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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