The Role Of Commercial Banks In Financing Building Projects In Nigeria

Project and Seminar Material for Estate Management

The Role Of Commercial Banks In Financing Building Projects In Nigeria


This study intends to investigate the role of commercial banks in financing building project in Nigeria with a view to marshal out some modalities that will enhance the performance of commercial banks in real estate development in Nigeria. Three banks were randomly selected from the study area and examined to ascertain their opinion in the subject matter. An interview recording schedule was designed and administered to obtain relevant information from the following management personnel of the banks under study who are involved in credit lending: manager – Risk/Portfolio management, Senior Manager- Real Estate sector, Senior ManagerCredit/Marketing and Manager – Property department.

Chapter One


1.1 Background to the Study

Commercial banks are important financial intermediaries serving the general public in any society. In most cases, commercial banks hold more assets than any other financial institution. In some cases even more than central bank. Apart from their many functions, commercial banks facilitate growth and development. Banks lends in many areas or sectors of the economy. Viewed from the building and construction sector, they contribute to investment, employment creation, and by extension, the process of infrastructure and economic growth. However, the researcher is examining the roles of the commercial banks in Nigeria in financing building and construction projects in Nigeria (Farrel, 1985).

The building and construction industry in both developed and developing countries may be viewed as that sector of the economy which, through planning, design, construction, maintenance and repair, and operation, transforms various resources into constructed facilities. The types of public and private facilities produced range from residential and non-residential buildings to heavy construction, and these physical facilities play a critical and highly visible role in the process of development (Kheni et al., 2008). The major participants from the building industry include the architects, engineers, management consultants, general contractors, heavy construction contractors, special trade contractors or subcontractors, and construction workers, along with the owners, operators, and users of the constructed facility.

Olowo-okere (1985), (cited in Eshofonie, 2008) asserted that most countries put over 55% of their gross domestic investment into the creation of physical facilities, including infrastructure that is necessary for development. The building sector has various levels of manpower ranging from highly skilled professionals to completely unskilled labourers. In developing countries, physical construction activities alone provide between 2 and 6% of the employment demands of the nation and the subsidiary activities provide an additional 2 to 4%, while in the developed countries the figure rises to between 6 to 10% and 4 to 6 % (Cockburn and Charles, 1970; Okeola, 2009). Ibironke (2004) and Shittu and Shehu (2010) stated that the building industry plays a key role in satisfying a wide range of physical, economic and social needs and contributes significantly to the fulfillment of various major national goals.

The commercial banks form an important source by which many investors get funds to finance building and other real property projects. Commercial banks are money creating financial institutions that perform three major functions, namely acceptance of deposits, granting or loans and the operators of the payments and settlements mechanism.

The major issue in building, real estate development and investment is finance. There is no iota of doubt that funding is an important factor in real estate development and building projects. The complexity and to a large extent, its capital intensive nature demands proper and adequate funding to make it realizable. The terms and availability of the needed funds determine the trend of building operation. Availability and easy accessibility of building finance in sufficient quantity will definitely accelerate all forms of property development. Building financing is concerned with the production of finance for building houses and office complexes which are basic necessities in a growing economy like Nigeria. The benefits to be derived from a rise in building financing in Nigeria are many and include;

  1. Increased rural and urban houses for the teaming Nigerian population.
  2. The construction of industrial estate for the localization of industries and commerce.
  3. An increase in employment for those in the construction industry.

The sourcing of funds for investment in building development poses a great deal of problem for the developer. This is largely due to economic instability and stringent measures imposed by most financial institutions. This is compounded by the fact that the interest rate structure has had an unfavourable impact on funding the development of building sector. Since the financing of building development is a long term project, it has necessitated the high interest rate that is being charged on the funds provided for such development purposes. Hines (1995) revealed that six major building financing methods are used across the world namely; Joint Venture, Equity and Debt Financing, Sale-lease Back Financing, Advance Payment of key money and Sale of Securities.

1.2 Statement of the Problem

Over the years, the government had been the major player in the area of building and housing development in Nigeria, by providing direct finance to the builders for previous housing schemes. This was embedded in the housing policy of past administrations but today, the dwindling nature of revenue accruing to the government, coupled with gross mismanagement and misappropriation of public funds and revenue has prohibited the ability of the government to continue to play her role as before (Nubi, 2000).

The mortgage finance institutions are faced with certain problems of low level of awareness of the services rendered by the institutions, bureaucracy in the granting and disbursement of mortgage loans to the borrowers, misunderstanding of the banking terms by the depositors and the public due to the used of technical and professional terms which are not understood by a layman and problem of repayment of loans by the borrowers. Commercial banks has the key player in the financial sector has contributed to the development of various sectors of the Nigerian economy by funding. However, the researcher will analyze the role of commercial banks in financing building projects in Nigeria.

1.3 Objectives of the Study

The general objective of this study is to analyze the role of commercial banks in financing building projects in Nigeria and the following are the specific objectives:

  1. To examine the role of commercial banks in financing building projects in Nigeria.
  2. To identify the role of other mortgage financial institutions in financing building projects in Nigeria.
  3. To identify the factors limiting financing of building projects in Nigeria.

