An Appraisal Of Deposit And Lending Policies In Nigerian Banks (A Case Study Of Access Bank Plc, Kaduna)
This research work was undertaken to assess the bank deposits and their impact on lending policies. This work was intended to achieve the following objectives: to apprise and determine the lending procedure of banks, to highlight the extent to which improper project evaluation influence bad debts of money. Deposit banks. Relevant data were collected from both primary and secondary sources. Questionnaire was the main primary data collected instrument employed while data from various relevant publications constituted the source secondary data. Upon the analysis of data, the following conclusion were drawn; that sound lending requires a clear-well articulated and easy accessible policy documents which spells out the philosophy of lending. On the basis of the above findings, it was recommended that banks should ensure that loans given out to customers should be backed-up with adequate collateral security. Finally, it is the opinion of the researcher that the management of bank deposit should prevent the incidence of bad debts in Nigerian banks.
1.1 Background of the Study
In a modern economic system, there is distinction between the surplus and deficit economic units and consequently a separation of the savings and investment mechanism. This has necessitated the existence of financial institutions whose jobs include the transfer of funds from savers to investors. One of institution is the money deposits bank, the intermediating roles of the money deposit banks places them in a position of “trustees” of the savings of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development. The techniques employed by bankers in this intermediary function should provide them with perfect knowledge of the outcome of lending such that funds will be allocated to investment in which probability of full payment is certain. However, in practice no such tool can be found in the decision of lending bankers. Virtually all lending decisions are made under creditors uncertain of the risk and uncertainties associated with lending decision situations are so great that the concepts of risk and risk analysis need to be employed by lending bankers in order to facilitate sound financial decision making and judgment.
This statement implies that if risks are to be objective assessed, lending decisions by the money deposit banks should be based less on quantitative data and more on principals tools subjected to provide sound and unbiased judgment. Furthermore, the banks depend heavily on historical information as a basis for decision making.
Apparently aware of the inadequacies of his or her decisions base, the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such securities is an insurance against bad debts. This makes the banker complacent with his loan port folio. The increasing trends of provision for bad and doubtful debts in most money deposit banks is a major source of concern not only to management but also to the shareholders who are be coming more ware of the dangers posed by these debts. Bad debts destroy part of the earning assets of banks such as loans and advances which have been described as the main source of earnings and also determine the liquidity and solvency which generates two major problems, that is liquidity and profitability, has to earn sufficient income to meet its operating costs and to have adequate returns on its investment.
Lending has becoming a vital function in banking operations in view of its direct effect on the economic growth and development in the business sectors. Thus, as far as banks are concerned, their activities are lending are as important as their deposit taking, considering the inter-relationships between lending and deposit taking.
Although Lending is risky, commercial banks profit oriented organization having a primary objective as profit maximization cannot do without lending out money. In most cases, they generate the highest proportion of their interest on lending. Moreso, the principal objective of lending of a bank is the provision of growth inprofitability and liquidity within the economy.
Commercial banks play an important role in the pass-through of monetary interest rates. Nevertheless, the efficiency of transmission of decisions of Central Bank is a complicated process and may depend on many factors such as: level of competition in financial industry, perception of credit risk (risk prenina) risk aversion, availability of close substitutes for loans etc. Moreover, banks may influence the external fiancé premium not only via the interest rate but also modifying the available maturity of loans or changing collateral requirements. Finally, as evidence by broad literature on bank lending channel, credit rationing and uncertainty about creditworthiness of borrowers may markedly influence banks risk taking thereby influencing their willingness to lend.
The existence of bank lending channel is conditioned on two important assumptions. First monetary policy decision impact bank liquidity position. Second, changes in the supply of loans affect borrowers because of constrained access to other sources of financing than bank loans. Tightening of monetary policy usually leads to decrease in the demand of deposit because banks adjust their deposit rates only partially to the other sector to equity investment funds. Shrinking bank’s liabilities force banks to decrease the supply of loans accordingly.
