MANAGEMENT OF LOANS AND ADVANCES IN NIGERIAN COMMERCIAL BANKS (A STUDY OF FOUR COMMERCIAL BANKS IN ENUGU)

ABSTRACT

This made efforts to assess the management of Loans and Advances in Nigeria

Commercial banks. The research was prompted by the growing rate of bank loans and advance default cases that result to collapse or disaster and se4rious situation led to distress of many banks institution in our country. However, the

objectives set of this study includes; to ascertain the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks, to determine the causes of repayment failure and defaults of loans and advances, to investigate the factors that influence high degree of bad debt and doubtful debts etc. The researcher equally formulated hypotheses in line to the objectives and research question. The primary data was collected using questionnaire that was distributed to the four banks of the study at the end 180 questionnaires was returned. The data was presented using percentage frequency and the hypotheses were tested using the z-test statistical tool.  Then the  study  discovered  the  following, –  that  honesty  of  the  credit applicant, provision of adequate collateral security, economic condition prevailing in  the  country, banking regulatory guideline of  transparency and accountability, strength of the applicant business and the viability of the project are  the  pre-requisite  factors  banks  considered  before  granting  loans  and advances, that the major causes of failure and default of loans and advance repayment include, fund diversion, risk/ unstable environment, fluctuation of exchange rate and inflation, poor evaluation and inadequate managerial skills, poor supervision and monitoring, poor sighting and hasty investment, illiquidity of  financial  instrument  and  high  interest  rate,  and     that  the  factors  that influenced high degree of bad debt and doubtful debts in the bank includes, poor record-keeping and transaction, over-the counter (OTC) trading and excessive insider abuse, poor transparency and honesty excess load non-recovery, favouritism and incompetence & poor management etc. While the following suggestions were given – there should be an increased and renewed vigour on training continuously the workforce on the measure to curtail incompetence in their operation, there should be an improve laws, regulations and conditionalties that must strictly enforced and uphold to minimized load repayment default, and distress, there should be strengthened attempt to regulate, measure appraisal commercials banks regularly to discover and punish any bank that “abuse” the prudential guidelines for loans etc.

The general and pertinent view of the   study support the statement that the success or failure of the commercial banks in achieving their objective   of maximizing profit depend s on how well the loans and advances are managed.

CHAPTER ONE:

1.0 Introduction

1.1      Background of the Study

Commercial banks are “retail banking institutions” that accept deposits and make short-term, medium-term, and long-term credits available to government, public/private business enterprises, and individuals. Some of their functions include accepting deposit through current and savings accounts; fixed deposit and others, granting of loans and advances, equipment leasing, loan syndication; financing advisory services; trade and export finance; other investments  and  foreign  remittances.  The  relationship  between  Commercial bank and others financial institutions in terms of functions, limits, and modus operandi are spelt out in the Bank and other financial institutions Decree 25

Banking and other financial matters decree (BOFID)of 1991. The Banking and other financial matters decree (BOFID) Decree 25 of 1991 in particular permits some other financial institutions like Merchant Bank, Development Bank and Insurance companies to engage in granting loans through mostly medium and long- term in nature.

This research  work  is mainly done on  the  management of  loans and advance (short, medium-term, and long-term) granted by the Commercial bank in Nigeria. Granting of loans and advances is an integral part of the functions of the Commercial Bank but one of the most risky one. It is based on its risky

nature that made it an interest of study focus in terms of its management by the commercial banks.

Filder (1982:249), states that it is a known fact that loans and advances are granted at a profit. Most loans and advances are granted out of the deposits accepted by the commercial banks or funds borrowed at a lower interest rate. The difference between the interest paid out plus share of management cost and the loan interest received makes up the profit to the commercial bank.

The  success  or  failure  of  the  Commercial  Banks  in  achieving  their  profit objective very much depends on how well the loans and advances are managed.

