeria h a d a m a j o r t r a d e relationship with a country which as her colonial m a s t e r . T h i s c r e a t e d the enabling environment for the importance a n d u s e f u l n e s s of b a n k i n g for many years. Banking in Nigeria started in 1892 w i t h t h e e s t a b l i s h m e n t of a branch of African Banking Corporation in Lagos.

Banking system in Nigeria is r e g u l a t e d t h r o u g h t h e Central Bank of Nigeria. This apex bank started operation on J u l y 1, 1959.

In 1892, African Banking Corporation a n d British W e s t Africa, now First Bank of Nigeria, were established in Nigeria. In 1925, Anglo-Egyptian Bank and National Bank of Sout h Africa gave b i r t h to Barclays Bank in Nigeria. In 1948, the British a n d F r e n c h B a n k for Commerce and Industry started operations in Nigeria, w h i c h m e t a m o r p h o s e d into the United Bank for Africa. The first d o m e s t i c b a n k In Nigeria was established in 1929 and called I n d u s t r i a l a n d C o m m e r c i a l Bank. The bank liquidated in 1930 and w a s replaced by Mercantile B a n k in 1931. The African Continental Bank w a s c r e a t e d in 1949 a s the only sustainable indigenous b a n k after the l i qui da t i on of t h e Industrial and Commercial bank. The year 1947, s h o w s t h e e m e r g e n c e of agricultural bank called Nigeria Farmers a n d Commercial B a n k .

Establishment of Commercial Banks

Willi an increase in the intensity of i n t e r n a t i o n a l trade between Nigeria and Britain, the establishment of a b a n k to a s s i s t a n d facilitate, trade transactions was imperative. This w a s b e c a u s e Nigeria had a major trade relationship with a c o u n t r y w h i c h h a d a l r e a d y known the importance and usefulness of b a n k i n g for m a n y y e a r s . Banking in Nigeria started in 1892 with the e s t a b l i s h m e n t of a b r a n c h of African Banking Corporation in Lagos.

The main function of the b a n k w a s t h a t of importing and distributing silver coins from Royal Mint a n d implicitly regulating their circulation. The activities of the b a n k with r e s p e c t to i m p o r t of coins were monopolistic in nature. This was b e c a u s e o t h e r i n s t i t u t i o n s h a d to pay a premium of 1 per cent for any i m p o r t a t i o n .

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K I N G S L E Y G. K. P h . D & EMMANUEL O. 8 0

The first indigenous b a n k (o b e e s t a b l i s h e d a s a n attempt to bring indigenous b u s i n e s s m e n into t h e h e l m of e c o n o m i c activities in Nigeria was the Industrial a n d C o n t i n e n t a l B a n k (ICB) e s t a b l i s h e d in 1929. The bank however failed in 1930 b e c a u s e of i n a d e q u a t e capital base, poor management a n d stiff c o m p e t i t i o n w i t h t h e well-established and experienced expatriate b a n k s a n d t r a d i n g c o r p o r a t i o n s which diversified into financing b u s i n e s s . In 1930, a g r o u p of o t h e r e n t e r p r i s i n g Nigerians founded the Mercantile B a n k w h i c h w e n t i n t o liquidation in 1936 barely five years front its e s t a b l i s h m e n t b e c a u s e of t h e s a m e factors that caused the failure of the first i n d i g e n o u s b a n k . In 1 9 3 3 , a third indigenous b a n k was established by n a m e t h e NaUonal B a n k of Nigeria.

In 1945 a n d 1947, t h e A g b o n m a g b e (now W e m a Bank) a n d the African Continental Bank w e r e e s t a b l i s h e d , respectively. These last groups of b a n k s were able to s u s t a i n t h e m s e l v e s irrespective of competition with the well m a n a g e d e x p a t r i a t e b a n k s . It m a y be t h a t they learnt from and overcame t h e d i f f i c u l t i es t h a t befell the earlier ' established indigenous c o m m e r c i a l b a n k s . T h e s a m e b a n k s are in existence today a l t h o u g h s o m e exist w i t h o t h e r n a m e s a n d some attendant problems. T he survival of i n d i g e n o u s b a n k s m a y not be attributed entirely to their m a n a g e m e n t efficiency b u t also on patronage by the different regional g o v e r n m e n t s a n d q u a s i - g o v e r n m e n t agencies. The popular c l i e n t / p a t r o n s of t h e A f r i c a n C o n t i n e n t a l B a n k were, for example, the Eastern Region F i n a n c e C o r p o r a t i o n a n d Marketing Board: that of the National B a n k of Nigeria W a s t h e Nigerian Marketing Board (appointed b a n k e r s to the b o a r d in S e p t e m b e r . 1950), a n d t h a t of the Agbomagbe Bank w a s the W e s t e r n Region M a r k e t i n g Board.