1.4 Research Questions

  1. What are the role of commercial banks in financing building projects in Nigeria?
  2. What are the roles of other mortgage financial institutions in financing building projects in Nigeria?
  3. What are the factors limiting financing of building projects in Nigeria?

1.6 Significance of the Study

This study has the following significance:

  1. This study will educate the general public, stakeholder in real estate, government and policy makers on the importance of building development and housing and the need for adequate financing of the sector considering the roles of commercial banks and other mortgage financial institutions.
  2. Findings from this study will be useful for future researches has it will constitute part of the empirical literature making it a guide for future researchers.

1.7 Scope / Limitations of the Study

This study on the role of commercial banks in financing building projects in Nigeria will cover all the financial investment in building and real estate in Nigeria considering the contributions of the commercial banks to the sector. It will also cover the activities of other mortgage financial institution in financing building development in Nigeria.

Limitation of Study
Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 Definition of Terms


A structure with a roof and walls, such as a house or factory.


Provide funding for (a person or project)

Real estate:

Property consisting of land or buildings.

Commercial banks:

A financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit.

1.9 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary Conclusion and Recommendations

5.1 Introduction

It is pertinent to note that this research was aimed at cross examining the contributions of financial institutions in housing development in Nigeria, thus the topic “examination of the role of commercial banks in financing building project 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 addressing the challenges associated with housing development in Nigeria.

5.2 Summary

The study reveals that the interest rates beingcharged by the lenders (commercial banks) areusually very high. Othersources of finance for housingdevelopment apart from the equity capital include insurancecompanies and pension funds, Government Bondsand the various commercial, merchant and mortgage banks in Nigeria. The problems beingencountered by housing and estate developers in the questfor fund include bureaucratic bottlenecks in thefinancial institutions thereby making funds difficult to reach the developers on time.Collateral security and certificate of occupancy as demanded by most of these commercial banks are source of problems for developers in getting finance for housing development. As a result of inflation,the real value of loan collected normally reduced making it impossible for the project to be completed with the arranged finance. The conditions under which loans are given particularly the short-term loans are usually too stringent and times developers find it difficult to meet such terms. There is always dearth of information on the amount of funding that takes place, by whom, or the methods used. This is because there is no physical focal point where the funding business can be transacted, the market is an abstract aggregation of separate, unrelated and uncoordinated funding transactions and the market is diverse and complex. The resultant effect of these is problem of getting real estatefinance.There is always non-availability of fund to finance real estate development partly because of inflation and the huge capital required. Loan repayment is always very difficult due to the high cost of servicing the loan by the developers. The dwindling economic situation in the country is taking its toll on the construction industry thereby reducing the availability of loanable funds for real-estate development. As a result of long gestation period for the development of real estates, most investors and lending institutions are normally discouraged.

5.3 Conclusion

The study examines the role of commercial banks in housing development in Nigeria.Based on the results obtained in this research, the following conclusions were drawn.

  1. Funding from commercial banks is the most frequently used source of finance by housing and estate developers.
  2. The findings reveal that housing and estate developers only on occasional bases seek for ways to enhance their finance base, this will affect the housing sector negatively.
  3. On the issue of a very high Interest rate charged by commercial banks the implication is that the final cost of housing will be high.
  4. Most of the respondents affirmed that they are not granted more than sixty percent of their total loan applications; this means that little funds will only be available for housing development.
  5. With regards to the duration of processing loans, the implication is that only few applications for loans can only be processed, meaning few numbers of private estate developers will be granted loan.
  6. Finance and land are least available housing construction inputs available to private estate developers in Port Harcourt, Nigeria.
  7. The militating factors against fund availability will affect the level of progress of work on housing development negatively.

The study concludes that finance is not readily available to private estate developers in Abuja, Nigeria. Funding and land are the major challenges in the Nigerian housing market. The high interest rate, not granting the total amount of loans requested are the characteristics of the market, which are a reflection of the source of funds which is predominantly short tenured. The inadequate capital base of most primary lenders limits their ability to provide needed finance to meet market demand. For asustainable development to be achieved there is the need for a responsive housing financing policy which must therefore concur with the existing national and socio-economic realities of the country. For this, relevant urban and housing development strategies should be formulated and integrated to form part of existing housing policy.

5.4 Recommendations

  1. It is hereby recommended that record of past transactions regarding borrowing and lending of finance for real estate development should be kept so as to assist others who would want to go into such transactions in future.
  2. Many problems plaguing the success of real-estate financing in Nigeria can be solved if our economic problems are solved since most of these problems are due to the inflationary economy that Nigeria faces.
  3. Government should intervene in this financing by instructing these financial institutions to slack their stringent rules for lending loan to developers. From the foregoing discussion, it can be concluded that finance plays a vital role in real estate development hence; it should not be handled with levity by both government, financial institutions and the real estate developers.

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