IMPROVING THE MANAGEMENT OF LEARNABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA. (A COMPARATIVE STUDY OF TRADE BANK (TB) AND INLAND BANK OF NIGERIA (IBN)
This study centered on improving the management of loanable funds in commercial banks. The study was comparative in nature, using Trade Bank of Nigeria (TBN) and Inland Bank of Nigeria (IBN).
These two banks were chosen because of their accessibility, high rate of mobilization of deposits and loan defaulting.
The major instrument used for data collection included oral interviews, bank records of daily operations, annual report and statement of accounts. Four hypothesis were formulated in line with the statement of the problems. The data obtained was organized and analyzed with the use of chi square test for goodness of fit, coefficient of correlation, percentage of loan chart and component bar chart were also used respectively where necessary.
The study finally revealed if the incidence of loan default was continuously on the increase/decrease and if such increase/decrease was more in government owned banks or in privately owned banks. It also saw if such increase/decrease was higher/lower in relation to deposit mobilization.
In order to find solution to the problem, it was suggested that banks should adhere strictly to the principles of good lending, improve on security valuation, ensure that men of high integrity are employed at the credit department and emphasize on prudent supervision and control of loan accounts. Other suggestions were purely focused on advisory and credit worthiness for effectiveness and proper management.
My greatest appreciation goes first to GOD ALMIGHTY for seeing me through and giving my family and I good health.
My appreciation also goes to my project supervisor, Mr. F.C. Okechukwu and my Head of Department (HOD), Mr. Wilson U. Ani for all their encouragement during this strenuous moment of my life. I will not fail to thank the other lecturers in the department especially Sir Dave Osuagwu, my academic adviser and indeed the polytechnics who have collectively made me what I am today.
I am also grateful to the authorities of Trade Bank of Nigeria limited especially Mr. Frank Edet (The Branch Manager) and his wonderful secretary. Mr. Steve Okonkwo, Alhaji Mageri Misan and Alhaji Ibrahim Garba of the IBN, Head office Bauchi, who did not hesistate to give me all the material and information used in this work and as well, all the necessary assistance I needed.
My heartful appreciation also goes to Mr. Musa Shaibu of Universal Trust bank PLC (UTB), whom at different intervals contributed immensely to this work both morally and otherwise and my dearest uncle Akunne Anionwu of Central Bank of Nigeria Ibadan who linked me up with the CBN at Enugu.
My special thanks also goes to my pastors, Tom Obiazi and his darling wife Sarah Obiazi and the entire members of Christ Embassy (BLW) Onitsha especially Sis. Peace, Bro. Onyeisi, Bro. Evarist Ikeomy every member of Excel and Diplomatic PCF and others, keep up the good fight.
My wonderful friends are not left out especially Ikechukwu Emodi who has been there to inspire and encourage me throughout this research work, Chinwe Okeke, Ifeoma Ogegbu and numerous others that both time and space cannot permit their individual mention here, but will receive God’s grace, which is ever present and sufficient for us according to their contributions in Jesus Name, Amen.
OFOKANSI STELLA, NKEMDILIM
TABLE OF CONTENTS
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objective of the study
1.4 Significance of the study
1.5 Research question
1.7 Scope and limitations
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Commercial Banking in Nigeria: Origin and development
2.1.1 History of Trade Bank Plc
2.1.2 History of Inland Bank
2.2 Commercial banks and economic development
2.3 Banking credit facilities and the Nigerian Economy
2.3.1 The bank loans and advances
- Short term loans
- Medium term loans
2.4 Commercial Bank lending criteria
2.4.1 Basic Principles of lending
22.214.171.124 Safety of advance
126.96.36.199 Suitability of advances
188.8.131.52 Profitability of advances
2.4.2 Factor that influence commercial bank lending policies
184.108.40.206 Capital position of banks
220.127.116.11 The risk and profitability of various types of loan and advances
18.104.22.168 Suitability of deposits
22.214.171.124 The position of the Economy
126.96.36.199 Monetary and Fiscal policies
2.4.3 The commercial bank lending policies
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Source of data
3.2 Study area
3.3 Sample (Specimen Banks)
3.4 Analytical techniques.
CHAPTER FOUR: PRESENTATION AND ANALYSIS
4.1 Test of Hypotheis one
4.2 Test of hypothesis one
4.3 Test of hypothesis one
4.4 Test of hypothesis one
CHAPTER FIVE: SUMMARY OF FINDING, RECOMMENDATION AND CONCLUSION
5.1 Causes of loan default in Commercial bank lending
5.1.1 Bank customers.
- Lack of strict adherence to the principles of good lending
- Poor credit analysis
- Lack of supervision and control of loan account
- Dishonest Bank officials
- Unqualified and conservative managers and lending officers.
- Lending on political grounds.
5.2 Government policies
5.2.1 The Banks
5.2.2 The customers
5.2.3 The economy
5.3 Benefit of impending the management up loanable funds in commercial bank lending.
5.4.1 Adhere strictly to the principles of good lending
5.4.2 Valuation of security, the bank staff
5.4.3 Business advisory unit (credit agency)
5.4.4 Supervision and control of loan account
5.4.5 Training of the managing and lending officers.
5.4.6 Loan syndication
5.4.7 Ensure realistic integrity of the credit departments.
5.4.8 Rescheduling of loan
5.4.9 Privatize commercial banks with substantial government interest.
4.1.1 Relative percentage of loan defaults to total loans and advances for Trade Bank of Nigeria for the period of 1996 – 2000.