Functions Of The Central Bank Of N i g e r i a (CBN)

CBN Ordinance of 1 9 5 8 s u b s e q u e n t a m e n d m e n t s ba se the functions of the CBN a s follows:

1. Issuance of legal t e n d e r c u r r e n c y n o t e s a n d c o i n s in Nigeria. 2. Maintenance of Nigeria's e x t e r n a l r e s e r v e s to

3. safeguard the i n t e r n a t i o n a l v a l u e of t h e n a t i o n ' s currency.

4. Promotion a n d m a i n t e n a n c e of m o n e t a r y stability a n d a sound and efficient financial s y s t e m in Nigeria.

5. It acts a s b a n k e r a n d financial a d v i s e r to t h e Federal Government of Nigeria.

6. Acting a s a b a n k e r a n d l e n d e r of l a s t r e s o r t to b a n k s

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The Modified Universal Banking Model

In 2010. Central Bank of Nigeria re-modified the existing Universal Banking Model that permits the holder of commercial banking license to operate in other non-core banking either directly or indirectly through designated subsidiaries. The introductions of these schemes classify banking licenses into commercial. Merchant a n d Specialized/Development Banking Licenses.

RESEARCH METHODOLOGY

The population for this study comprises of five (5) selected banks. This work adopted the random sampling technique to achieve its sample size. Due to the nature of the research work, the sample size for this work is one hundred (100) which is made up of one hundred (100) workers from the five selected banks with twenty (20) workers from each bank.

The instrument used for the data collection in this study in order to find out the impact of internal control on banks credit management is a closed-typed questionnaire structured in Likert method which responses involves four (4) responses ranging from positive through negative feelings of the respondent(s).

The instrument used for data collection for this research work was structured in the Likert Method which comprises of four various levels of responses ranging from strongly agreed (SA), agreed (A), strongly disagree (SD)and disagree (D), hence, Chi-square is used for data analysis, which is represented with "X2" with the formula given below:

X2 = Where:

X2 = Chi-square

Fo = Observed frequency Fe = Expected frequency

Decision Rule

If the calculated Chi-square (X2) value is less than the critical value, the tested null-hypotheses will be accepted.

Data Presentation, Analysis And Interpretation

One hundred (100) questionnaires were administered to the respondents of the five (5) selected banks for this study. Ten (20) copies each to the live banks

Out of the one hundred (100) questionnaires administered in total, a total of ninety-two (92) questionnaires were retrieved. This in other words represent 92% retrieval. Data from the ninety-two (92) retrieved questionnaires were used for this study.

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T H E BUSINESS MASTER 8 3

% OF RESPONDENTS

• STRONGLY AGREED • AGREED

• STRONGLY DISAGREE • DISAGREE

Source: Data Survey, 2016 Analysis:

From the above pie chart, we can deduce t h a t 38.04% strongly agreed t h a t internal check e n h a n c e bank customer credit reporting t h a t b r i n g s a b o u t quality c u s t o m e r credit report. 25% of the r e s p o n d e n t s hit agreed, while 17.40 % hit strongly disagree, while 19.56% disagreed.

R e s e a r c h q u e s t i o n 2:To what extent does a u t h o r i z a t i o n / a p p r o v a l e n s u r e security of b a n k credit?

To a n s w e r the above research question, question 10 in the q u e s t i o n n a i r e will be u s e d which states "Authorization/approval p r o c e d u r e s e n s u r e provision of a d e q u a t e security for b a n k credits" a s analyzed below.

Strongly agreed: ^ x ^ = 32.61%

Agreed: 92 x = 40-21O//°

Strongly disagree: ^ x ^ = 13.04%

Disagree: — x — = 14.13%

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KINGSLEY G. K. P h . D & EMMANUEL O. 84

% O F R E S P O N D E N T S

• STRONGLY A G K f c t D • A G K b h D

• S T R 0 N G I Y D I S A G R f r • D I S A G R f f

S o u r c e : D a t a Survey, 2 0 1 6

Analysis:

The pie c h a r t s h o w s t h e p e r c e n t a g e of t h e r e s p o n d e n t s b a s e d on their opinion. 3 2 . 6 1 % strongly agreed t h a t a u t h o r i z a t i o n / a p p r o v a l e n s u r e s security of b a n k credit, 4 0 . 2 1 % agreed to t h e fact t h a t A u t h o r i z a t i o n / a p p r o v a l p r o c e d u r e s e n s u r e provision of a d e q u a t e s e c u r i t y for b a n k credits, thereby s t r e n g t h e n i n g t h e a s s e r t i o n t h a t a u t h o r i z a t i o n / a p p r o v a l e n s u r e s security of b a n k credit. While 13.04 strongly disagreed a n d 14.13% disagreed for t h e said a s s e r t i o n .

