An Assessment of the Relationship Between Credit Policy and Loan Default Rates in Unity Bank, Kebbi State
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Background of the Study
Credit policies are essential in shaping the lending behavior of banks and the financial stability of borrowers. In Unity Bank Plc, which operates in Kebbi State, the credit policy is designed to ensure that loans are granted to creditworthy individuals and businesses while minimizing the risk of loan defaults. However, poor credit policies or inadequate risk assessment can lead to high loan default rates, which negatively impact the bank’s financial performance and its ability to meet the needs of future borrowers (Olubunmi & Amaka, 2023).
The relationship between credit policies and loan defaults is a significant area of research in banking, as banks aim to strike a balance between lending profitability and risk management. Kebbi State, an agrarian region with a growing small-scale business sector, presents unique challenges in managing credit risk, including low financial literacy and volatile income streams. This study aims to assess the relationship between Unity Bank’s credit policies and the loan default rates in Kebbi State, exploring how adjustments in credit policies influence the likelihood of defaults and the overall financial health of the bank (Lawal & Musa, 2024).
Statement of the Problem
Unity Bank, like many other banks in Nigeria, faces challenges in managing loan defaults. The bank’s credit policy aims to reduce defaults by assessing the creditworthiness of borrowers and setting appropriate loan terms. However, high default rates continue to be a concern, especially in Kebbi State, where many small businesses and agricultural enterprises lack proper financial documentation or collateral. Despite the bank’s efforts to curb defaults, the existing research on the direct relationship between credit policies and loan default rates in this context is sparse.
This study will investigate how Unity Bank’s credit policies affect the loan default rates in Kebbi State and suggest improvements that could reduce defaults and improve the bank’s financial stability.
Objectives of the Study
1. To evaluate the impact of Unity Bank’s credit policy on loan default rates in Kebbi State.
2. To assess the factors that contribute to loan defaults despite the existing credit policy at Unity Bank.
3. To recommend strategies for improving credit policies to reduce loan default rates in Unity Bank.
Research Questions
1. What is the impact of Unity Bank’s credit policy on loan default rates in Kebbi State?
2. What factors contribute to loan defaults in Unity Bank despite the existing credit policy?
3. How can Unity Bank improve its credit policy to reduce loan default rates in Kebbi State?
Research Hypotheses
1. Unity Bank’s credit policy has a significant impact on loan default rates in Kebbi State.
2. Certain factors, such as lack of collateral and financial literacy, significantly contribute to loan defaults in Unity Bank.
3. Changes in Unity Bank’s credit policy can significantly reduce loan default rates in Kebbi State.
Scope and Limitations of the Study
This study will focus on Unity Bank Plc and its credit policy in Kebbi State. It will examine loan default data from 2023 to 2025. A limitation of the study is that it may not fully capture the influence of external economic factors, such as regional economic downturns, on loan default rates.
Definitions of Terms
• Credit Policy: The set of guidelines that a bank uses to determine whether to grant credit to a borrower, including risk assessments and loan terms.
• Loan Default Rate: The percentage of loans that are not repaid as agreed, typically within a specific period.
• Creditworthiness: An assessment of a borrower’s ability to repay a loan based on financial history, assets, and income.
• Collateral: An asset pledged by a borrower to secure a loan, which the lender can seize if the borrower defaults.
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