An  efficient  lending  policy  will  in  every  ramification  reduce  the incidence of bank distress and generally increase the wealth of the owners of the bank  as  a  business.  It  will  equally  help  in  revitalizing  and  boosting  the economic activities in the country.

According to Teriba (1990:21), a situation where the bank lending policy is weak and inadequate makes loan and advances management difficult and this result to shoot-outs of several problems in the development of the economy. Any economy with inadequate level of loan and advances, stringent lending policy and obvious huge bank bad-debts and provisions has a dull future in terms of its overall development. It is this incidence of poor management of commercial bank loan and advances in the Nigerian economy that has promoted my idea of instituting this scholarly investigation as a way to findings lasting solution to the problems.

1.2     Statement of the Problem

As earlier noted, that granting of commercial bank loans and advances is one of the most risky businesses entered into by the commercial banks. The risk nature of commercial bank credit on customer who fail to meet up with their credit facilities results to huge amount of bad-debts and provisions for bad- debts.

The following fundamental problems rise from poor handling of commercial bank loans and advance:

–   the high rate of growth in the commercial banks lending risk in terms of the amount of provisions for doubtful debts and bad debts has by far overridden the rate of growth in the commercial banks’ lending plans.

– the targeted earnings planned to increase the wealth of the shareholders of commercial banks as a business is negatively affected by bad debt charges which obviously reduce the annual earning of the commercial banks and thereby null the fulfillment of the obligation to the owners of the business.

– high rate of defaults has resulted to the reduced granting of commercial loans and advances which in turn has contributed to the retarded development of the Nigerian Economy through reduced economic activities.

– diversion of Commercial Banks loan and  advances (through insider abuse) negatively effect industrial base of this country and contributed much to the Bank Distress Syndrome being orchestrated in the present day economy of Nigeria.

– the existence of high proportion of non-performing loans and advances is a major cause of reduced granting of such loans and advances to the economy by the banking system in extreme cases, in negative net-capital base of the commercial banks resulting in extreme cases, in negative net- worth.

It is clear that any steps towards reduction of commercial bank loan and advances in Nigeria would reduce economic activities and in the same time retard the overall development in the entire economy.

The major cause of the reduced granting of commercial bank loans and advances are due to unchecked failures which is a function of the management of the commercial bank loans and advances.

The increasing defaults and poor management of commercial bank loans and advances result to accelerated or high degree of bad debt and doubtful debts.

1.3 Objectives of the Study

The following objectives serve as guide to the study.  The specific objective of this study is to determine the problems inherent in the management of loans and advances in Nigerian commercial banks. While the other are:

1.  To ascertain the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks.

2.  To determine major causes of repayment failures and defaults of loans and advances in Nigeria commercial banks.

3.  To investigate the factors that influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

4.  To identify the effective policy packages that will ensure loans and advances stability and revolutionalized management actions.

5.  To findout the best financial management technique for appraisal and assessment of commercial banks healthy capital capacity.

1.4     Research Questions

In an attempt to provide relevant and accurate solution to the objectives focus the following research questions is framed.

1) What are the best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks?

2) What are the major causes of repayment failures and defaults of loans and advances in Nigeria commercial banks?

3) What are the factors that influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks?

4) What are the effective policy packages that will ensure loans and advances stability and revolutionalized management actions?

5) What are the best financial management technique for appraisal and assessment of commercial banks healthy capital capacity?

1.5     Research Hypotheses

The following hypotheses were formulated for this research:

Hypothesis 1

1) Ho:        There are  no best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks

1) H1:        There are best conditions that will be appropriate to manage and checkmate the granting of loans and advances in the Nigeria commercial banks

Hypothesis 2

Ho:        The environment and policy favourability are not major cause of loans and advances repayment failure and defaults.

H1:        The environment and policy favourability are the major cause of loans and advances repayment failure and defaults.

Hypothesis 3

Ho:        High  proportion   of   non-performing  loans  and   advances  does  not influence the degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

H1:         High proportion of non-performing loans and advances influence high degree of bad debt and doubtful debts provision in the Nigeria commercial banks.