R e s e a r c h Q u e s t i o n 3:To W h a t e x t e n t d o e s p e r f o r m a n c e e v a l u a t i o n e n h a n c e reduction in n o n - p e r f o r m i n g b a n k c r e d i t s ?

To a n s w e r t h i s question, q u e s t i o n 15 in t h e q u e s t i o n n a i r e will be u s e d which w a s s t r u c t u r e d a s follows: P e r f o r m a n c e e v a l u a t i o n report help in reduction of n o n - p e r f o r m i n g credits. And it's a na l yz ed a s follows: Strongly agreed: 21 x 222 = 36.96%

Agreed: ~ x — = 32.60%

92 1

Strongly disagree: 22 x 222 = 14.130/0

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The above is summarized in the diagram below:

% OF R E S P O N D E N T S

• STP'MI<ilYA«,r.m» • A<i|£([) STRON^U C»|SAM:f[ • DISAGREE

Source: Data Survey, 2016

Analysis:

The pie chart above illuminates that 36.96% strongly agreed and 32.60% agreed that performance evaluation enhance reduction in non-performing bank credits. While 14.13% strongly disagreed, 16.30% disagreed to the proclamation that performance evaluation enhance reduction in non-performing bank credits.

Test of Hypothesis l:There is no significant effect of internal check on customer credit management.

Table 2Table of Frequency observed

OPTION FIRST ECO FIDELITY ACCES DIAMOND TOTAL

BANK BANK BANK S

BANK

SA 7 6 3 9 10 35

A 4 6 10 2 1 2 3

SD 4 3 1 1 7 16

D 2 3 4 8 1 18

17 18 18 2 0 19 92

Source: Da a Survey, 2016 Fe = ^

-Where:

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KINGSLEY G. K. Ph.D & EMMANUEL O.

Gt = Grand total

R1 = 17x354-92 = 6.46 18x354-92 = 6.84 18x354-92 = 6.84 20x35-=-92 = 7.6

19x354-92 = 7.22

R2 = 17x234-92 = 4.25 18x234-92 = 4.5 18x234-92 = 4.5 20x234-92 = 5

19x23-f92 = 4.75

R3 = 17x16-92 = 2.95 18x16-92 = 3.13 18x16-92 = 3.13 20x16-92 = 3.47 19x164-92 = 3.3

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Fo F e Fo-Fe (Fo-Fe)2 _{( T}

7 6 . 4 6 0.54 0.29 0.04

4 6.84 -2.84 8 . 0 6 1.18

4 6.84 -2.84 8.06 1.18

2 7.6 -5.6 3 1 . 3 6 4.12

6 7.22 -1.22 1.48 0.20

6 4 . 2 5 1.75 3 . 0 6 0.72

3 4 . 5 -1.5 2 . 2 5 0.5

3 4 . 5 -1.5 2 . 2 5 0 . 5

3 5 -2 4 0.8

10 4 . 7 5 5.25 27.56 5.80

1 2.95 -1.95 3.80 1.29

4 3 . 1 3 0.87 0 . 7 5 0.24

9 3 . 1 3 5.87 3 4 . 4 5 11.01

2 3.47 -1.47 2.16 0.62

1 3 . 3 -2.3 5.29 1.60

8 3.32 4.68 21.90 6.59

10 3.52 6.48 41.99 11.93

1 3.52 -2.52 6.35 1.80

7 3.91 3.09 9.54 2 . 4 4

1 3.71 -2.71 7.34 1.98

X2 = 5 4 . 6 2 Source: Data Survey, 2 0

Df = (C-1)(R-1) Where:

Df = degree of freedom C = n u m b e r of column R = n u m b e r of row

Df = (4-l)(5-l) (3)(4) = 12

Df = 12 a t 5% level of significance of 0 . 5 u n d e r 12 = 2 1 . 0 3 , calculated X2value = 5 4 . 6 2

D e c i s i o n Rule:

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KINGSLEY G. K. Ph.D & EMMANUEL O. 8 8

Test of Hypothesis 2:Aulhorization/approval does not significantly enhance security of b a n k credits.

