MANAGEMENT OF LOANS AND ADVANCES IN NIGERIAN COMMERCIAL BANKS (A STUDY OF FOUR COMMERCIAL BANKS IN ENUGU)


MANAGEMENT OF LOANS AND ADVANCES IN NIGERIAN COMMERCIAL BANKS (A STUDY OF FOUR COMMERCIAL BANKS IN ENUGU)  

ABSTRACT

This made efforts to assess the management of Loans and Advances in Nigeria Commercial banks. The research was prompted by the growing rate of bank loans and advance default cases that result to collapse or disaster and se4rious situation led to distress of many banks institution in our country. However, the objectives set of this study includes; to ascertain the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks, to determine the causes of repayment failure and defaults of loans and advances, to investigate the factors that influence high degree of bad debt and doubtful debts etc. The researcher equally formulated hypotheses in line to the objectives and research question. The primary data was collected using questionnaire that was distributed to the four banks of the study at the end 180 questionnaires was returned. The data was presented using percentage frequency and the hypotheses were tested using the z-test statistical tool. Then the study discovered the following, - that honesty of the credit applicant, provision of adequate collateral security, economic condition prevailing in the country, banking regulatory guideline of transparency and accountability, strength of the applicant business and the viability of the project are the pre-requisite factors banks considered before granting loans and advances, that the major causes of failure and default of loans and advance repayment include, fund diversion, risk/ unstable environment, fluctuation of exchange rate and inflation, poor evaluation and inadequate managerial skills, poor supervision and monitoring, poor sighting and hasty investment, illiquidity of financial instrument and high interest rate, and  that the factors that influenced high degree of bad debt and doubtful debts in the bank includes, poor record-keeping and transaction, over-the counter (OTC) trading and excessive insider abuse, poor transparency and honesty excess load non-recovery, favouritism and incompetence & poor management etc. While the following suggestions were given - there should be an increased and renewed vigour on training continuously the workforce on the measure to curtail incompetence in their operation, there should be an improve laws, regulations and conditionalties that must strictly enforced and uphold to minimized load repayment default, and distress, there should be strengthened attempt to regulate, measure appraisal commercials banks regularly to discover and punish any bank that “abuse” the prudential guidelines for loans etc.

The general and pertinent view of the  study support the statement that the success or failure of the commercial banks in achieving their objective  of maximizing profit  depend s on how well the loans and advances are managed.

TABLE OF CONTENTS 

Title  page………………………………………………………………   i

Approval page…………………………………………………………    ii

Certification…………………………………………………………..     iii

Dedication……………………………………………………………..   iv

Acknowledgements……………………………………………………   v

Abstract……………………………………………………………….    vi

Table of  content …………………………………………………….     vii

CHAPTER ONE 

1.0 Introduction………………………………………………………… 1

1.1 Background of the Study ……………………………………….  1

1.2 Statement of the problem……………………………………….. 3

1.3 Objective of the Study,………………………………………….  4

1.4 Research hypothesis ……………………………………………. 6

1.5 Significance of the Study ……………………………………….  7

1.6 Scope  of the Study…………………………….. ………………. 8

1.7 Limitation of the Study…………………………………………………………. 9 

CHAPTER TWO  

2.0 Review of Related Literature ………………………………………  11

2.1 The Introduction………………………………………………….. 11

2.2 The basic commercial Bank’s Lending and Advances principles…15

2.4 Objective and policies of Lending ………………………………...17

2.5 The sources of Commercial Banks Funds………………………….20

2.6 Lending principles and practices in Commercial Banks………….. 23 

2.7 Classification of Bank Loans……………………………………… 26 

References ………………………………………………………… 30

CHAPTER THREE 

3.0 Research Design and Methodology ………………………………  31

3.1 Introduction ………………………………………………………   31

3.2 Research Method used…………………………………………….. 31 

3.3 Sources of Data …………………………………………………… 31 

3.4    Population of the  Study …………………………………………… 33

3.5    Method  of Data Analysis ………………………………………….. 33   

References  …………………………………………………………35

 CHAPTER FOUR 

4.0 Data Presentation and Analysis ……………………………………. 36

4.1 Introduction …………………………………………………………36

4.2 Data presentation Analysis ………………………………………… 37 

4.3 Hypotheses  Testing …………………………………………….  45

CHAPTER FIVE 

5.0 Summary of Findings, Conclusion and Recommendations ……….. 55

5.1 Summary of Findings……………………………………………. 55

5.2 Conclusion ………………………………………………………  57

5.3 Recommendations……………………………………………….  58 

Bibliography……………………………………………………..  59 

Appendix ………………………………………………………… 61 

CHAPTER ONE: 

