Bank Lending Policies And Recovery Procedure In Nigeria
Lending is the most important activity of the Bank. It is the utmost activity of financial intermediation whereby fund mobilized from the surplus sector of the economy is judiciously redirected to the deficit sector, for investment purposes and economic growth of the country. However, this lending activity is frosted in many dangers especially that of default and delay in repayment. This is what prudential guidelines try to curtail by creating performing and non-performing credit portfolios. Various Banks equally respond to this by creating lending policies, detail what to do and how is to be done concerning their various credit portfolios in order to minimize their exposure. Zenith Bank plcis our case study in this work and we shall examine some of these policies aim at reducing non-performance credit by various corporate bodies and customers by enhancing the Bank’s profitability.
1.1 Background to the Study
The financial system of most developing nations have come under stress as a result of the economic stock of the 1980s. The economic stocks largely manifested through initiate distortions of sizes of the financial system relative to non-financial magnitude (Davidson & Gabriel, 2009). Rasheed (2010) states that Nigeria’s economy saw different interest rate for different sectors in 1970s through the mid-1980s (Regulated Regime 1960 – 1985). The preferential interest rates were based on the assumption that the market rate, if universally applied, would exclude some of the priority sectors. Interest rates were, therefore adjusted periodically with visible hands to promote increase in the level of investment in the different sectors of the economy. For example, agriculture and manufacturing sectors were accorded priority and the commercials banks were directly from the Central Bank of Nigeria to charge a preferential interest rates (vary from year to year) on all loans and advances to small-scale industries. Since 1986, the inception of interest rates deregulations, the government of Nigeria has been pursuing a market determined interest rate region, which does not permit a direct state intervention in the general direct economy (Adebiyi&Babatope-Obasa, 2004).
Lending which may be on short medium or longtime basis is one of the services that deposit money banks do render to their customers. In other words, banks do grant loans and advance to individuals, business organizations as well as government in order to enable them embark on investment and developed activities as a means aiding their growth in particular or contributing towards the economic development of a country in general (Felicia, 2011).
Banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make an important phenomenon in economic growth and development. In performing these roles, it must be realized that banks have potential scope and prospect for mobilizing financial resources and allocating them to productive investments and return promote their performance. Therefore, no matter the source of the generation of income or the economic policies of the country, bank will be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles finding their operation which are profitability, liquidity and solvency (Adolphus, 2011).
However, banks decisions to lend out are influenced by a low of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment banks liquidity ratio, prestige and public recognition to mention but a few.
Lending practice in the world could be traced to the period of industrial revolution which increase the price of commercial and production activities thereby bringing about the need for large capital outlays for projects. Many managers of industries were unable to meet up with the financial requirement and thereby turn to the banks for assistance (Ezirim, 2005). However, the emergence of banks in Nigeria where Zenith Bank was one of, through the lending after the establishment of the African Bank Co-operation in 1873 (ABC) during the time lending practice in Nigeria was biased and based on discrimination and could not be said to be a good lending practice of the only colonial banks were given loans and advances. And these leads to the establishment of indigenous banks in Nigeria, prior to the advance of Structural Adjustment Programme (SAP) in 1986. The lending practice of banks become strictly regulated under the close surveillance of the banks supervisory bodies the SAP period brought about relaxation of the stringent rules finding banking lending.
The Bank and other Financial Act Amendment (BOFIA) 1998, requires banks to report large borrowing to the CBN. The CBN requires that their total value of a loan credit facility or any other liability in respect of a borrower, at any time, should not exceed 20% of the shareholders’ funds union paired by losses in the case of commercial banks (Felicia, 2011).
1.2 Statement of Problem
This study will attempt to address some specific issues that serve as barriers to the application of bank lending policies with respect to the following questions amongst others: Does the level of loans granted to customers dependent on the degree of reliance banks have no the security of customers?; Does the high rate of interest on lending scare investors from obtaining loan and advances from the banks?; What constitutes government (CBN) regulations on cash reserve requirement and liquidity ratio on loans and advances?;Which sector do you consider most profitable for your banks to invest in?
1.3 Objectives of the Study
The objectives of the study are to ensure that banks can perfectly compete locally. The following are some of the objectives of this study:
- To ascertain the level of reliance bank place on the security supplied by customers before granting them loan.
- Find out if the interest rate demanded by the banks restricts the members of customers intending to borrow from the bank.
- To know the sector that is more profitable for banks to invest in by highlighting the sector with the highest default.
- To know the extent to which the cash reserve requirement and liquidity ratio of Nigeria banks affect its lending policies.
- To highlight the policy of maturity pattern of loan and advances so that the particular area the banks lay emphasis on will be known with ease.
1.4 Research Questions
The study shall be guided by the following research questions;
- What are the lending policy objective and financial performance in the Nigeria banking industry?
- Does lending policy enhance financial performance of banks in Nigeria?
- What are the issues that are relevant to the effective maintenance of lending policy in Nigeria?
- What are the challenges facing the lending policy and financial performance and how they could be tackled in Nigeria?
1.5 Statement of Hypothesis
The hypotheses for the study are in null and alternative form; where (HO) null hypothesis implies a rejection of the alternative hypothesis and alternative hypothesis (HI) implies rejection of the null hypothesis. And this research was guided by the following hypotheses;
- HO: The level of loans granted to customers is not dependent on the degree of reliance banks have on collateral security supplied by customers.
- HI: The level of loans granted to customers is dependent on the degree of reliance banks have on collateral security supplied by customers.
- HO: The interest rate demanded by banks does not restrict the number of customers intending to borrow from the bank.
- HI: The interest rate demanded by banks does restrict the number of customers intending to borrow from the bank.