1.2 Statement of the Problem
Years after years, banks suffer much from the part of full loan extended which has for one reason or the other proved irrecoverable. Banks lose millions of Naira in various bad debts yearly and deposit efforts by bank management committee of chief inspectors and the bankers committee on the other hand, the ware of bad debts in banks is still on alarming proportion. This is gathered from a combination of literature reviews on the topic.
On the other hand, many banks experienced a lot of bad debts when new government abandoned the project awarded to the contractors by the former government. These contractors borrowed to execute the project awarded to them but could not repay the loan, due to government action on revamping the economy. Again, experience may arise in respect of lapses on the part of the bank credit officers. For instance, there may be excesses over approved facility, unformatted facilities and expired facilities not renewed in time in each of these cases, the customer may easily deny even owing the bank all or part of the amount. Deposit banks have always borne the burden alone, but this may not continue in future as the banks may be unable to take the risk of lending more but when eventually they do, they would seek the best way to come out of the risk with realistic reward which they are dearly failing to achieve at present.
1.3 Objective of the Study
The objective of the study are stated below:
- To determine and appraise the lending procedure of bank using Access bank plc as a case study with a view to highlighting the effectiveness and adequacy or otherwise of the credit management policy of Nigeria banks in reducing the occurrences and consequences of bad debts.
- To ascertain the extent to which government intervention in lending policies of bank deposit has influenced bad debts in Nigeria money deposit and lending policies.
- To highlight the extent to which improper project evaluation influence bad debt of deposit money banks and their lending policies in Nigeria.
- To highlight that rate at which inadequate collateral security provision by borrowers increase the incidences of bad debts in Nigeria.
1.4 Research Questions.
In view of the consequence of bad debts in Nigeria deposit money banks and their lending policies, it is necessary to formulate some research question which will enable the researcher formulate statistical tables.
- Has adequate collateral security provision by borrowers caused bad debt in access bank of Nigeria plc?
- Does fund diversion has any effect on bad debt in intercontinental bank of Nigeria plc?
- To what extent has government intervention in lending polices and bank deposit influence bad debts in Access bank plc?
- To what extent does improper evaluation influence bad debt in intercontinental bank plc?
1.5 Significance of the Study
It is hardly an exaggeration that the difference between the success and the failure in the banking industry is in the effective management of the banks loans and advance. Efficient loan management is vital to the protection of assets and the achievement of adequate returns to investment. Through much work abound in the literature of the techniques of lending, the methods of securing such lending and the pitfalls that await the unwary banker. By comparison it appears to be very little in the point on the subject of loan management and recovery.
A study of this subject will therefore be a welcome addition to the existing volume of banking literature.
Bank deposit and lending polices recognize that beyond the application of sound banking principles whenever a loan is made, there is need for urgency in appreciating the point when a loan begins to look doubtful. In arriving at a decision as to the appreciate action and in taking that action. This will enable the bank to at least obtain full payment including accrued interest or at worst to mitigate the capital loss in the face of increased competition among banks. Future profits are likely to be harder to come by and since bad debts are charged against profits, it is appropriate that the researcher review the methods, proportions and margins of lending to bad doubtful debts.
Hence, the significance of this study to bankers will enable them to appreciate an appraisal of their lending control mechanisms now that they are expected to lend under tight monetary conditions. The economic as a whole will benefit from the study because if the level of bad debts is reduced, banks will be left with more profits to enable them make the expected contributions to the development of the economy.
1.6 Scope of the Study
In the scope of the study deposit and lending polices in Nigeria, Access bank plc was used for my analysis. All references therefore relates to access bank plc.
1.7 Historical Background of Access Bank Plc
Access Bank Plc, commonly refers to as Access bank but often called intercontinental is a commercial bank in Nigeria. it is one of the twenty-four (24) commercial banks licensed by the central bank of Nigeria, the country’s banking regular.
