Analysis Of Incidence Of Loan Default In Merchant Bank (A Case Of Ivory Merchant Bank)
This research studied the nature, problem and prospect of the new product developed in the banking industry from 1990-2003.
In this research work, the researcher chose four of the products and measures the extent to which they have been able to satisfy the customers. The product selected are smart card, international money transfer, educational scheme and integrated banking network transaction.
Data for this research were collected through questionnaire and interviews by bank customers and the review of existing literature on the topic using simple random procedure and the descriptive method of research. The data so collected were analysed using the simple percentage and the formulated hypothesis were tested with chi-square (x2) method.
Some of the findings are the nature of the new product can measured in terms of accessibility, speed, timeliness, simplicity and reliability.
Customers who patronize the new product are majority those who want money transfer both locally and internationally customers derived high level of satisfaction from the new products.
Inadequate infrastructural level in our banking industry and high cost of installing them contributed to the problem of the new product.
Based on the findings, the following were recommended banks should come together and establish a common data communication satellite to minimize constant problems.
A parallel organization that was supplying electricity in competition with NEPA should be allowed to evolved so that an efficient supply of electricity can be ensured.
Finally, since this study alone cannot exhaustive of this vital subject, it is recommended for further studies.
According to Paget (1998), a renowned banker he defined banks as “a corporation or person (or persons) who accepts money on current account, pays cheques on such account in demand and collects cheques for customers.”
Banks are financial institutions that are charged with the responsibility of funds intimidation. They act as a go-between the simples funds sources and deficit fund services. They equally act as “a dealer in capital or more properly a dealer in money as we defined by Gulbert (1995) in performing this function, they engage themselves with deposit acceptance and granting of loans and advances to any needy sector of the economy or individual. Investors and industrialist. The banks are not charcterable organization, hence they render these services with the motive of profit making.
The banks in performing this very important duty they are faced with myriad of problems that grows in bounds everyday in consonance with the dynamic nature of Nigerian economy and growth. Their major problem emanated from the fact that those customers to whom the banks lend money on agreed terms and condition default to repay on maturity, thereby putting a wedge on the wheel of both profit making objectives of the banks, credit expansion within the system for economic activities and continual operations of the bank. This granted into bad debts.
In the pre-independence era when few banks dominated the industry, cases of loan default and bad debt were very minimal, of course, the banks management and loan grants were carefully studied before actual disbursement by the expatriates.
Today, management of many Merchant Banks are worried by the trend of incidence of loan defaulters and bad debt been recorded. Still decisive and obvious action have not been taken by them to at least its impact on their operations and the effect on the economy at large which is the purpose of this study to proffer effective suggestions on how to bring under control rate of bad in merchant banks and particularly Ivory Merchant Bank.
Financial analysts all over the world agree that bad debt and loan default cannot be completely eliminated in banking industry but a constant check can be kept over every factor capable of generating this ugly experience to most financial and non-financial institutions that engaged in funds intermediation directly or indirectly.
It is note worthy to state here that some merchant banks in Nigeria apparently faced by an increasingly hostile business environment are applying to the Central Bank of Nigeria to convert to commercial banks had applied to C.B.N. as at end of October, 1993.
Incidence of loan default in merchant banking, a very important sub-sector leaves nobody any comfort, hence the researcher’s interest in searching the immediate and remote causes of bad debts and how to remedy the ugly experience so that the public confidence could be restored to the financial sector.
1.1 Background of the Study
While reading through journals, weekly financial and business papers, on the rate of increase in number of distress and liquidating banks, the researcher was pulled into imaging that would become of the financial system in the future if dotting is deliberately done to rescue the situation. We are ignorant of the abysmal value of currency” Naria” in the past few years up to date, would you reason out that we cannot build the Nigeria of our dream if this is coupled with constant bank liquidation and failure.
