1.0 CHAPTER ONE

 INTRODUCTION

1.1 BACKGROUND TO THE STUDY

In order for financial institutions to handle their operational and financial credit commitments to their customers, timely payback is essential to their survival (Warue, 2018). Customers should be reimbursed for credit advances promptly in order to support the credit management cycle. Majeb (2019) established that Financial institutions have three different loan repayment levels: prompt repayment rates, credit delinquencies, and default. Since the repayment level is a byproduct of credit management procedures, timely loan repayment is anticipated to result from efficient management. Timely repayment demonstrates that the credit is returned on schedule, the loan is operating in accordance with the terms and circumstances of the contract, and the borrower is fulfilling their repayment responsibilities on schedule to avoid penalties. Joana (2016)  described Delinquency is defined as debt repayment that occurs after the due date and includes both principle and interest. Joana continues by saying that past-due loans alert lenders to a borrower's repayment issues, which if left unchecked will soon lead to default. Hoque (2010) pointed out that loans at default levels indicate major repayment issues of the borrower or worst credit recoveries and such loans will result into a loss to microlenders  unless they are controlled. Defaults demonstrate repayment inability of the customer, a situation that shows signs of financial and operational sustainability problems, and taking away financial outreach away from the people. Credit management plays a great role in improving loan repayment performance in financial institutions (Pandey, 2018).

. Credit management is the process of finding, vetting, assessing, and evaluating possible borrowers. It also include granting credit and collecting it from clients in accordance with agreed-upon terms and conditions. Given that credit management practices and policies have an impact on loan repayment behavior, financial institutions should regularly assess them to protect the company from default risk.. According to Moti, Masinde, Mugenda and Sindani (2017) while Credit management techniques have an impact on loan repayment behavior among micro lenders, according to the study .

Credit terms (loan terms), credit appraisal , credit collection  policy are a few examples of credit management techniques. The general client appraisal procedures used in credit administration and the creation of client credit histories for upcoming credit assessments for loan requests are based on these credit management techniques.. Furthermore Rosenberg (2019) Loan repayment behavior success is impacted by credit management, as was discovered when evaluating MFI performances in the USA using a cross-sectional design..           According to Ditcher (2017) Writing about corporate finance and investment choices in English financial institutions brought to light how important credit management is to credit administration and how it impacts organisational success. This suggests that credit management techniques have a big influence on loan payback. Putting credit management and policies into practice should have a good effect on loan payback, which will increase financial institutions' viability.. The management inference is that loan repayment behaviour is a result of credit management and therefore loan repayment behaviour and credit management procedures should be positively correlated. Therefore, the ability of the organisation to effectively and wisely manage consumer credit lines and their repayment obligations is necessary for effective credit management.. Again Rosenberg (2019) In order to improve timely payback rates, Micro lenders organise their credit management contracts on group lending practices (credit terms) and weekly repayment schedules (repayment policy), according to an analysis of the group lending and repayment schedules. According to scholars and microfinance experts, group lending practices that apply group screening, guarantee, and self-monitoring of members' loan repayment requirements improve timely repayment rates.. Individual members of the group are all responsible for repaying loans to each other, and if one person defaults, the other members of the group will be seen to be in default as well and will not be able to obtain new loans until the outstanding balance is completely paid back. By encouraging repayment discipline and placing pressure on the borrower to fulfil their obligations, this lowers the likelihood of credit default and delinquencies. Tesfaye (2019) Additionally, link MFIs' high loan recoveries of credit to weekly payback plans in which clients are expected to fulfil their repayment commitments on a weekly basis. The clients' weekly payments encourages regular repayment and a culture of saving from the profits and returns of their business activities. Field, Rohini, Rogol (2010) confirm that this repayment strategy is the best one for reducing the risks of default and delinquencies, which are frequent in MFIs. Since small businesses earn income on a daily or weekly basis and should not wait for end-of-month payback, it is preferable that collections occur frequently. If they do not, the small businesses may be tempted to use the funds for other personal obligations

