CHAPTER ONE

INTRODUCTION

1.1            BACKGROUND OF THE STUDY

Bank credit arises when a borrowing capacity is provided to a firm by the banking system in the form of a loan. The total bank credit the firm has is the sum of the borrowing capacity each lender bank provides to the individual. It is essential business tool acting as a bridge for the constant flows of liquidity. Bank grants credit to enhance production processes to manufacturers with a resultant benefits in form of interest charged. Bank credit creates account receivable or trade debtor that the bank is expected to collect in the near future. Manufacturing company in its attempt to succeed in such a competitive environment, adopt several strategies one of which is obtaining loan from banks to finance its projects. Pandey (2004) submitted that credit is a marketing tool for laying off excess liquidity in banks. Lending to companies however, must be monitored because regardless of an organization’s collateral, share of the market and demand for its products, if there are no measures put in place to regulate lending, then there could be problem especially those related to liquidity.

The importance of banks credit therefore, to Manufacturing Sector cannot be over emphasized because it is a factor that has a strong influence on the cash inflow of an organization from its production activities which is very critical to any business organization. Every lending policy set up by the bank seeks to achieve adequate profitability and assurance on repayment of loanable funds which are the two basic factors that sustain a bank in the present and determine its position in the long-run.

A bank lending policy refers to the action taken by a bank to grant, monitor and collect the cash for outstanding account receivable. The lending policy of a typical bank contains the following variables: collection policy, cash discount on early repayment, credit period, collateral requirement, company’s repayment history, and credit standard.

While classified at it as credit limit, credit terms, customer’s deposit, customer information, and documentation. And each of the components of a bank’s credit policy is used as a tool for monitoring accounts receivable which is the outcome of loanable funds, its covers from the kind of company that credit may be extended when usual collection period would be made.

There is however, no particular universal lending policy that should be adopted by every bank. The lending policy of a bank should therefore, be based on its available liquidity circumstances, industry standard, current economic condition, and the degree of risk involved. For a manufacturing company to achieve its borrowing objectives, concern should be given to the rate of interest charged, repayment period, penalty on default and its associated risk if collateral is claimed.

The reason for this writing termed from the fact that in Banks, it is usual to present policy that regulate lending to companies. Nowadays, banks operate basically on extending credit to manufacturing companies, small and medium business and even to individual borrowers. The existence of lending policy itself is however, not an issue, the main problem lies in the fact that every bank exist in a dynamic and complex environment especially in current time where information technology is the order of the day, trends emerge on a daily basis and the behavior of customers keep changing. This constantly changing environment affects banks as well as their decision and all their policies.

A lending policy that is therefore, written without an undertaking of the market and ample room for change in it, and one which is not constantly or frequently re-visited could becomes obsolete in a matter of weeks. It is therefore, not enough for these policies to be established but there should exist flexibility, provision for reviews and adjustment. This is necessary to keep the banking industries on a going-concern with the constantly emerging trends in the world of business.

There is no “one-fit-size-911” credit policy to favour both the lenders (Banks) and the borrowers (manufacturing company), lending policy should be based on borrower’s particular business, cash-flow circumstance of the lender and the degree of risk involved.

1.2     STATEMENT OF THE PROBLEM

          Pivotally, obtaining credit from banks was to induce cash inflow, thus enhance or expand productive capacity with a simultaneous increase in profit of companies but this is not in consonance with the aim as loan obtained brings about increase in product pricing as a result of high interest rate, risk of seizure or forfeiture of collateral, surplus working capital, high administrative expenses. Similarly, because of freedom offered by the lending company (banks), borrowers (Manufacturing Sector), can borrow more than they can repay when it calls for. A manufacturing company that depends solely on banks’ lending for its productivity will incur opportunity cost in terms of interest charged coupled with uncertainty in its external environment. This study intends to investigate and bring solution to the afore-listed problems.

1.3     OBJECTIVE OF THE STUDY

The main objective of this study is to examine the effect of Bank’s Credit on the performance of Manufacturing Sector. Other objectives of the study include:

(1)    To examine the repayment period

(2)    To examine the effect of high interest rates on the product pricing of Manufacturing Sector

(3)    To determine the effect of high interest rates on the profitability of Manufacturing Sector

(4)    To examine information needed in obtaining credit

(5)    To determine the effect of early repayment on liquidity position of manufacturing company.

1.4     RESEARCH QUESTIONS

This research is aimed at finding solution to the following questions:

(1)    Does obtaining loan solve company’s liquidity problems?