Hypothesis 4

Ho:        Effective policy packages will not ensure loans and advances stability and revolutionalized management actions.

H1:        Effective policy packages will ensure loans and advances stability and revolutionalized management actions.

Hypothesis 5

Ho:        Negative and poor appraisal of the commercial banks loans        and advances may not lead to granting of non-performing loans        and advances or thereby cause high non-recovery rate which  may  ultimately  reduce  the  profit. H1:        Negative and poor appraisal of the commercial banks loans        and advances may lead to granting of non-performing   loans    and    advances    or thereby cause high non-recovery rate  which may ultimately reduce the profit.

1.6     Significance of the Study

Banks are very important institutions in any economy, developed or developing. As one of their functions they aid in the expansion of credit and investment in the process of extending these credits,  the  commercial banks experience a lot of default in repayment. This, as noted earlier on, has reduced the  willingness  on  the  part  of  many of these  banks  to  extend  credits.  But something has to be done to reduce the risks involved in bank lending and

possibly  reduced  this  incidence  of  loans  and  advances  problems.  This, definitely, would reassure the banks and make them inject more fund facility in the  economy.  The  importance  of  this  cannot  be  over-emphasized.  This  is because credit extension has a high positive correlation with the rate of development in the economy.

If the problems of bad debt arising from bank lending are not controlled, banks may find it increasingly difficult to grant credit. In view of the above this research work would seek a solution to this problem loans and advances vis-à- vis credit extension.

It  is  hoped  that  the  solutions  would  provide  a  good  guide  to  bank managers and credit analysts in their onerous tasks of credit extension. This will obviously reduce the incidence of lending default leading to provision of more credit to the economy. This will ensure rapid economic development of the country. There is no doubt that this research will also assist those who apply for bank credit to fully acquaint themselves with bank requirement for credit extension.

Finally, this research is meant to make a positive contribution to the body of knowledge of finance and banking in Nigeria.

1.7     Scope of the Study

For the purpose of this study, the commercial bank is defined to include all  banks  which  engaged  in  retail  banking  functions.  The  retail  banking

functions  include:  acceptance  of  deposits  and  making  short  term  credits available to government, private business enterprises and individuals.

Making of short term credits can be expanded to include:- i)       Granting of loans and Advances

ii)      Equipment leasing iii)     Loan Syndication

iv)     Financing advisory services

v)       Trade and Export finance and

vi)     Other investments foreign remittances.

But the scope of the issues examined is limited by the overall objectives of the study.

Osuala (1993:28) an adequate statement of problem also defines it very carefully in terms of its scope. The researcher must set forth exactly the bounds of the topic being researched.

1.8     Limitations of the Study

Many variables have acted jointed and severally to limit this research. These include:

1)       Scarcity of Data: The annual reports and financial statements of the banks operating in the country did not show details of the whole data needed for the research work. For instance they showed only provisions made for bad and doubtful debts for the year without actually stating the amount that was bad. To the extent that the researcher could not get down to the real figures of problem

loans and advances for each bank to that extent is the findings of this work limited.

Even journals and periodicals could not be of much help because they also  suffer  from  the  same  dearth  of  the  materials  required.  Many  of  the textbooks in the country have not actually dealt with the topic, especially as pertained to individual banks.

The availability of correct and up-to-date data is not easy, even when available one still encounters wholly unnecessary bottlenecks due to our socio- cultural milieu, bureaucracy and subterranean motives. This constituted an impediment to this research.

Financial and time constraints were seriously encountered by researcher in the course of this work. Exorbitant transportation costs, high level of risk of traveling by road and the geographical spread of the data base constitutes limitations in themselves.

In other to reasonably establish the causes of poor management of loans and advances in the Nigerian commercial banks, elaborate use was made of descriptive  statistic  as  well as the  theoretical under pinning’s of  the  study, particularly in the area of concepts, measurements, comparisons and causes of poor management of commercial banks, loans and advances.

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