Lending Practices In Commercial Banks And The Problems Of Bad Debt In Nigeria

Project and Seminar Topics with material for Banking and Finance

Abstract

The issue of bad debts has become so pervasive that not a single day passes without attention being drawn to the effect it has and continues to have on the banking industry. This has become a real challenge for banks who are the engines of growth to formulate strategies and decide weather and how they must continue to play their roles of credit creation within the economy.

Due to this problem, I become courageous to contribute to my own ideas on how bad debt or loan default should be minimized in the banking industry. The research paper is divided into five chapters.

The first chapter focuses on the introduction, statement of problems, purpose of the study research questions and hypothesis. Significance of the study, scope of the study. And limitations of the study

The second chapter reviewed other peoples work and ways in which bad debts can be reduced

The third chapter discussed the methodology and research investigation.

The fourth chapter shows the presentation and analysis of data and test of hypothesis

And finally chapter five discussed about the summary of findings, recommendation and conclusions.

Table Of Contents

Preliminary Page(s)

• Title Page
• Approval Page
• Certification
• Dedication
• Acknowledgement
• Abstract
• Table Of Contents

Chapter One

1.0 Introduction

• 1.1 Background Of The Study
• 1.2 Statement Of The Problem
• 1.3 Purpose Of The Study
• 1.4 Research Hypothesis
• 1.5 Significance Of The Study
• 1.6 Delimitation Or Scope Of The Study
• 1.7 Limitation Of The Study
• 1.8 Definitions Of Terms

Chapter Two

2.0 Literature Review

• 2.1 History Of Commercial Banks Lending In Nigeria
• 2.2 Roles Of Commercial Banks
• 2.3 History Of Lending
• 2.4 Lending Principles And Practices
• 2.5 Management Of Lending
• 2.6 Security For Advance.
• 2.7 Types Of Security
• 2.8 Banking Laws And Regulation
• 2.9 Concept Of Bad Debt
• 2.10 Causes Of Bad Debt And Doubtful Debts
• 2.11 C.B.N. Prudential Provisioning Guidelines
• 2.12 Bad Debt Management
• 2.13 Recovery Of Doubtful Debts
• 2.14 Functions Of Lending In Commercial Banks
• 2.15 History Of Union Bank Of Nigeria Plc
• 2.16 History Of First Bank Of Nigerian Plc
• 2.17 Problems Of Bad Debt In Union And First Banks

Chapter Three

3.0 Research Methodology

• 3.1 Introduction
• 3.2 Sources Of Data Collection
• 3.3 Method Of Data Collection
• 3.4 Sample Size Determination
• 3.5 Techniques For Data Analysis

Chapter Four

4.0 Data Presentation And Analysis

• 4.0 Introduction
• 4.1 Data Presentation
• 4.2 Data Analysis
• 4.3 Test Of Hypothesis

Chapter Five

5.0 Summary, Conclusion And Recommendation

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendation
• Bibliography
• Appendix

Chapter One

Introduction

1.1 Background Of The Study

Lending which is one of the services rendered by banks needs to be effectively carried out by the commercial banks since it is the basis for the establishment of sound economic development. The lending operations of commercial banking in any Economy constitute a critical sector in the growth and development of any economy. The need for lending arises in view of the apparent financial disequilibrium in the economic system which is the gap arising between the deficit unit and the surplus unit. Thus, lending must be designed in such a way that it could be a total benefit to all different interest group of the bank, which include the shareholders, depositors and the borrowers.

According to Roy and Lewis (1971), giving credit to worthy borrowers is one of the most significant functions of commercial banks that are directly related to the development of the economy. If those loans or credit where not grow, the expansion of our production facilities and operations would almost be impossible and take a longer time for expansion.

The lending function has been seen as the outflow of finance intermediation process. According to Egonu (1992), it represents the channeling of funds by institution to those economic must unit that have more investment and consumption “Need than their resources can meet. It is as a result of the way in which all interest group can benefit form bank lending that researcher seeks to examine the lending practices and the problem of bad debt in Nigeria commercial banks.

The issue of bad debt has become pervasive so much that not in single day possess by without attention being drawn to the effort it has and continues to have on the banking industry. Of recent, we have seen one lending disaster after another. The case of progress bank of Nigeria plc, African continental bank plc, the republic bank etc are goods example. Also the total collapse of capital merchant bank limited, Alfa merchant Bank and also Savannah bank plc are consequences of misfortunes, facing the banking industry, majority through inefficient lending operations.

Bad and doubtful debts generally are component of account receivables or trade credit granted to the customers of a business organizations but which cannot be recovered within the specific period for one reason or another. According to Asakamye (1983) what then should the bank do in this situation should they stop the extension of credit to their customers so as to avoid bad debt? Yet lending is the sources of bank profit.

