TOOLS AND POLICIES FOR EARLY DETECTION OF BAD DEBTS

Abstract

The purpose of the research is to determine the main causes of bad debts, to determine how bad debts are managed in banks and the extent of their conformity with banking policies, and find solutions to the problem of debtors failing to fulfil their obligations.

The two research questions that this paper deals with are the following: a) What are the preventive measures that banks take to address bad debts? b) What extent does the Central Bank of Libya intervene in directing bank credit?

Important literature guiding this research includes the concept of default, its stages, and the banking treatment of troubled debts, and Alternatives to Dealing with Troubled Debt prepared by the Research and Information Centre at the College of Economics for Administrative Sciences and the Sudan Academy for Banking and Financial Studies.

Qualitative research design is focused on the fact that early detection of bad debts would spare the community these losses and open up the opportunity for optimal exploitation of its funds in a way that guarantees economic progress and ensures that the banks operating in it increase their ability to continue in the banking market, protect their conduct, and draw their attention to the risks that threaten the stability of the projects that are for society.

The search methods are used to develop banks’ capabilities in treating their troubled debts, not only by stopping granting credit or being strict, but they must also carry out the process of monitoring and this will only be done by using early debt detection tools which are financial analysis tools and credit information system so that banks can perform their main role effectively.

There are two main results in the research. First: Financial failure does not occur all at once, but rather passes through several stages to reach the intractable stage of failure. Knowing these stages leads to correct treatment of financial failure in its initial stage. Second: The causes of insolvency in financial institutions are due to common matters between the institution itself, the debtors, and the surrounding circumstances.

The policy implications are that bad bank debts are considered one of the most serious problems facing the banking system and the state’s economic activity because of their costly consequences and complex effects. Their impact is not limited to the present only, but extends to the future because of the instability that occurs and the shaking of the structure of trust in the bank and the elements and units of banking.

Implications for practice are related to the management of the funded project, including the lack of correct and accurate data about the project, and reliance on wrong feasibility studies based on assumptions. Using debt for purposes other than those for which it was granted leads to the project assuming obligations that it will not be able to fulfil. Lack of administrative and technological expertise among those in charge of the project, lack of experience in those responsible for the project and lack of the necessary skills to manage the project, and Insolvency and bankruptcy.