CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Lending is the main function of commercial banks through lending banks strives to satisfy the credit needs of the economy as well as enhance its profitability. One of the cardinal principles of classical banking is to ensure effective lending. Lending is the major product of every commercial banking activity, and it also provides the larger part of the bank’s profit. Banks in Nigeria have found it necessary to increase their lending ability and at the same time increase policies to establish the direction and use of fund from shareholders, depositors and creditors to control the composition and size of the loan portfolio and to determine the general circumstances under which it is appropriate to make and advance.
A banker’s decision will be influenced by many factors. Some of these factors include the character of the borrower, the risk involve the profitability of the transaction to the bank, the lending policy of the government, the best interest of the borrower and of the community generally. The perfect advance or lending will be safe liquid and profitable. “it will for a suitable purpose. Needless to say, these requirements will not always be present at the same time and banker will therefore search for an acceptable compromise”.
Lending is considered effective if it successful reconciles the banks’ objective of maximum profitability to the shareholders of the banks and maximum liquidity to meet the transaction and precautionary needs of the banks customers and investing public. But for obvious reasons, this principle cannot be regarded entirely satisfactory in a developing economy like ours (Nigeria) where we have a lot of new generation banks, which lends to a conflict (severe conflict) between, the profitability and liquidity needs of banks.
Against this background “effective lending in a developing economy may be defined as the quantum of lending which maxims the banks objectives of liquidity and profitability and the economic objectives of development. This is because highly profitable lending which also ensure liquidity may not always be effective. “for the instance lending for commerce may be effective in the profitability and liquidity sense, but may be ineffective in terms of maximum contribution to economic development”, similarly, although lending to Agriculture, Road construction or House, it may well be very effective lending in a development sense. Thus effective lending in a development economy must combine the classical view”. It is therefore important to note that lending should not be seen by the two parties involved bankers and borrowing customer as a hide and seek game, but as partners in progress. The banker should equally market his product and make adequate profits. The loan should be adequate and recoverable at maturity together with interest. The loan should be properly secured to make up for any liability in case the borrower defaults or facility goes bad.
Security is a kind of insurance. The real security is the character of the borrower unsecured borrowing in the shape of balance sheet that is, advances to big established limited companies may account for nearly half of the banks lending in any particular year. These advance, made to trusted borrows are usually for less troublesome than the secured advanced, which require a certain amount of work before the advance is taken, to see that the security is perfected, that the bank has control over it.
1.1 STATEMENT OF PROBLEM
The critical issues on the problems and prospects in extending credit facilities by commercial banks to their customers and the investing publics for investment purposes are many. Banks do not give their customers loan because they need it. Certain factors should be taken into consideration. Commercial banks as we know, by their very nature in terms deposit liabilities are traditionally short-term order. They do not participate in the provision of long-term lending, until recently when commercial banks under section 21 of the banks and other financial decree (BOFID) No. 25 of 1991 which permits commercial banks to acquire shares in small and medium scale industries and Agricultural enterprise. The commercial banks the change (as collateral security) on the most easily marketable securities of their client, e.g. stock of raw materials, finished goods and credit to customers. The collateral securities may equally include fixed assets in the form of landed property with good tithe documents and financial assets in the form of ordinary share, insurance policies.
Experiences in banking industry have shown that most bank borrowers, especially those that fall within the category of small and medium scale entrepreneurs, do not know the purpose for which they are obtaining the loan. Therefore, they are ignorant of the fact that the purpose of securing the loan must synchronize with the amount and types of the loan. This factor increases the banks exposure to risk of default. Also on the part of government, concretionary monetary policies and the stringent control through the central bank of Nigeria, make it extremely difficult for banks to lend for the purpose of investments. This results in discretionary bank lending and slow practices in the banking industry. Stressing more on the above problems, the following questions need to be resolved;
i. How much does the borrower want?
ii. What is it for (purpose)?
iii. For how long does he want to borrow?
iv. What is the source of repayment?
It is these and other similar problems that this research studies is designed to resolve.
