CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF STUDY

Credit policies are rules and regulations as well as other consideration that guide a bank or other financial institution credit decision taking includes who receives the credit, the amount of credit and organization structure for it’s distribution, Robere (2007), states that a bank credit policy should set out the bank lending philosophy and objectives including, appraisal for implementation, monitoring, appraisal and review.

In a rational profit maximizing world, banks should maintain a credit policy of lending if only if borrowers have positive net present value projects. Why then are changes in credit policy seemingly correlated with changes in condition of those demanding credit? . this paper argues that rational bank managers with short horizons will set credit policies that can be influenced by other banks and demand side conditions. Nwakwo (2008) to facilitate lending, reduce risk and maintain standard in economic development, the loan policy or bank should specify the quantity of loan to be made, which loan should be secured and which should not, the type and quality of acceptable securities and the loan security that are in admissible, some of the factor to consider in drawing up a credit policy include the risk associated with various types of loans, the need for diversification to spread the risk liquidity consideration, type of customers, the capability of the personal and the relative profitability of the various types of loans.

1.2      STATEMENT OF THE PROBLEM

Despite the effort made at providing finance and ensuring that regulating environment in conducive, through the repealing of regulations that where inimical to orderly growth and development of Nigeria economic there are still areas that have not beer addressed. These are the credit delivery of financial system to the economy. This instability of the banking sector is adversely affecting business. This is because they lack adequate collateral securities for the credit facilities as such as credit policy affect the development of the economy.

1.3      PURPOSE OF THE STUDY

The purpose of the study is to examine the effect of credit policies of financial institution and its relevance to economy development and to further examine the following:

-              To examine whether credit policy of financial institution affect aggregate output and productivity in Nigeria economy.

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