                     1.0 Introduction 

1.1 Background of the Study 

Commercial banks are “retail banking institutions” that accept deposits and make short-term, medium-term, and long-term credits available to government, public/private business enterprises, and individuals. Some of their functions include accepting deposit through current and savings accounts; fixed deposit and others, granting of loans and advances, equipment leasing, loan syndication; financing advisory services; trade and export finance; other investments and foreign remittances. The relationship between Commercial bank and others financial institutions in terms of functions, limits, and modus operandi are spelt out in the Bank and other financial institutions Decree 25 Banking and other financial matters decree (BOFID)of 1991. The Banking and other financial matters decree (BOFID) Decree 25 of 1991 in particular permits some other financial institutions like Merchant Bank, Development Bank and Insurance companies to engage in granting loans through mostly medium and long- term in nature.

This research work is mainly done on the management of loans and advance (short, medium-term, and long-term) granted by the Commercial bank in Nigeria. Granting of loans and advances is an integral part of the functions of the Commercial Bank but one of the most risky one. It is based on its risky nature that made it an interest of study focus in terms of its management by the commercial banks.

Filder (1982:249), states that it is a known fact that loans and advances are granted at a profit. Most loans and advances are granted out of the deposits accepted by the commercial banks or funds borrowed at a lower interest rate. The difference between the interest paid out plus share of management cost and the loan interest received makes up the profit to the commercial bank. 

The success or failure of the Commercial Banks in achieving their profit objective very much depends on how well the loans and advances are managed. 

An efficient lending policy will in every ramification reduce the incidence of bank distress and generally increase the wealth of the owners of the bank as a business. It will equally help in revitalizing and boosting the economic activities in the country. 

According to Teriba (1990:21), a situation where the bank lending policy is weak and inadequate makes loan and advances management difficult and this result to shoot-outs of several problems in the development of the economy. Any economy with inadequate level of loan and advances, stringent lending policy and obvious huge bank bad-debts and provisions has a dull future in terms of its overall development. It is this incidence of poor management of commercial bank loan and advances in the Nigerian economy that has promoted my idea of instituting this scholarly investigation as a way to findings lasting solution to the problems. 

1.2 Statement of the Problem 

As earlier noted, that granting of commercial bank loans and advances is one of the most risky businesses entered into by the commercial banks. The risk nature of commercial bank credit on customer who fail to meet up with their credit facilities results to huge amount of bad-debts and provisions for bad-debts. 

The following fundamental problems rise from poor handling of commercial bank loans and advance:

⦁ the high rate of growth in the commercial banks lending risk in terms of the amount of provisions for doubtful debts and bad debts has by far overridden the rate of growth in the commercial banks’ lending plans. 

- the targeted earnings planned to increase the wealth of the shareholders of commercial banks as a business is negatively affected by bad debt charges which obviously reduce the annual earning of the commercial banks and thereby null the fulfillment of the obligation to the owners of the business. 

- high rate of defaults has resulted to the reduced granting of commercial loans and advances which in turn has contributed to the retarded development of the Nigerian Economy through reduced economic activities. 

- diversion of Commercial Banks loan and advances (through insider abuse) negatively effect industrial base of this country and contributed much to the Bank Distress Syndrome being orchestrated in the present day economy of Nigeria. 

- the existence of high proportion of non-performing loans and advances is a major cause of reduced granting of such loans and advances to the economy by the banking system in extreme cases, in negative net-capital base of the commercial banks resulting in extreme cases, in negative net-worth. 

It is clear that any steps towards reduction of commercial bank loan and advances in Nigeria would reduce economic activities and in the same time retard the overall development in the entire economy. 

The major cause of the reduced granting of commercial bank loans and advances are due to unchecked failures which is a function of the management of the commercial bank loans and advances. 

The increasing defaults and poor management of commercial bank loans and advances result to accelerated or high degree of bad debt and doubtful debts. 

1.3 Objectives of the Study 

The following objectives serve as guide to the study.  The specific objective of this study is to determine the problems inherent in the management of loans and advances in Nigerian commercial banks. While the other are:

1. To ascertain the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks.

2. To determine major causes of repayment failures and defaults of loans and advances in Nigeria commercial banks.

3. To investigate the factors that influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

4. To identify the effective policy packages that will ensure loans and advances stability and revolutionalized management actions.

5. To findout the best financial management technique for appraisal and assessment of commercial banks healthy capital capacity.

1.4 Research Questions 

In an attempt to provide relevant and accurate solution to the objectives focus the following research questions is framed.  

1) What are the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks?

2) What are the major causes of repayment failures and defaults of loans and advances in Nigeria commercial banks?