1.2 PURPOSE OF THE STUDY
During the 1960s and early 1970s most commercial banks had traditionally been favourably disposed towards the extension of short-term loans. This in the main is due to the liquidity it confers on the banks coupled with the fact that by the very nature of the loan it must be repaid within one year. However, this preference for short-term loan by banks have long been over-taken by events hence banks have moved into long-term lending some of these factors included here are not restricted to the following;
i. Increased lending capacity of banks: The resources of banks have witnessed an upsurge in the recent past. Since banks are bulging with excess liquidity there is the need to seek for profitable investment outlets for their fund so as to improve their earnings.
ii. The establishment of Nigerian Deposit Insurance Corporation (NDIC): – This Corporation is established to protect depositors by insuring depositor’s fund for a maximum of N50, 000 in the event of bank running into difficulties. Since the liquidity problems of banks are fairly reduced by the establishment of the NDIC, banks felt that they cannot extend loans of longer maturities as a way of boosting their earnings.
iii. Annual Policies: – Annual policies of the Federal Ministry of Finance through the central bank of Nigeria in recent years have been to ensure that commercial banks provide needed capital to small and medium scale industries to help improve their present state. This development resulted in the liquidity and profitability trauma in the banking industry as the ceiling on the sectoral allocation of credit exposes banks to a higher risk of default. The study therefore sets out to ascertain the desirability of securities for loan in Nigerian’s commercial banks and the findings will help to make recommendation for future improvement.
1.3 SIGNIFICANCE OF THE STUDY
This study will be of great help to potential borrowers. It will enable them to have an insight into existing opportunities in commercial banks for obtaining financial assistance through loans and other financial services offered by banks. It will also help them to know the types of loan that they will be able to collect from the commercial banks. It will equally be of help to practicing bankers regarding identification of potential problems, which the banks have not yet recognized. This is because in some cases, customers do not have enough time to discuss their problem with their bankers; they may not disclose some facts, which will be a disadvantage to the bank. The study may also present on identify some problems thus creating another avenue for further research work.
1.4 STATEMENT OF HYPOTHESIS
Although this research is a case study which entails going to banks for direct investigation. The researcher has however found it necessary to supplement this approach with a statement of hypothesis.
The objective of this research work is to determine the degree of desirability of securities for loan by commercial banks. Therefore the hypothesis is:
Ho: There is an effect of securities on bank lending.
Hi: There is no effect of securities on bank lending.
Ho: The securities on bank lending have not reduced the rate of fraudulent malpractice in Nigerian commercial bank.
Hi: The securities on bank lending have reduced the rate of fraudulent malpractice in Nigerian commercial bank.
1.5 SCOPE AND LIMITATIONS
The scope of this research work is limited to commercial banks in Enugu, Enugu state. It covers Afribank Plc Enugu. Some limiting factors to this scope of study are the un co-operative attitude of many of the people who are in the position to give out the materials, which will be useful for this work. This is because many of them microstructure the motive of the study. Also lack of textbooks, journal and bulletins on this topic contributed to a limited review of related literature thus, this was not elaborately done.
1.6 DATA COLLECTION
The data for this study will be collected from primary and secondary sources. For the primary data, the specimens will e visited in order to make use of authentic records for verification of the hypothesis already listed. The relevant data will therefore be extracted from records of operations, annual reports and of the banks. The secondary data for the study will be sourced from other published materials and literature such as textbooks, periodicals, financial and business publications and newspapers.
1.7 DEFINITION OF TERMS
Some terms are defined here to enable one understand the research work more easily some of the terms are:
a. Collateral: – Any tangible assert pledged by a customer to obtain credit.
b. The bank: – Afribank Plc used as the case study.
c. Investment: – Loans, overdrafts and advances, which generate interest, income to the bank.
d. Project: – The research work
e. The books: – Financial books of the bank; profit and loss account, the balance sheet and auditors reports.
f. Credit: – Any form of borrowing by the public which must be repaid.
g. Monetary Authorities: – Federal ministry of finance and the central bank of Nigeria.
h. Bank Deposit: – Demand deposit, short deposit and savings deposit.
i. Loan: – Money borrowed at interest.