(2)    Do high interests charged affect product pricing?

(3)    How do risk of collateral seizure determine?

(4)    How do bank’s policies affect company’s borrowing capacity?

(5)    How do account payable monitored?

1.5     RESEARCH HYPOTHESIS

To aid attainment of the study goal, the following hypotheses are formulated:

(1)       Ho: Banks Credit does not affect the performance of Manufacturing Sector.

       H1: Banks Credit affects the performance of Manufacturing Sector.

(2)       Ho  High interest charged do not affect product pricing of Manufacturing Sector.

       H1: High interest charged affect product pricing of Manufacturing Sector

1.6     SCOPE OF THE RESEARCH AREA

This study shall be limited to the performance of Nigeria Champion Breweries Plc, between 2011-2014. Similarly, constrain (like cost and time) made the work limited to the borrowing capacity of Nigeria Champion Breweries, loanable funds, credit period, interest charged, repayment terms, and factors influencing the lender’s (banks) policies.

1.7     SIGNIFICANCE OF THE STUDY

          Top managers of Manufacturing Companies usually cut across many disciplines which may not be related to banking/accounting. Most of the time they are not able to anticipate the evil of high interest rate occasioned by Banks Credit on their profit as well as product pricing.

          The study will educate them on the importance of having a calculating policy with regard to Banks Credit and why priority should be placed on it.

          In addition, the study will also add to the body of knowledge in the area of the performance of Manufacturing Sector via Banks Credit. Above all, the study will be a source of material for future research on Banks Credit and the performance of Manufacturing Sector.

1.8     DEFINITION OF TERMS

Below are terms used in the study which calls for definition:

Bank Lending Rate: This is the percentage of the borrowed fund a customer must pay in addition to the actual fund borrowed.

Borrowers’ Capacity: A term use to denote the range to which fund could be borrowed considering its repayment strength. Credit standard is some time used to mean one and the same thing.

Repayment Terms: These include conditions made available by the lender and which are necessary in granting credit.

Credit Period: Durations of which the borrower is expected to make repayment.

Manufacturing Sector: These are firms engaged in production of commodities. It is sometimes refers to as manufacturing companies.

Liquidity: The extent to which assets could be converted to cash enabling it to pay its debts as they fall due.

1.9     Historical Background of Organization under Study

Champion Breweries Plc was incorporated as a private limited liability company on the 31stof July, 1974 with the same South East Breweries Limited. The company’s name was changed from South East Breweries Limited to Cross River Breweries Limited and thereafter to Champion Breweries Limited the later name, Champion Breweries Limited was changed to champion Breweries Limited was changed to Champion Breweries PLC on the 1st of September, 1992. On the 24th of November, 1974, the South Eastern State of Nigeria signed on Humbury (Technical Partners) for the supply and construction of a turkey Brewery in Uyo with a capacity of 150,000 hectolitres. The foundation stone of the Brewery was laid on the 19th March, 1976, the Brewery was officially commissioned and its products champion Ledger Beer launched with initial capacity of 150,000 hectolitres per anum

The second expansion, which incorporated more sophisticated machinery, was completed and put on trial run in September 1979. The second production line was officially commissioned on the 11th of December 1979 with enhanced capacity of 500,000 hectolitres per anum.

The same year the company’s products, “Champion Ledger Beer” and “champ malt” won silver medal for quality at the 16thword selection for Beer and non-alcoholic Beverages in Luxemburg.

With the advent of democracy in Nigeria in May 1999; the government of Akwa Ibom State Investment and Industrial Promotion Council (AKIIPOC) was charged with the responsibility to reactivate the company. Pursuant of this mandate, AKIIPOC, in conjunction with the board of directors of the company, went to the market to solicit for core investors/technical managers. In the process, Messrs Montgomery Venture incorporated or panama (with offices in Geneva, Switzerland) was identified and brought into the company as core investors/technical managers after a Memorandum of Understanding (MOV) was signed.

Based on the memorandum, a reactivation committee was set up by the board of the company to work with the core investors/technical mangers for the revamping of the company. The reactivation process, which commenced in February, 2000 lasted about nineteen month. Now, the plant has been revamped and restructured to use one hundred percent locally sourced raw materials. The Brewery is now July operational and the capacity is 500,000 hectolitres per anum.

The reactivation Brewery was officially commissioned on the 23rd of October, 2001. Champion lager Beer is now in the market and is doing well. Other product of the company including champ malt has followed.

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