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The Concept Of Banking And Bad Debt

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The financial sector plays a very vital role in the development of any country or nation. The banking sectors, as a major player in the financial system, is a major concern to all and sundry in a country most importantly the government through its agencies like the central bank and the ministry of finance. Recently, there has been a big upheaval in the Nigeria financial sub-sector i.e. the banking sector as the Central Bank of Nigeria and the Governor, Sanusi Lamido Sanusi, audited the accounts of some banks and came up with a list of banks that are found faulty.

THE CONCEPT OF BANKING AND BAD DEBT

Banking could mean different things to different people. Scholars, bank professionals and even laymen had defined the concept and lots are still going on to capture what banking denotes in the present time taking into consideration the changing world environment. A number of definitions shall be considered here:

Banking, according to InvestorWord (2009) has been defined as engaging in the business of keeping money for savings and checking accounts or for exchange or for issuing loans and credit, etc. However, from finance perspective, it is defined as ‘the management of money and credit and banking and investments. From right of offset perspective, InvestorWord sees banking as the legal right of a bank of seize deposited fund to cover a loan that is in default.

Wikipedia also gives a number of definitions as to the word banking. First, it defines banking as the transacting business with a bank deposit or withdrawing funds or requesting a loan, etc. A second definition sees it from financial perspective, deforming banking as the commercial activity of providing funds and capital. More relatively modern term is that which defines banking from home banking perspective as ‘that in which transactions are conducted by means of electronic communication (vial telephone or computer). Other definitions as provided by Wikipedia are:

i. Banking is the business of a bank or of a banker (role perspective)

ii. Banking is the art of transacting business with bank, depositing or withdrawing funds or requesting a loan etc.

iii. Lastly, banking as engaging in the business of banking, maintaining savings and checking accounts and issuing loans and credit, etc.

In all, banking is a nebulous concept but one could curl out some cogent terminologies so important the concept of banking to include the following: Exchange, account, business, savings, checking, loans, credit, finance, deposit, withdrawal, fund or capital, transaction, and issuing.

THE CONCEPT OF BAD DEBT

There is no organization, whether banks or others kind of establishment that prays for bad debt. Ironically, bad debt is table in some certain organization, more importantly in the banking sector where loans are being given out in millions and billions on even daily/weekly basis.

Backlog of irrecoverable loans could sum-up to bad debt which used to pose great threat to the survival of most banks. The recent audit of some bank’s records which reveals anomalies in the operations of such banks and which brought about the removal of seven bank chiefs (CEO) up-to-date has been the talk of the town and a more controversial issued both locally, nationally and at the world’s scene.

Here, we shall be looking at some of the definitions of bad debt as it were and do a bit of exigency on the concept.

The investor word takes a comprehensive look at the concept from two perspectives Vis-a-Vis Non- GAAP and GAAP. Also, dictionary of finance and investment terms defines it as open account balance or loan receivable that has proven noncollectable and is written off.

The dictionary of Banking terms describes bad debt as loans classified as a probable loss and has no economic values.

Lastly on definitions, the dictionaries of Business terms see bad debt as debt that is not collectible and is therefore worthless to the creditor. So noncollectable because the debtor is insolvent; while the dictionary of marketing terms put bad debt as ‘customer failing to pay for the merchandise or service received; also called bad pay’.

The highlights from these definitions are:

i). Bad debts are receivables

ii). they are always noncollectable

iii). the debtors are usually insolvent

iv). Bad debts are usually written off

v). They are treated as expenses in the income statement

vi). They are loss to the going concern

vii). Such amount is worthless to the creditor


Source by Oluwanisola Seun

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