DEVELOPMENT OF A CREDIT FACILITY CALCULATOR

By

Author

Presented To

Department of Computer Science

CHAPTER ONE

INTRODUCTION

1.0 Introduction

Attracting and retaining profitable customers, and increasing revenue from those customers, is a priority of the managers of all firms in today’s globalised marketplace. It is particularly important in the highly competitive retail financial services market, where the core business of banking continues to be "the profitable management of risk". For banks and other shareholder-owned financial services firms, risk management is consistent with their profit-maximizing objective and is evidenced by the focus of the commercial banks on providing tailored home and personal loan packages to profitable low-risk customers (Saunders and Lange, 2001). Academic research suggests that the increasing availability of consumer credit to traditionally rejected households is a major influence on rising consumer bankruptcies in developed countries (Getter, 2000). The authors show that the combination of more high-risk borrowers and more bankruptcies is a warning for financial institution managers not to allow their social role to override sound lending practice. According to Ziegel (2001), sound lending practice has three key elements namely: the systematic identification of the risk of individual loan applicants, the adjustment of lending conditions to compensate for this risk prior to loan approval; and the implementation of timely arrears procedures when payments are missed. Financial institutions are very important in any economy. Their role is similar to that of blood arteries in the human body, because financial institutions pump financial resources for economic growth from the depositories to where they are required (Shanmugan and Bourke, 2003). Commercial banks are financial institutions and are key providers of financial information to the economy. They play even a most critical role to emergent economies where borrowers have no access to capital markets (Greuning and Bratanovic, 2003). Wellfunctioning commercial banks accelerate economic growth, while poorly functioning commercial banks impede economic progress and exacerbate poverty.

Commercial banks (CBs) face various risks that can be categorized into three groups: financial risk, operational risk and strategic risk. These risks have different impact on the performance of commercial banks. The magnitude and the level of loss caused by credit risk (CR) compared to others is severe to cause bank failures (Chijoriga, 2000). Over the years, there have been an increased number of significant bank problems in both matured and emerging economies. Credit problems, especially weakness in credit risk management (CRM), have been identified to be a part of the major reasons behind banking difficulties (Grasing, 2002). Loans constitute a large proportion of CR as they normally account for 10-15 times the equity of a bank (Kitua, 2002). Kitua (2002) further argued that banking business is likely to face difficulties when there is a slight deterioration in the quality of loans, and that poor loan quality has its roots in the information processing mechanism. According to Kitua, the problem often begins right at the loan application stage and increases further at the loan approval, monitoring and controlling stages, especially when CRM guidelines in terms of policy and strategies/procedures for credit processing do not exist or weak or incomplete.

Lending has been, and still is, the mainstay of banking business, and this is more true to emerging economies where capital markets are not yet well developed (Mwisho, 2001). To most of the transition economies, lending activities have been controversial and a difficult matter. This is because business firms on one hand are complaining about lack of credits and the excessively high standards set by banks, while CBs on the other hand have suffered large losses on bad loans (Richard, 2006). It has been found out that in order to minimize loan losses and so as the CR, it is essential for CBs to have an effective CRM system in place (Basel, 2002). Given the asymmetric information that exists between lenders and borrowers, banks must have a mechanism to ensure that they not only evaluate default risk that is unknown to them ex ante in order to avoid adverse selection, but also that can evolve ex post in order to avoid moral hazard (Richard, 2006).

According to Heffernan (2002), banks face the twin problems of moral hazard (monitoring problem) and adverse selection (risk assessment problem) when dealing with small firm lending propositions. It is possible to argue that these problems can lead to a credit glut, but there has been some work in the UK, which has revealed the expected mismatches between providers (the commercial banks) and clients suggested by the theoretical papers. Banks will find it difficult to overcome moral hazard, because (for relatively small amounts of finance) it is not economic to devote resources to monitor ventures closely. However, there are marketing implications of taking what might be cost minimization approaches to these twin problems of moral hazard and adverse selection (Kantor and Maital, 2001).