3) What are the factors that influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks?

4) What are the effective policy packages that will ensure loans and advances stability and revolutionalized management actions?

5) What are the best financial management technique for appraisal and assessment of commercial banks healthy capital capacity?

1.5 Research Hypotheses  

The following hypotheses were formulated for this research:

Hypothesis 1

1) H­o: There are  no best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks

2) H1: There are best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks

Hypothesis 2

Ho: The environment and policy favourability are not major cause of loans and advances repayment failure and defaults.

H1: The environment and policy favourability are the major cause of loans and advances repayment failure and defaults.

Hypothesis 3

Ho: High proportion of non-performing loans and advances does not influence the degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

H1: High proportion of non-performing loans and advances influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

Hypothesis 4

Ho: Effective policy packages will not ensure loans and advances stability and revolutionalized management actions. 

H1:Effective policy packages will ensure loans and advances stability and revolutionalized management actions.

Hypothesis 5

Ho: Negative and poor appraisal of the commercial banks loans and advances may not lead to granting of non-performing loans and advances or thereby cause high non-recovery rate which may ultimately reduce the profit. H1: Negative and poor appraisal of the commercial banks loans and advances may lead to granting of non-performing loans and advances or thereby cause high non-recovery rate which may ultimately reduce the profit. 

1.6 Significance of the Study 

Banks are very important institutions in any economy, developed or developing. As one of their functions they aid in the expansion of credit and investment in the process of extending these credits, the commercial banks experience a lot of default in repayment. This, as noted earlier on, has reduced the willingness on the part of many of these banks to extend credits. But something has to be done to reduce the risks involved in bank lending and possibly reduced this incidence of loans and advances problems. This, definitely, would reassure the banks and make them inject more fund facility in the economy. The importance of this cannot be over-emphasized. This is because credit extension has a high positive correlation with the rate of development in the economy. 

If the problems of bad debt arising from bank lending are not controlled, banks may find it increasingly difficult to grant credit. In view of the above this research work would seek a solution to this problem loans and advances vis-à-vis credit extension. 

It is hoped that the solutions would provide a good guide to bank managers and credit analysts in their onerous tasks of credit extension. This will obviously reduce the incidence of lending default leading to provision of more credit to the economy. This will ensure rapid economic development of the country. There is no doubt that this research will also assist those who apply for bank credit to fully acquaint themselves with bank requirement for credit extension. 

Finally, this research is meant to make a positive contribution to the body of knowledge of finance and banking in Nigeria. 

1.7 Scope of the Study 

For the purpose of this study, the commercial bank is defined to include all banks which engaged in retail banking functions. The retail banking functions include: acceptance of deposits and making short term credits available to government, private business enterprises and individuals.

Making of short term credits can be expanded to include:-

i) Granting of loans and Advances 

ii) Equipment leasing 

iii) Loan Syndication 

iv) Financing advisory services       

v) Trade and Export finance and 

vi) Other investments foreign remittances. 

But the scope of the issues examined is limited by the overall objectives of the study. 

Osuala (1993:28) an adequate statement of problem also defines it very carefully in terms of its scope. The researcher must set forth exactly the bounds of the topic being researched. 

1.8 Limitations of the Study 

Many variables have acted jointed and severally to limit this research. These include: 

1) Scarcity of Data: The annual reports and financial statements of the banks operating in the country did not show details of the whole data needed for the research work. For instance they showed only provisions made for bad and doubtful debts for the year without actually stating the amount that was bad. To the extent that the researcher could not get down to the real figures of problem loans and advances for each bank to that extent is the findings of this work limited. 

Even journals and periodicals could not be of much help because they also suffer from the same dearth of the materials required. Many of the textbooks in the country have not actually dealt with the topic, especially as pertained to individual banks.   

The availability of correct and up-to-date data is not easy, even when available one still encounters wholly unnecessary bottlenecks due to our socio-cultural milieu, bureaucracy and subterranean motives. This constituted an impediment to this research. 

Financial and time constraints were seriously encountered by researcher in the course of this work. Exorbitant transportation costs, high level of risk of traveling by road and the geographical spread of the data base constitutes limitations in themselves. 

In other to reasonably establish the causes of poor management of loans and advances in the Nigerian commercial banks, elaborate use was made of descriptive statistic as well as the theoretical under pinning’s of the study, particularly in the area of concepts, measurements, comparisons and causes of poor management of commercial banks, loans and advances.        

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MANAGEMENT OF LOANS AND ADVANCES IN NIGERIAN COMMERCIAL BANKS (A STUDY OF FOUR COMMERCIAL BANKS IN ENUGU)



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