1.2 Statement of the Problem

Commercial bank have been incurring huge amount of bad and doubtful debts due to the failure of recovering measures adopted in such situations. Many commercial banks are inefficient in credit granting functions and recovery measures and these results to a huge amount of bad and doubtful debt being reported in their annual profit and loss account.

Through there have been significant improvement of banks since various banking acts have been promulgated and credit guidelines have been communicated to the banks annually to regulate bank lending, they still face various problems could be enumerated as follows: Loans defaults fueled by wrong appraisal techniques, michannelling of loans finds, dubious character of the borrowers etc the share holders, the banks and other are identified to have a part in the championing of this problem and their roles could be disassed as follows.

Shareholders:

Many shareholders who are the main owners of these banks have created problems for some banks. Sometimes a prospective borrower, whether he has collateral or not can be sure of getting a loan once he knows any of the owners of the bank. In this case, loans and granted based on who you knows any of the owners of the bank. In this case, loans are granted based on who you knows and not on any appraisal techniques and such loans are defaultable.

Banks:

The administration of the loans and advances portfolio of many banks leaves much to be sold. The department changed with the responsibility of granting and monitoring the loans and advances of he portfolio do not usually coordinate their efforts. It was apparent that the department lacked adequate and experienced manpower in credit administration. According to Doyle (1968), the lending practices in banks is characterized by the following irregularities.

1. Facilities were not subject to prosper credit appraisal before lending to the customer. In most cases, neither the ability to repay nor adequate securities were available
2. The viability of the projects to be financed and the integrity of customers were usually given the pride of place in the processing of application for credit.
3. Failure of management to have a defined landing policy.
4. Delay in the approval and disbursement of loans helps to fuel loan default. Sometime, it takes banks a couple of months to perfect some security items.

1.3 Purpose Of The Study

The main purpose of this study is to investigate lending practices and problems of bad debt in Nigeria commercial banks and how to minimize the rate of bad debt. The purpose of this study is as follows.

1. To deuterium why there is incessant demand for bank loans and overdraft.
2. To identify the casual factor of high incident of bad debt in some Nigerian bank
3. To fine out what is to be done to control the burden of bad debt which is now telling on the banks so that shareholders wealth in these banks are better maximized.
4. To ascertain the strength and weakness in the business environment as it can lend to default of the lenders objectives.
5. To find out factors that can influence lending practices.
6. To discuss and make appropriate recommendation for;
   • Control of loans and advances.
   • Minimizing bad debts arising from bank lending.
7. Finally, the study will also highlight the necessary institutional support provided by the government to enable the banks perform and the implication of the various, laws regulations and guidelines given by the government central bank of Nigeria and other regulatory body.

1.4 Research Hypothesis

1. H1: There is significant relation between lending practices and bad doubtful debts problems in commercial banks.
   H1: Lending rate has a positive influence on bad and doubtful debt.
2. H1: Bad and doubtful debt exert significant negative influence on the bad problems.
   H1: Loans and advances are significantly affected by lending rates and the previous years bad and doubtful debt.

1.5 Significance Of The Study

1. One of the significance of the study is the ways of improving the lending practices of the commercial banks with the view of minimizing the incidence of bad and doubtful debt.
2. Secondly, it is also the conviction of the writer that the findings of this study will e immense benefit not only to bank but other allied institutions whose aim and objectives are similar to the banking industry.
3. Thirdly, the import of lending practices to the performance of the bank is worthy giving great attention considering the important role of commercial bank in economic development of the country.
4. Fourthly, the research will find out whether the stated objectives of borrowing are accomplished.
5. Finally, the study will also highlight the necessary institutional support provided by the government to enable the banks perform and the implication fo the various, laws regulations and guidelines given by the government central bank of Nigeria and other regulatory body.

1.6 Scope Or Delimitation Of The Study

In this study, we cannot dismiss the fact that lending pelicious and practices as a management function is a wide field, we cannot therefore afford to be general in our analysis, consequently were shall therefore focus on commercial banks and the lending principles of this banks and low effectively they are practiced.

1.7 Limitation Of The Study

Constraints were met in this research work since much researcher have not gone far into a research of this problem. Related literature to this was a limitation for a comprehension analysis and investigation. The constraints includes.

Financial constraints:

Due to financial constraints, the researcher cannot veer all the relevant detailed facts and information on commercial banks.

Time constraints:

Inadequate time also affected a true research on this topic because there is limited time to carryout the research work.

Lack of data and information:

Inarguable data and information is another problems in Nigeria banking sectors, unlike bank in other advanced countries.

