Abstract

The purpose of this study was to determine the impact of credit assessment process on loan repayment of Atlantic Bank. The specific objectives of the study were to examine the determinants of credit assessment process used by Atlantic Bank and to examine the effect of credit assessment process on loan repayment in Atlantic bank.

To achieved these objectives data collection was by means of a self-completion questionnaire which was filled by the staffs and employees of the bank, using convenient and simple random sampling techniques. The parameters considered under the credit appraisal processes were; the 5C’s Process, 5P’s Process, CAMPARI Process, LAPP Process, PACT Process. The factors in the credit assessment process that were analyzed include; policy, screening, appraisal and review.

The study revealed that no one credit appraisal technique was used in isolation, with the bank opting to use more than one of each of the credit appraisal techniques. The most commonly used process was the 5C’s followed by the 5Ps, CAMPARI, LAPP and PACT was the least used appraisal. The study revealed there were weaknesses in credit appraisal policies, which allowed rogue bank staff to award loans to non-qualifying applicants.

The respondents however agreed the drafting of appraisal policies involved the input of bank staff. Regression analysis revealed that credit appraisal techniques has a significant effect on loan repayment. The study findings revealed that some of the information required by the bank during the credit appraisal was irrelevant in ascertaining the creditworthiness of borrowers.

The study recommended that the bank should therefore seek to get information that would reflect the ability of the borrower to pay loans advanced based on such factors as the type of sector the funds are invested in or the purpose for which funds are committed.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Lending has become a vital role in banking due to its direct impact on economic growth and development. This is being pursued in the majority of countries, especially in emerging countries, where banks and lending activities have been usefully incorporated into government policy formation in the national economic development process. Thus, in the modern economy, bank lending activity as it influences economic growth and development has continued to acquire prominence (Kariuki, 2013).

Banks provide loans and advances, as well as a variety of dependent facilities, as development agents. The majority of cash deposited with banks is used to provide personal and company customers with loans and advances to help them with their particular economic activity. Banks, like any other business, are in the business of making money, so they charge interest on credit extended and pay interest on cash deposited with them. The gross margin is the difference between the interest received and the interest paid, which represents the banks’ profit (Damankah and Amankwaa, 2015).

Credit/lending is the most profitable and income-generating activity/sector in every commercial bank in particular and banking system in general. Most of the commercial banks that saw the light in the early nineteen century are no more today and had closed their doors due to poor credit evaluation before giving out loans which made the loans go delinquent and eventually defaulted. It should be borne in mind that proper credit assessment is key to every successful loan repayment and this assessment can only be carried out with the help of the 5C’s which some other schools of thought have like 7, 9, and 12 respectively. These principal 5C’s are collateral, character, capital, capacity and condition.

Cameroon’s financial sector is made up of a central bank, commercial banks, Insurance companies, Pension funds, microfinance institutions as well as self-help groups (njangi) that have roots in the colonial period and were historically oriented toward meeting the financial needs of external trade and large-scale commerce. These financial institutions do not, therefore, have a track record of lending to households and start-up Small Enterprises. Bank lending is guided by credit policies which are guidelines and procedures put in place to ensure smooth lending operations. Bank lending if not properly assessed, involves the risk that the borrower will not be able or willing to honour their obligations.

To lend, banks accept deposits from the public against which they grant loans and other forms of advances. Since they bear a cost for carrying these deposits, banks undertake lending activities to generate revenue. The major source of revenue comprises margins, interest, fees and commissions.

Beyond the urge to extend credit and generate revenue, banks have to recover the principal amount to ensure the safety of depositors’ funds and liquidity adequacy. Bank lending has to consider interest incomes, cost of funds, statutory requirements, depositor’s needs and risks associated with loan proposals or applications. For these reasons banks have over time developed credit policies and procedures which stipulate the lending process. These processes include among others; Credit appraisals, documentation and proper information collection, disbursement, monitoring and recovery processes, long term customer relations, collateral and compensating balancing and credit rationing.

Bank lending is also based on international standards. However, banks have continued to face an average of 10 – 20% of bad debt written off yearly. However, there have been some improvements with Non-Performing Loans (NPL) improving from 14.1% in 2011 to 13.2% in December 2012 and 12% by December 2013.

In the lending function, banks also manage risk by establishing documented norms and processes for processing each loan request. The majority of bank loans and advances follow several basic rules that serve to reduce the negative effects of lending, particularly the frequency of bad debt. Banks place a high value on a borrower’s character, such as honesty, truthfulness, integrity, and dependability. The sum provided must be able to be repaid with reasonable certainty from the firm’s operations. If the loan is given to a private individual, the source of repayment must be secure. The borrower must be able to provide adequate security that may be used as a backup plan if the projected source of repayment fails (Anolue, 2010).

To assist in lower credit risk, all of these precautions are included in lending activity. The danger that the principal or interest, or both or part thereof, of credit granted to a customer, may not be returned by the loan arrangement is known as credit risk (Anyanwaokoro, 1996). When this occurs, the bank will designate the credit as bad debt, which will eventually be written off. This has a long-term negative impact on the bank, as well as the economy as a whole.

This is exactly what happened to numerous banks in Cameroon that were previously categorized as troubled by the Central Bank of Cameroon (BEAC). As a result, it is required that banks maintain a high level of efficiency and effectiveness in their operations, particularly in the field of loan-making, given the impact on bank profitability, liquidity, and safety objectives, as well as the overall health of the economy (Cameroon Tribune, 2010).

1.2 Statement of the Problem

The commercial banking industry in Cameroon has been facing a lot of issues over the past decades. These are stern to the increasing competition from microcredit institutions such as credit unions and microfinance who are capable of providing support to the less privileged in rural areas. Commercial banks also faced the issues of increasing operational costs combined with low-interest rates and a decrease in return on equity, which is all putting pressure on commercial banks in Cameroon (Ojong and Tabot, 2019).

The increasing level of non-performing loan rates in banks’ books, poor loan processing, undue interference in the loan granting process, and inadequate or absence of loan collateral among other things are linked with poor and ineffective credit risk management that negatively impact banks’ performance.  It is, therefore, crucial to analyse whether the credit risk is affecting the financial performance of the banks in the study attempting to make a modest contribution to the literature on credit risk (Ojong and Tabot, 2019).

Income from lending constitutes an average of 70 – 80% of all bank’s incomes (BEAC Report 2012, p.15). Credit policies and procedures are designed to guide lending and ensure prudent lending operations. Despite the rigorous credit assessment process, Atlantic bank uses which include among others proof that customer does not have other credit obligations, analysis of their bank account performance, sustainability of their income levels, security and ability to pay, Atlantic bank is faced with problems of its loan portfolio. The financial records show that Atlantic bank’s provisions and bad debts written off increased over the years.

1.3 Research Questions

1.3.1 Main Research Questions

How does the credit assessment process affect loan repayment of Atlantic Bank?

1.3.2 Specific Research Questions

1. What are the determinants of credit assessment process by Atlantic Bank?
2. What is the effect of credit assessment on loan repayment in Atlantic bank?

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