Bank lending by way of loans, over draft, financing capital intensive projects by way of loan syndication, trade credit finance all over the world. The process of financial intermediation is assuming complex dimension. As they try the live up to expectation in this regard they (banks) are confronted with unacceptable pill of loan defaults. When granted loans are dues for payment and without it been actually paid, such loans are regarded as being defaulted, hence analysis of the incidence of loan default in Merchant banking.
1.2 Statement of the Problem
There is no doubt the difficulties confronting the banking industry today in Nigeria. Every bank is striking to at least keep pace with others. In their daily dealings as conduct pipe for money, whereby they aggregated funds and disaggregate them it the investing public, they are met with hitches of defaults on the part of loans and advances beneficiaries to meet their obligations have serious consequence on the lending banker.
Therefore the banks are expected to do something very urgently to address the problems so as to forestall it lending them to distress. The failure to refund money borrowed by customers have big adverse effect on banking operations. Such call for study and investigation, so that the solution could be proffered.
1.3 Objective of the Study
- To identity the causes of loan default
- To identify the level of incidence of loan default and bad debt.
- To determine the extent of monitoring by merchant banks of projects for which they extended loans.
- To identify the effects of loan of default in merchant banks.
- To make recommendations can how loan default and bad debt will be minimized or eliminated.
1.4 Research Questions
- What are the measures adopted by the bank in preventing loan default occurrence?
- What is the level of incidence of loan default to your bank?
- How has your been able to monitor its advances granted to customers?
- What do think are the causes of loan default?
1.5 Research Hypothesis
After thoroughly research, it lies on the research to make the following hypothesis.
- Ho: Incidence of loan default in merchant banks is not high.
Hi: Incidence of loan default in merchant banks is high.
- Ho: Loan supervision and monitoring are not major solution to loan default in merchant bank.
Hi: Loan supervision and monitoring are major solution to loan default in merchant bank.
- Ho: Loan default does not lead to bank failure in merchant bank.
Hi: Loan default leads to bank failure in merchant bank.
1.6 Significance of the Study
Based on guiding and recommendations that would be offered at the end of the study, Ivory merchant bank will use it to reassess their credit analysis, loan disbursement and recovery formular. It will also guide the treasury manager on liquidation management to eliminate the bank running into financial distress.
It is important to state here that the research findings will be immense help to other financial intermediaries in their daily dealings with both savings fund borrowing public.
Implementations of the researcher’s recommendation will restore also confidence of the public on the banking industry.
1.7 Scope / Limitation of Study
The study is to be based on the contributory impact or incidence of loan default on both expansion and operation of Ivory merchant bank in Nigeria limited. The scope therefore precludes other innovations and products of the bank, such as corporate finance ceasing and investment advisory services, merchant bank loan syndication process. Investigation would be limited to the office of Ivory merchant bank alone.
It is important therefore that further researches should be extended to merchant bankers corporate and investment advisory services to determine their (merchant bankers) role in accelerating industrialization and economic development growth of Nigerian economy.
1.8 Definition of Terms
A bank loan may be defined as financial faculty granted by a bank which is in tender to be applied for financing of a specific purpose an it usually has a defined duration and fixed repayment programme.
2. Loan Default:
This could be seen as a situation whereby customers failed to repay the loans they borrowed from the bank.
3. Incidence of Loan Default:
This is the rate at which borrowers could not pay back their money occurs in Ivory Merchant Bank.
4. Merchant Bank:
A merchant bank is defined by the Banking Amendment all 1979 as “any person in Nigeria, who is engaged in wholesale banking, medium and long term financing, equipment leasing debt factoring, investment management, issue an acceptance of bills and the management of this trust.
5. Ivory Merchant Bank:
This is a branch of merchant bank formed for the purpose of lending in banking industry.
6. Bank Lending:
These are basic principle a banker should observed while granting loans and advances to customers.
7. Criterion for Bank Lending:
These are basic factors, which a banker should put into consideration before granting loans.
8. Finance System:
Nigeria finance system is made up of banking institution and non banking institutions.
Summary of Findings, Recommendations and Conclusion.
5.1 Summary Of Findings
In the course of the topic, analysis of incidence of loan default in merchant bank (a case of ivory merchant bank) the researcher had the following findings.