1.8 Definition Of Terms

In other to and our understanding of what this research work is about, some terms are hereby defined to enable better understanding. The terms are as follows:

Lending:

Lending a way of given the temporal use of money, usually at an interest rate.

Bad debt:

This means when the borrower fails to pay the loan in accordance with their terms of agreement.

Collateral:

It is a security pledge of the fulfillment of an undertaken such as payment of a loan to be forfeited in the case of default.

Banks:

This is an institution that receives lends and safeguard money and other important document.

Shareholder:

A shareholder is an owner of share in a business company or bank.

Prerequisite:

This means something required as a condition for something use.

Depositor:

A person who deposits e.g. money in bank.

Advance:

This means a to pay Money before it is due to be paid or to lend money.

Disbursement:

This means to pay out money

Constraints:

A thing that limits or restricts

Banker:

A person carrying on the business of receiving money and collecting draft from customers which are subject to withdrawal by cheques.

Doubtful debt:

Doubtful debt are those debts for which its recovering is doubtful.

Criteria:

Principle by which something is measured for value.

Statutory:

Fixed and required by law.

Feasibility:

That which can be managed or that is convenient.

Viability:

Capable of developing and serving without outside help.

Incorporated:

United or formed into a corporations

Chapter Five

5.0 Summary, Conclusion, And Recommendation

5.1 Summary

After the study carried on lending practices and the problems of bad and doubtful debt in Nigeria of both the first bank and Union bank plc. We came up with the following findings.

Bad and doubtful debt and profit of both banks are positively and significantly related to total assets. Also, bad and doubtful debt is inversely and significantly related to the lending rate in the first bank, while in the Union bank, it is inversely related to the lending rate through insignificant as interest rate shows insentivity to borrowing or lending in the bank. It is also shown that the higher the bad and doubtful debt in first bank, the lower the profit, and this justifies the economic expectation while in he union bank, that is to the contrary..

Furthermore, in the first bank, the higher the bad and doubtful debt of the previous year, the lower the loans and advances at presence and also the lending rate is positively related to the loans and advances. while in the union bank these were no significant influence on loans and advance. The earning per share is insignificantly influenced by the bad and doubtful debt of both banks while loans and advances of both banks are significantly related to nets interest income. In addition, while the first bank finding shows that a higher bad and doubtful debt leads to a decrease in net interest income and dividend which is in line with the economic expectation contrarily, the higher the bad and doubtful debt, the higher the dividend in the union bank. This could be attributed to the dividend policy of the bank.

5.2 Conclusion

The intention of government all over the world in intervening in the banking system by introducing various laws and regulations is to correct the imperfection of the financial markets and to ensure that credit allocation are in line with identified national priorities. Without legislation, lassies faire attitude would pervade the economy diaster and chaos. The economics and financial system would be disrupted. Hampered and devoid of growth , while some legislation have been made to help in the process of economic and financial development .

However, the only way to mitigate the size of the bad and doubtful debt is to recognizes that they must be committed to the principle of good lending practices and be sincerely honest in their risk exposures, bearing in mind that when the system is being controlled and bad debt eventually arises, it will be easy to attribute them to business risk which all industries incures. This way the dilemma is resolved.

Furthermore, decreases in loan and advance granted to customers as banks may not want to incure.
Further bad and doubtful debts and as such reduce their bad and doubtful debt through granting less lending at the present. Bad and doubtful debt reduces dividend as well as earning per share of the shareholders should be enhanced.

In addition, interest income should also be encourages to increase through thorough and good appraisal techniques since the finding shows that increase in interest income causes dividends to increase. This being part of the profit which also leads to increase, in total assets.

If the recommendation of this work is religiously followed, it will go a long way to phasing out some, if not all of the problem identified in the statement of the problems of this work.

5.3 Recommendation

In order to mitigate the risk of bad and doubtful debts in bank, the following must be strictly carried out by the banks.

1. The various sectors of he banking act must be strictly complied with.
2. Bank should have full knowledge of their customers. This is of paramount importance because it will assist the bank in lending decisions.
3. Bank must adhere to internal credit policy as well as complying with directive of the bank tariff.
4. Banks must employ competent managers which must be hard working and be able to deal with different situations.
5. Banks should thoroughly evaluate collateral securities before extending credit to their clients.
6. Government should be sensitive and consider the implication of certain policies before they are introduced or implemented.
7. Bank should therefore mandate their credit departments to identify major factors affecting each bank and act on those recommendation
8. Banks should also monitor how the loans and advances they give out are utilized and also ensure that all their employees comply with all the rules and regulation of the granting of loans and advances.

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