Moti et al (2017) Using a cross-sectional survey design, they examined the impact of credit management systems on loan repayment in MFI in Kenya. Their findings showed that credit management systems, including credit terms, collection period, credit policy, and appraisal, have a positive impact on loan repayment performance. Njenga (2017) evaluated the impact of credit management techniques on the performance of loans in Deposit Using a cross-sectional survey approach, it was determined that when the loan portfolio grew, non-performing loans likewise gradually increased for microfinance institutions in Kenya. This suggests that his study's use of credit management techniques did not result in higher repayment rates. This indicates that credit management and loan repayment in MFIs do not positively correlate. Ditcher (2017) are in agreement that credit management techniques have a positive impact on financial institutions' loan payback rates. This suggests that managing credit has an impact on loan repayment.  The results of the study were at odds with what the three researchers mentioned above had found. His findings demonstrated that credit management had a detrimental effect on loan payback. This suggests that credit management techniques have no bearing on loan payback.

Borrowers and lending financial institutions both rely heavily on loan payback behaviour. When a borrower makes loan repayments according to the terms outlined in the loan contract, loan repayment performance occurs. performance metrics for loan repayment if borrowers fulfil their contractual obligations to repay their debts in full. The larger the lending institution's liquidity position and ability to fulfil debt obligations, the better its loan repayment performance (Ekka et al., 2016). Good loan repayment performance enables lenders to lower the interest rates they charge consumers, which lowers the cost of borrowing money and makes credit available to more people. Strong loan payback performance raises the lending institutions' capacity to satisfy borrowers' demands (Ekka et al., 2016).

Lending money to people and small businesses who are unable to obtain bank loans or other forms of funding due to financial constraints is the idea behind microlending. Credit risks may be associated with this type of loan activity for these institutions. Credit risk is the possibility of suffering a loss if a person or business is unable to repay the loan that has been given to them. These losses have a direct negative impact on these MFIs' annual financial performance. The MFIs have to make sure that lending risks are not too high in order to lessen the losses that result from lending activity. Given the nature of its operations, credit risk is the most evident risk that a credit union encounters. It is usually the biggest kind of risk in terms of possible losses. A small number of members defaulting could mean a huge loss for the union (Bessis, 2017). When a member is unable to pay or cannot make a timely payment, credit risk may arise. Although there are a variety of causes for default, most of the time the borrower is experiencing financial hardship and may be about to file for bankruptcy. He has the option to refuse to fulfil the debt service obligation, for instance in the event of fraud or a legal disagreement. Although credit risk is difficult to completely eradicate, it can be diversified since systematic risk may contribute to some of the default risk. Furthermore, even while diversification reduces overall uncertainty, the unusual character of some of these losses continues to provide a challenge for creditors. This is especially true for banks that accept extremely illiquid assets and those that lend in local markets. In these situations, credit risk is difficult to transfer and obtaining precise loss estimates is challenging (Ekka et al., 2016)

The effectiveness of microfinance risk management, which encompasses methodologies, methods, processes, procedures, activities, and incentives, is projected to have a major impact on the financial performance of the industry given the significance of credit risk management to microfinance operations . The microlending institutions ought to function according to solid, clearly established standards for giving loans. A clear description of the institution's target market, a deep comprehension of the borrowers, the goal and structure of the credit, and the source of repayment should all be included in the criteria. A clear and defined system for amending the loan agreement, renewing, and re-financing existing credits must also be in place, as must the process for approving loans . Micro lenders should be centred on credit risk management in order to continue its financial viability and attract new customers (Ogilo, 2018). Furthermore Of all the risks that Nigerian commercial banks confront, credit risk is the most important. Since credit risk directly jeopardises financial institutions' solvency, it is the most costly risk in financial institutions and has a greater impact than other risks. It is to this the study centres on effect of credit risk management and repayment behaviour on emerging micro lenders

1.2 STATEMENT OF THE PROBLEM

It is commonly acknowledged that financial institutions have significant issues in managing credit globally. Financial institutions, in particular banks, play a critical role in providing low-income members of society with financial services as well as credit facilities (customers). However, they frequently deal with default risks, moral hazard, and adverse selection, just like other financial organisations. Nigeria was spared the immediate effects of the global financial crisis of 2008, but from 2010 to 2017, the country's financial industry stagnated, placing pressure on commercial banks and microfinance institutions. As compared to the time before the crisis, banks were compelled to raise interest rates by an average of more than 8%.. This put additional pressure on banks by forcing the Central Bank of Nigeria to issue a new directive regarding the handling of credit risk management. Financial institutions' profitability is undermined by the difficulties in managing credit since they rely only on loan lending to grow their portfolios. This is because the lending institution will not receive compensation from the interest that is paid on the loans when borrowers fail to fulfil their loan servicing duties or default on the loans that were granted to them. The economy was under heightened inflationary pressure due to the ongoing rise in commodity prices, which also had an impact on borrowers' overall ability to repay their loans. This is demonstrated by the bank records, which reveal that some borrowers fully default on their loans while others fail to make timely loan payments.

