Credit Management

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CREDIT MANAGEMENT & COLLECTION OF RECEIVABLES

DR. RICHARD MAYUNGBE

LAGOS, NIGERIA

26TH – 27TH OF JULY, 2010

INTRODUCTION

Nearly every writer on the subject has worked out his own definition of credit. The following writers are examples:

John Stuart in his Political Economy defines credit as the permission to use another’s capital.

Joseph French Johnson in Money and Currency calls credit the power to obtain goods and services by giving a promise to pay at a specified date in the future.

One of the most widely quoted definitions holds that credit is a present right to a future payment. In business therefore, credit is the trust given or taken in exchange for money, goods, or services but, Richard Mayungbe, one of Nigeria’s leading credit scholars defined credit as the granting of the purchasing power of one party to the other party for the purpose of creating wealth , but for a promise to pay back at an agreed future date.

Purchasing Power in this context refers to:

1. Cash

2. Movable Assets

3. Immovable Assets

4. Intangible Assets, i.e. goodwill, fame. Popularity etc

The essence of credit is to create wealth and expand or energise new economic activities through the deployment of resources from the surplus units to the deficit units of the economy.

CHARACTERISTICS OF CREDIT

Credit would typically have the following characteristics :

• Value -In monetary measurement

• Tenor – Period covered by the credit

• Price – Interest and other associated costs of the credit

• Purpose – Intended use for which the credit is meant

• Terms – Mutually binding conditions between the parties to the credit

TYPES OF CREDIT

Credit may be classified in many way but for our purpose, we shall classify it according to the type of credit transaction by which it is established:

Retail Credit – This falls into two categories ( Charge Account and Installment Credit). The charge account is considered the credit for convenience – payment is made monthly for purchases made the previous month, or during a specific billing period. Installment credit is where partial payment is made at scheduled intervals over a period of weeks or months, usually based on necessity.. A charge or interest is usually added to the basic cost of installment purchases.

Personal Installment loan credit – The phenomenal expansion of retail credit sales has not been sufficient to keep pace with the ever increasing needs of the consumer. Nearly everybody at one time or another needs immediate cash beyond its own resources. Since a relatively small percentage of the populace are in a position to borrow from bank, personal installment loan credit has been developed to meet the needs of the general public.

Mercantile or Trade Credit – Mercantile credit is the credit used to secure goods for resale in exchange for a promise to pay at some specified future date. The goods involved may be raw materials, finished products etc. The prime element of mercantile credit is that it is used in an exchange for goods intended for resale with or without further processing by the buyer. Mercantile credit is the principal medium of exchange in the production and distribution of goods up to point of their delivery to the retail merchant from the view point of the credit manager, this is perhaps the most important category of credit.

Commercial Banking Credit – Commercial banks have two primary functions – to receive deposits and to advance funds on the basis of loans or discounting credit instrument. By granting short, medium and long term credit to their customer, commercial banks play a vital role in any given economic system.

Factoring – The term factoring once used exclusively to designate the selling of goods by one person for another on a commission basis is now applied to the purchase of account receivables as a business. Factoring in its...
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