- HO: Cash reserve requirement does not affect its lending policies in banking industries.
- HI: Cash reserve requirement affect its lending policies in banking industries.
1.6 Significance of the Study
This research work will attempt to investigate bank lending policies and procedures in Nigeria and Zenith Bank of Nigeria Plc was used in this study. The significance of this study is to examine the extent to which bank lending has geared up the growth of the Nigeria economy through loan and advances for investment. The following are some of the importance of the study;
- It helps the surplus sectors of the economy to channel the abundance fund to the deficit unit.
- Lending policies helps to minimize the rate of bad and doubtful debts in the banking sector.
- The bank lending policies aids easy repayment of loan i.e. the security deposited with the bank motivates the borrower for easy payment.
1.7 Scope and Limitation of the Study
The area of importance as far as this research work is concerned is that this research work will cover bank lending policies generally against the background of the Central Banks of Nigeria’s monetary policy circulars, and guidelines issued periodically to ascertain the effectiveness of banks’ lending policies with particular references to Zenith Bank of Nigeria Plc. It shall also cover the extent to which loans and advances over a period that is carefully chosen to reflect the lending pattern.
Challenges and implications with the period, for example, they check the efficiency of banking operations, the maturity pattern of loans and advances, method of payment and the percentage of bad and doubtful debts by the debtors as recorded in the schedule of returns to the Central Bank of Nigeria.
This project work is centered on the banking industry in Nigeria. It is concentrated on bank lending policy as it aids in the advancement of development of a country. However, some of the limitations identified in carrying out this research are as follows:
- Insufficient books in the library limited the effort of the researcher in carrying out an in-depth research on the project work.
- The rules and regulations guiding the case study of the researcher that is, Zenith Bank Plc did not allow the researcher to carry out personal observation and probably interview bank lending officers.
- Another limitation is that some of the information or answers given in the questionnaire are incomplete.
1.8 Definition of Terms
This is the time taken for the loan and advances given by the bank to mature.
A systematic examination and evaluation of data or information, by breaking it into its component part to uncover their interrelationship.
An establishment authorized by the government to accept deposit, pay interest, clear cheques, make loans, act as an intermediary in financial transactions and provide other financial services to its customers.
Written or oral agreement for a temporary transfer of a property usually cash from its owner (the lender) to a borrower who promises to return it according to the terms of the agreement, usually with interest for its users.
If the loan is repayable on demand, it is called demand loan. If payable in equal monthly payments, it is called installment loan. If payable in lump sum on the loans maturity, it is called time loan. Loans are characterized into; customer, commercial and industrial loan, construction and mortgage loans, secured and unsecured loans.
Standard or guidelines that the employees must observe in granting or refusing a loan request.
Cash Reserve Requirement:
Minimum amount of cash or cash equivalent (computed as a percentage of deposits) that banks and other depository institution are required by law to keep on hand and which may not be used as lending or investment.
Calculation of a company available cash and marketable securities agents outstanding debt. Ahigh ratioindicates a company with a low risk of default and vise-versa.
1.9 Organization of the Study
The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.
Summary, Conclusion and Recommendation
It is important to reiterate that the objective of this study was to assess banking lending policies and recovery procedure in Nigeria.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in supporting the view that there huge benefits are accrued to the establishment and management of small scale poultry farm.
Loans to business enterprises for commercial or industrial purposes, whether proprietorships, partnerships or corporations, are commonly described as commercial loans. In asset distribution, commercial or business loans frequently comprise one of the most important assets of a bank. They may be secured or unsecured and have short or long-term maturities. Such loans include working capital advances, term loans and loans to individuals for business purposes. Short-term working capital and seasonal loans provide temporary capital in excess of normal needs. They are used to finance seasonal requirements and are repaid at the end of the cycle by converting inventory and accounts receivable into cash. Such loans may be unsecured; however, many working capital loans are advanced with accounts receivable and/or inventory as collateral. Firms engaged in manufacturing, distribution, retailing and service-oriented businesses use short-term working capital loans.This study examined the banking lending policies and the recovery procedures it applies.
The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for fruitful purpose, mobilizing and controlling flow of funds from surplus to deficit units and supporting financial and economic policies of government. The success of banking is assessed based on profit and quality of assets it possesses. Even though bank serves social objective through its priority sector lending, mass branch networks and employment of many people, maintaining quality asset book and continuous profit making is important for banks continuous growth. Bank loans are one of the most important long-term financing sources in many countries. In some developed countries like Japan, long term bank loans represent more than 70% of its total long-term debt. Lending institutions play a major role in economic growth and development through provision of credit to execute economic activities. However, the major concern of any lender while advancing credit is how they will get their money back, and this implies that the engagement between lenders and borrower is accompanied by certain level of risk. The major types of risks faced by lending institutions globally include market risk, operational risk, and performance and credit risks. The level of each type of risk largely depends on the environment that the lending institution is conducting its operation. Credit risk is defined as the change in the value of the asset portfolio of a bank, due to the failure of an obligor to meet his payment commitments.
The study recommends that Central bank should provide strict lending policies based on the prevailing economic environment as this will ensure uniformity in administration of credit facilities.
Banks should ensure low PAR through prudent lending and strict loan recoveries. The ability and qualifications of the credit officer is of importance in assessing the credit worthiness of the borrower. Therefore the banks staff should be given occasional training to equip them with the relevant skills as this will go a long way in reducing the levels of non-performing loans among commercial banks.
The study recommends the bank to come up with loan differentiation strategies by segmenting the customers based on their needs, size and type of business and designing products that meet the unique needs of these customer segments and also creating a pricing strategy for each segment. The banks should consider more products and services which can appeal to the women and youth who form the bulk of the Nigeria population.
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