Access bank is a large finance services provide in West Africa. As at December 2008, the banks’ shareholder’s equity was valued at approximately S1.7 billion (N 261 billion). The share of stock of Access bank is listed on the Nigeria stock exchange (NSE) where they trade under the symbol: INTERCONT
The bank was established in 1989 under the name Nigerian intercontinental merchant bank limited. That same year, the first subsidiary intercontinental securities limited, was established. In 1996, the bank acquired controlling shareholding in equity bank of Nigeria, a commercial bank. Also in 1996, Access acquired majority shareholding in West Africa provincial company plc (WAPIC), an insurance company.
Access bank converted into a commercial bank in 1999. In 2002, the company listed its shares on the Nigeria Stock Exchange. In 2005, Access bank successfully merged with three (3) other commercial banks, in which it held equity position prior to the merger, namely Equity bank of Nigeria, gateway bank and Global bank. In 2009, a special audit of the commercial banks in Niger by the Central Bank to be under capitalized and badly managed. Access Bank plc was one of the troubled banks. Following the injection of capital by the federal government of Nigeria to maintain solvency, the troubled banks have embarked on recapitalization through participation by new investors.
Increasing the capital base: according to its un-audited interim results at August 31 2006. Intercontinental has a capital base in excess of N61 billion ($491 million) ranked as Nigeria’s fourth most capitalized bank. Access bank is in the market to raise an additional N50 billion ($403 million) by way of a combined rights issue and public offer for subscription.
Revenue and Profitability
According to interim results for the first six months of the access bank financial year to August 2006, interest income is up close to 150% on the same period in 2005. Profit before tax is up 91.4% to N8.14 billion ($ 66 million) and the proposed interim dividend is up 100% at N3.2 billion ($26 million) (Access Bank Financial Statement 2006).
Intercontinental bank has more than 200 branches national, rising to 280 by the end of February 2014. The bank has begun its continental expansion in Ghana, where it recently obtained approval in principles to commence operations. The bank intends to build its presence in major financial centers, including South Africa, the United Kingdom, United States of America, Hong Kong and Dubai.
Current Structure of the Nigerian Banking System
The Nigerian Banking sector is organized around the activities which include the taking of deposits highlighted above. The most notable aspects of these activities include taking of deposits from the public and the granting of credit facilities by the deposits money banks. Donle (2003) holds that these two particular aspects are the hub of banking in Nigeria. The various deposit money banks (otherwise called commercial banks) through their branch network around the country, provide financial services to the Nigerian public, who may be individuals. Informal and formal groups, small medium and large corporate bodies as well as the three tiers of government and their respective ministries, departments and agencies (MDAs).
Deposit money banks are mainly owned by Nigerian indigenes and institutional bodies; there are however, some foreign part-ownerships of banks. Thus, the management and control of the operations of these banks are largely influenced by a significant individuals or by a family members, who usually appoints individuals to membership of the board of directors. The Central Bank of Nigeria in nearly all cases approves these board appointments. In 2008, the CBN introduced a uniform financial year-end in December for all deposit money banks. But later rescinded the decision allowing the various banks to choose their own respective year ends. In the courses of the financial year the NDIC and CBN through their examiners fulfill their statutory mandates of regulation and supervision by employing off-site and on. Site examinations of the books and activities of banks Soludo (2009), states that the activities of banks account for over 90% of the Nigerian financial system assets and are increasing dominant source of financing for the economy. These activities in the banking system form a significant part and determine to a great extent the economic fortunes of Nigeria.
However, given the importance of the roles banking system plays in the economic growth and development of Nigerian and the limitation of these interactions and activities among the above actors i.e. imperfections of market mechanisms to mobilize and allocate financial resources to socially desirable economic activities of the nation. It becomes necessary for the Nigerian government to regulate them more than any sector in an economy. In addition, the nature of banking business is conducted with greater secrecy compared with real sector business. These cause for reasons for its strict supervision. In charge of this supervision in CBN and the NDIC share in this responsibility. Table one shows how supervision and monitoring has been carried out since 1929 through off site and on-site surveillance.