Table 4 Table of Frequency observed

OPTION FIRST ECO FIDELITY ACCES DIAMOND TOTAL

BANK BANK BANK S

BANK

SA 5 4 10 7 4 3 0

A 7 12 1 10 7 3 7

SD 1 1 5 0 5 12

D 4 1 2 3 3 13

17 18 18 2 0 19 9 2

Source: Data Survey, 2016 Fe = ^ i

C' Where:

Rt = Row total Ct = Column total Gt = Grand total

R1 = 17x304-92 = 5.54 18x30-92 = 5.87 18x304-92 = 5.87 20x304-92 = 6.52 19x304-92 = 6.2

R2 = 17x374-92 = 6.83 18x374-92 = 7.23 18x374-92 = 7.23 20x374-92 = 8.04 19x374-92 = 7.64

R3 = 17x124-92 = 2.21 18x124-92 = 2.35 18x124-92 = 2.35 20x124-92 = 2.61 19x124-92 = 2.48

R4 = 17x134-92 = 2 . 2 1

18x134-92 = 2 . 5 4

1 8 x 1 3 - 9 2 = 2 . 5 4

20x134-92 = 2 . 8 2

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THE BUSINESS MASTER 8 9 21.03. the tested null hypothesis is therefore rejected and alternative accepted. This therefore denotes that Authorization/approval does significantly enhance security of bank credits.

Test of Hypothesis 3:Performance evaluation report does not significantly enhance reduction in non-performing bank credits.

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KINGSLEY G. K. Ph.D & EMMANUEL O.

Where:

Rt = Row total Ct = Column total Gt = Grand total

R1 = 17x34-92 = 6.28 18x34-92 = 6.65 18x34-92 = 6.65 20x34-92 = 7.4

19x34-f92 = 7.02 R2 =

R3 =

R4 =

17x30-92 18x30-f92 18x30-92 20x30-92 19x30-92 17x12-92 18x12-92 18x12-92 20x12-92 19x12-92 17x16-92 18x16-92 18x16-92 2 0 x 1 6 - 9 2 19x16*92

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Table 7 Contingency table for HO2

Fo Fe Fo-Fe (Fo-Fe)2 (f.-f.

f.

3 6.28 -3.28 10.75 1.71

13 6.65 6.35 40.32 6.06

0 6.65 -6.65 44.22 6.65

1 7.4 -6.4 40.96 5.53

10 7.02 2.98 8.88 1.26

0 5.54 -5.54 30.69 5.54

3 5.87 -2.87 8.23 1.40

5 5.87 -0.87 0.75 0.13

7 6.52 0.48 0.23 0.03

1 6.19 -5.19 26.93 4.35

2 2.22 -0.22 0.0484 0.02

8 2.35 5.65 31.92 13.58

9 2.35 6.65 44.22 18.82

2 2.61 -0.61 0.37 0.14

7 2.48 4.52 20.43 8.24

2 2.96 -0.96 0.92 0.31

5 3.13 1.87 3.49 1.12

14 3.13 10.87 118.15 37.75

0 3.48 -3.48 12.11 3.48

0 3.3 -3.3 10.89 3.3

X2 = 1 2 1 . 1 6 So ur c e : Data Survey, 2016

Df = (C-1HR-1) Where:

Df = degree of freedom C = n u m b e r of column R = n u m b e r of row

Df = (5-1 )(4-1) (4) (3) = 12

Df = 12 a t 5% level of significance of 0.5 u n d e r 12 = 21.03, calculated X2 v a l u e = 121.16

D e c i s i o n Rule:

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Interpretation Of Result And D e c i s i o n Rule

In the process of trying to find out t h e impact of internal control on b a n k s credit m a n a g e m e n t , three (3) h y p o t h e s e s were formulated a n d tested. In respect of the tested h y p o t h e s e s above, the C h i - s q u a r e (X2) calculated were a s follows: 54.62. 73.87 a n d 121.16 respectively.

This indicates t h a t the figures of the calculated Chi-Square are g r e a t e r than the Critical value of 21.03. therefore, all the tested Null Hypotheses were rejected and the alternative accepted.

Summary Of Findings

The findings of the st udy are s u m m a r i z e d a s follows:

i. There is a significant effect of internal c h e c k on c u s t o m e r credit m a n a g e m e n t .

ii. Authorization/approval does significantly e n h a n c e security of b a n k credits.

iii. Performance evaluation report does significantly e n h a n c e reduction in non-performing b a n k credits.

Conclusions

Based on the findings of the study, the following c onc l usi ons were reached by the researcher.

1. There is a significant effect of internal check on c u s t o m e r credit m a n a g e m e n t .

2. Authorization/approval does significantly e n h a n c e security of b a n k credits.

3. Performance evaluation report does significantly e n h a n c e reduction in non-performing b a n k credits.

R e c o m m e n d a t i o n s

The following recommendations were given by the r e s e a r c h e r to those who may find this work useful a n d those who may w a n t to c a n y out more research on this topic.

1. The board of directors should have responsibility for approving a n d periodically (at least annually) reviewing the credit policies of the b a n k .

2. B a n k s should establish overall credit limits at the level of individual borrowers a n d c o u n t e r p a r t i e s, a n d g r o u p s of connected counterparties.

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