4.1.2 Relative percentage of loan defaults to total loans and advances for Inland Bank of Nigeria for the period of 1996 – 2000
4.2 Relative percentage of loan defaults for the specimen banks.
4.3.1 Coefficient determination for loan defaults for the specimen bank.
4.3.2 Coefficient determination for loan default for IBN
4.4.1 Coefficient determination for profits for IBN
4.4.2 Coefficient determination for profits for IBN
4.1.1 Bar Chart of rate of loan default between 1996 – 2000
4.1.2 Bar Chart of Rate of loan default between 1996 – 2000
4.2.1 A compound bar chart of percentage of loan default in the specimen bank.
1.1 BACKGROUND OF THE STUDY
banking institutions perform an enviable role of being an important source of capital for development. This emanates mainly from the role, which banking institutions play in mobilizing various deposits and deploying same towards feasible and viable money yielding ventures.
Banks through the provision of loans and advances, which are the lifeblood of the business community, occupy a very important position in the structure of the nations economy. The size, type and level of such profitable outlets, along with other complimentary factors contribute to the improvement of the economic well being of the country in which these banks are located. As a result of this, banking institutions have been seen as agents of economic growth and perhaps economic development. These deposits which are loanable funds can only be made available to banks, if customers make substantial deposits, which may accrue from loans and advances. This enables the banks to run its day to day administration cost remain in business and pay satisfactory dividend to its shareholders. Thus banks have a lending policy to establish the director and use of funds from shareholders deposits, to control the composition and size of loans portfolio and determine the general circumstances under which it is appropriate to make advances.
Such loans and advances, are put into productive use by borrower, which leads to increased productivity and profits. These borrowers as a result of the increased profits are able to pay back the principal as well as the interest on such loans and advances, while the bank in turn will extend such repayment as loan and advances to other potential borrowers.
These loans and advances are in a continuous circle. Any default in repayment will lead to a day in the circle, and reduction in loanble funds, and will as well affect the economic growth of the economy”.
Thus bank’s play a very crucial role in the economic well being of the country through the extension of loans and advances. However, full utilization of such facilities is achieved through proper management of such loans and advances.
1.2 STATEMENT OF PROBLEM
Lending is the backbone of banking activities, because it generally provides the larger part of banker’s profit. To ensure efficient allocation and utilization of the loanable funds, and hence foster economic development, the banking industry has to be efficient in the loan administration.
In this period of scarce financial resources, the economy will only be on the growth path with proper deployment of its loanable funds.
However, the banking industry in Nigeria is saddled with the problem of loan default. This arise from the inability of the borrowers to amortize the loans when they are due, thus constituting serious leakage in the loanable funds and this makes it extremely difficult for other intending borrowers to avail themselves of the opportunity on enjoying such funding facilities among other consequences.
A look at the financial report of most banks in Nigeria indicates a rising incidence of loan default. These default contribute a leakage in the economy as it denies the economy the utilization of that part of the funds, which are written off and which would have been recovered and reinvented. Its also denies the bank the profit, which would have accrued from the advances. This also cause puncture in the investment tube of the economy as it rugates the complete recycling of loanable funds. The incidence of loan default is rightly attributed to the failure of the borrowers to repay the loans and advances. However such failure would have been prevented if the lending policies and practices of the banks were efficient.
Thus the increasing level of loan default can be attributed to the inability of the lending banks to adequately install lending policies and practices that will minimize them. The banks that are worst hit by this problem are government controlled banks, which suffer because of the poor lending practices.
1.3 OBJECTIVES OF THE STUDY
The study aims at evaluating the management of loanable funds in commercial banks with a view to:
a. Identifying the causes of loan default in banks,
b. Identifying the reason for the increased loan defaults in banks.
c. Examining why the increase in loan default seems to be more frequent in government owned banks than in privately owned banks.
d. Examining the effects of the default in loanable funds on commercial banks in particular and on the economy at large.
e. And to make recommendations on possible and functional solutions.
1.4 SIGNIFICANCE OF THE STUDY
From the perspective of the effects of loan default on the banks, and the significance of this study will fully be appreciated.
Incidence of loan default threatens the banks corporate existence. This study will therefore, be beneficial to the banks as it will help in reducing loan defaults and ensure greater utilization of the resources in the economy for the benefit of both the banks and the economy. It will also help the banks identify their wrong lending policies and practices and ensure installation of adequate ones.
1.5 RESEARCH QUESTIONS
i. What is responsible for the loan default?
ii. Is management of loan responsible for loan default?
iii. In which type of banks do one experience loan default in Nigeria?
iv. Is there any relationship between venture of loan and loan default?
v. What are the effect(s) of management of loans on the banks and economy in general?
For this study, its an assumption that loanable funds are not properly managed and the incidence of loan defaults is on the increase in the banks as a result of factors derived from the above assumptions, which of course form the main hypothesis.
The following operational hypothesis is to be treated:
1i: Ho: incidence of loan defaults due to mismanagement of loans in commercial banks is continuously increasing.
ii. Hi: incidence of loan default due to mismanagement of loans in commercial banks is not continuously increasing.
Ho: Loan default occurs more in the government controlled banks than privately controlled banks.
Hi: Loan default does not occur more in government controlled banks than in privately controlled banks.
2i Ho: Loan default occurs more in government controlled banks than in privately controlled banks.
ii. Hi: Loan default does not occur more in government controlled banks than in privately controlled banks.
3i. Ho: there is no strong and positive correlation between the volume of loans and loan defaults.
ii. Hi: There is a strong and positive correlation between the volume of loan and loan defaults.
4i. Ho: The level of profitability is not adversely affected by the level of loan default.
ii. Hi: the level of profitability is adversely affected by the level of loan default.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study will be limited to the selected banks, a government controlled bank and a privately controlled bank, for comparative study, which will represent the entire banks in Nigeria.
A major limitation of the study will be the question of time and limited financial resource, which will undauntedly constitute a limiting or constraining factor.