Again Issues with credit management are thought to have far-reaching effects in addition to influencing loan payback success. This is because some of the money may have been issued as loans by Micro Finance banks are still obligated because of client default; hence, other potential borrowers might not be able to access credit facilities. A nation's entire economy can be impacted by poor credit management, which is why the Central Bank of Nigeria establishes regulations to help financial institutions reduce default risk by utilising credit reference bureaus. Credit management's goal is to reduce the risk of default, which could lead to a decrease in the loan portfolio of lending institutions. Its inability to provide loans to borrowers is a crucial aspect of financial institution management. This study will therefore seek to bridge the literature gap on effect of credit risk management and repayment behaviour on emerging micro lenders

1.3 OBJECTIVES OF THE STUDY

The purpose of this study is to examine the  effect of credit risk management and repayment behaviour on emerging micro lenders. Other specific objectives include

1)To analyze if  there is a significant relationship between credit terms and repayment performance of micro lenders

2.To examine if there is a  significant relationship between credit appraisal and loan repayment performance of micro lenders

3.To examine if there is a significant relationship between Credit Collection Practices And Loan Repayment performance of micro lenders

4. To examine the relationship between credit standard and Loan repayment performance of micro lenders

1.4 RESEARCH QUESTIONS

1What is the significant relationship between credit terms and loan repayment performance  of micro lenders?

2.What is the  significant relationship between credit appraisal and loan repayment performance of micro lenders?

3.what is the significant relationship between Credit Collection Practices And Loan Repayment performance?

4.What is the relationship between credit standard and Loan repayment  performance of micro lenders ?

1.5 HYPOTHESES

H01: There is no significant relationship between credit terms and loan repayment performance of micro lenders

H02; There is no significant relationship between credit appraisal and loan repayment performance of micro lenders

H03: There is no significant relationship between Credit Collection Practices And Loan Repayment performance of micro lenders

H04; There is a significant relationship between credit standards and loan repayment performance of micro lenders

1.6 Significance of the study

The findings of this study will be both useful as they are timely. The results of the study will inform the management of Microfinance banks in Nigeria regarding the significance of credit risk management on loan performance in the banks they manage. They will therefore be better placed to formulate appropriate credit risk management policies and strategies for their institutions for the enhanced management of credit risk. The government and regulatory authorities may find the insights of the study useful in the development of regulations for the population under study. The study results will be useful to investors who may be considering investing in the population under study as it will provide useful revelations regarding risk and return tradeoff inherent in such institutions and their effect on profitability and shareholder wealth. The study will provide a basis for scholars who are interested in further research in this field as well as lessen their burden in determining the research gap that exists in view of the findings of the study

1.7 SCOPE AND LIMITATION OF THE STUDY

The study would cover effect of credit risk management and repayment behaviour on emerging micro lenders. The researcher was faced with the following constraints in carrying out this study:

Time: The time within the researcher is too short to carry on the detail study on this topic.

Resources: Another constraint of the researcher is financial resources to carry on the detail study of this topic.

Data: Another limitation to this study will be lack of data to make valid study on the research problem.

1.8 ORGANIZATION OF STUDY

The present study is divided into five chapters. First chapter gives background to the study  

Second chapter deals with relevant studies found in the literature and that are related to the i.e. review of literature. Third chapter deals with the methodology and procedure used in this study

Fourth chapter deals with the analysis of data and presentation of the study which evaluates the data collected keeping in mind the set objectives.  Fifth chapter deals with conclusions and suggestions which are derived from this study.

An appendix at the end

1.9 Definition of terms

Credit risk management ; Credit management is the process of granting credit, setting the terms on which it is granted, recovering this credit when it is due, and ensuring compliance with company credit policy, among other credit related functions.

Loan repayment behavior; Repayment performance is the capacity of a borrower to service a loan effectively as and when loan installments are due