- In the test for the first hypothesis, which was aimed at determining whether inadequate collateral provision by borrowers increases incidence 5 in chapter 4 was posed and the responses received showed that 40 or 80% of the responses received were of the opinion that inadequate collateral security provisions by the customers affects the incidences of bad debt in Ivory Merchant bank to a great extent where as 10 or 20% believed that it affects the incidences of bad debt to an extent. The researcher states as his findings that inadequate collateral security provisions by borrowers increases the incidence of bad debts in Ivory Merchant bank.
- In the test for the second hypothesis which was aimed at determining whether fund diversion affects bad debts in Ivory Merchant bank. Question 6 in chapter 4 was posed and the responses received showed that 47 or 94% of the responses received accepted that fund diversion has a contrary view. The researcher states as his findings that fund diversion affects bad debts in Ivory Merchant bank of Nigeria plc.
- In the test for the third hypothesis which was aimed at determining the extent of which government intervention in lending policies of Money-Deposit Banks. Question 8 in chapter 4 was posed and the responses ceiling posses a problem to Ivory Merchant bank in granting loans while 2 or 4% had a contrary view. The researcher states as his findings that government intervention has direct influences on Ivory Merchant bank of Nigeria plc bad debt.
- In the test for the fourth hypothesis which was aimed at determining the effects of the incidences of bad debts in Money-Deposit Banks with regards to improper evaluation of projects, question 9 in chapter 4 was posed and the responses received showed that 50 or 100% of the responses received were of the opinion that improper project evaluation has significant relationship with bad debts in Ivory Merchant bank. The researcher states as his findings that improper project evaluation has significant influence on the bad debt of Ivory Merchant bank of Nigeria plc.
Based on the findings by the researcher in course of this research study, the researcher therefore made the following recommendations.
In the first findings, which states that inadequate collateral security provisions by borrowers increases the incidence of bad debts in Ivory Merchant bank, banks should ensure that loans given out to customers are backed by adequate collateral security. This means that loans should be given to individuals and corporations with adequate collateral security.
In the second finding which states that fund diversion affects bad debt in Ivory Merchant bank, there should be close and proper monitoring of loans before and after disbursement. Infact, the monitoring should continue for the entire life of the loan.
In the third findings which stipulates that government intervention has a direct influence on Ivory Merchant bank bad debt in Nigeria, government should as much as possible reduce the incidence of conflicting policy pronouncements which have adverse effect on business projection. Again, much as interest earnings constitute a great proportion of the gross earning of banks, the bank should be caution in increasing the rates charged on a loan.
In the fourth finding which states that improper project evaluation has significant influence on the bad debt of Ivory Merchant bank, the bankers should lay relatively more emphasis on the integrity of the borrower, the ability of the project to pay itself and previous experience with the customers also advances department should be staffed with qualified and resourceful officers capable of making seasonal decisions based on credit analysis. These staff should benefit from regular training and re-training programmed in landing appraisals. The services of quantitative analysis who will appropriate data and can predict the provision for bad debts to be necessary.
To manage loan and credit effectively, efforts have to be made to obey and respect the cannons of good lending and ensure adequate control and supervision on the facility extended within the frame work of government regulation and guidelines. Sound lending requires a clear, well articulated and easily accessible policy document which spells out the philosophy of lending. This will ensure that loan losses are kept at a minimum via a programmed which permits constant supervision on the projects being financed, easy identification of delinquent loans and instituting effective corrective measures.
It is instructive to note that no one can have complete control of his environment, which is Banking is dominated by external factors such as economic and political situations and unpredictable behavior of human beings.
All these factors are subject to change and therefore increase the risk of bank lending, losses are normal in the business of lending money but they must not be disproportionately high lending. Officers are therefore expected to continuously evaluate their loan portfolios and make adequate provisions for losses. The issue of bad debts cannot be ruled out in banking business but the incidence can be minimized with prudent lending philosophy and proper grasp of economic and political environment factors.
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