1.8 Definitions of Terms
Who is the customer what is his previous relationships with the bank and what does his previous records on credit book look like? A banker has to know his customer based on existing bank customer relationship and if there are any information such as stakes of credit report. Through available services character worth of credit is largely a function of a person’s honesty and integrity and is just as important in lending to business firms and personal borrowers.
2. Capacity to Borrowers:
Banks are interested not only in the borrower ability to rely in legal capacity to borrow. It contracts for payment of money lend to a minor (and any security associated with the loans) is absolutely void as it is a contract for the purchase by minor of non necessary goods and services in lending to a partnership. It is usually advisable to require all members of the partnership sing for the loan. If that is not feasible, the lending officers should determine whether the singing partner have authority to borrow for the partnership. A verified copy of the partnership or power of attorney may be used for this purpose. When such evidence is collected which include the folio signing partners, if they establish that the borrowed funds were not used to further the business of the partnership. In lending to a coronation, it is advisable to examine the character and by law authority to negativities for loans may be irrevocable.
3. Collateral Security:
It has been said earlier that this is of paramount importance in lending (i.e security) as it refers to what the lending banker can fall bank on in the event of default by the borrow. the value of the security must be constantly watched in order to protect the bank in the case of realization some of the security that can be taken are insurance policies, sock and shares. Debentures etc. all these securities will be examined in the latter part of this chapter.
Capital here refers to the borrowers contribution as to the amount required. This principles of partial contribution by the customer in view of the fact that the external banks only position to contribute certain percentage of total capital required before such loan could be granted. Most customers are under the illusion that when they secure a contract or decide on a project requiring finance their bank bears the full financial requirement.
Summary, Conclusion and Recommendations
The objective of the study is to establish whether there is a relationship between granting of loan and profit evaluations of the bank. And to analyze the different type of loans and to evaluate the lending policy of the deposit money banks in Nigeria.
In accordance with the terms of the loans agreement, some of these important factors or elements deserve thorough because evaluation they are generally referred to as C’s of credit they include character, capacity, capital, condition, collateral.
Lending policy with regards to delegated authority is based on the branch manager having varying credit limits which are usually a function of their expenses. Data was collected through primary and secondary sources. These primary sources include questionnaire and interview and secondary source include textbooks, journals and magazines etc.
Findings revealed that the loan granted to customers has an impact on the customer and the bank encountered problems in recovering loans. It can therefore be concluded that it is the duty of the credit officer to guide initial interview within higher degree of fact on borrowers to the banks. It is recommended that accept only readily and marketable security as collateral for those credits that are supported and required that all credits be supplied by primary and secondary sources of repayment.
The most loan analysis, the four C’s of lending must be considered before loan could be granted to customer, character, capacity, capital, collateral. For any customers to be entitled to loan from intercontinental bank plc, he must signify in writing an apply for loan and the customer is given form which would have to be completed. And the personal financial statement form reveal that the total assets, total liability, total income, total expenditure and the type of securities that the customer is willing to charge to bank, these form will critically be examined by lending officer after which he or she would evaluate based on the information he or she collected from the form.
Credit risk, is the risk that extended loan to customer will not be paid according to the terms and conditions of loan agreement between the bank and the customers.
- Only readily marketable security should be accepted as collateral for those credit that are supported by security.
- All necessary information on credit should be supplied by primary and secondary sources of repayment.
- The bank must maintain adequate provision to reverse for possible loan losses, and ensure reverses for loan losses are maintained.
- Access bank plc should also maintain a standard and control procedures for loan approval disbursement and recovery
- The bank should diversify its credit or loan portfolio so as to avoid excessive concentration of credit amount to feel, individuals debtors within any geographical area extending credit in small amount to large number of borrowers.
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