To facilitate easy management of credit facility calculations there is need for the development of software systems that will accurately compute the interest rate on the loans issued to the customers. This will be more reliable that human computation as errors are more likely to take place when the computation is manually done. When this computerized system is in place, it will aid proper utilization and realization of profit on credit issued to customers. The system should be able to determine if customers are eligible to be given credit. It serves as a credit risk assessment system and interest calculator.

1.1 Background of the Study

Gufax Microfinance Bank Ltd is one of the leading Microfinance Banks in Nigeria, operating in Akwa Ibom State, in the Niger Delta region of the country. The Bank presently has total assets of N600million approximately $3.94 million.

The Bank was incorporated on April 4, 2008 and received its approval from the CBN on September 8, 2008. It started operations with an initial share capital of N20million as prescribed by the CBN. It has so far registered an increase in Share Capital from the initial N20m to N250million with the Corporate Affairs Commission on August 4, 2010. At present, the Bank’s paid up capital is above N111million.

The increased Share Capital is to ensure that it reaches out to more people and meet its target of putting smiles on the faces of its customers.

Vision: To be the leading Microfinance institution in Nigeria that is technologically driven and globally acceptable while providing distinctively unique range of microfinance services aimed at putting smiles on the faces of its esteemed customers.

Mission: To render unparalleled financial services to the productive poor through a broad range of innovative financial products and services available in all our outlets.

Organizational Values:

• Integrity
• Empathy
• Honesty
• Resilience
• Faith
• Business Focus

From inception, their primary business focus has been putting smiles on the faces of our customers by giving them unhindered access to a range of financial services not readily available to them in the conventional banks and naturally, we have grown older and more mature in our commitment to implementing more programmes that cater for our customers’ interests.

Strategy: The strategic business  plan is to ensure that all productive but deprived active poor have unhindered access to credit, micro loans and other financial services to create wealth and drastically reduce poverty. To this end, ordinary traders, women, widows, youths and even the physically challenged are given express attention at all our service points.

Board Of Directors: A group of professional and dynamic men of integrity form the Board of Directors of Gufax Microfinance Bank. They are:

Engr. Nsikanabasi Ibanga " Chairman

Mr. Uduak Udo " MD/CEO

Engr. Bassey Iton " Director

Mr. Mbobo Mbobo " Director

(Source: http://gufaxmfbank.com/about.html)

1.2 Statement of the Problem

The following problems necessitated this study:

1. Absence of an automated system to determine the eligibility of customers to obtain credit or loans.
2. Human error due to oversight or miscalculation in computation of compound interest accruable from obtaining credit.
3. Difficulty in accessing credit management records.
4. Delay in obtaining reports from existing records easily.
5. Delay in processing credit application of customers.

To overcome these problems, a credit facility calculator will be developed.

1.3 Aim and Objectives of the Study

The aim of the study is to develop a credit facility calculator. The following are the specific objectives:

1. To develop a system that will enable the storage of credit details by any microfinance bank.
2. To develop a system that will be used to compute accruable interest on credit issued to customers.

1.4  Significance of the Study

The study is significant in the following ways:

1. It will reveal how information and communication technology can be applied to manage credit risk.
2. It will provide a system that will aid quick processing of credit applications by financial institutions such as microfinance banks, commercial banks and credit lenders.
3. The study will serve as a reference material for other researchers seeking information on the subject

1.5 Scope of the Study

This study covers development of a credit facility calculator using Gufax Microfinance bank, Ikot Ekpene as a case study.

1.6 Limitations of the Study

The following are the limitations of the system:

• The system can only run on a stand-alone computer.
• It is a client-based system and not a server based system
• It cannot run over a network

1.7 Definition of Terms

Debt: an amount of money, a service, or an item of property that is owed to somebody

Credit: an amount of money given to somebody on the condition that it will be paid back later with interest

Credit rating: An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

Lending: to allow a person or business to use a sum of money for a particular period of time, usually on condition that a charge interest is paid in return

Guarantor: somebody who gives a guarantee, especially a formal promise to be responsible for somebody else’s debts or obligations

Interest: It is the charge for the privilege of borrowing money, typically expressed as annual percentage rate