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Chapter 1
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GENERAL INTRODUCTION
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1.1 Background of the
Study---------------------------- 1
1.2 Statement of
Problem--------------------------------
7
1.3 Objectives of the
Study------------------------------ 13
1.4 Statement of Hypotheses---------------------------- 15
1.5 Scope of the
Study------------------------------------
15
1.6 Significance of the
Study---------------------------- 18
viii.
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Chapter II CONCEPTUAL FRAMWORK AND RELATED
LITRRTURE
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2.1
Introduction------------------------------------------- 20
2.2 Types of Credit
facilities----------------------------
21
2.3 Credit Maturity profile
------------------------------ 24
2.4 Credit Management
Concepts---------------------- 25
2.4.1 Commercial Loan theory
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2.4.2 Shiftability Doctrine
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2.4.3 Anticipated Income
theory
2.4.4 Liability Management
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2.4.5 Profitability
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2.5 Credit Policy
Formulation---------------------------
32
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2.6 Criteria
for loan/Loan Decisions
and
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its effect
on
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profitability-------------------------------------------- 40
2.7
Ratios---------------------------------------------------- 47
2.8 Securities for Bank Loans and
Advances----------- 58
2.9 Loans Review monitoring and
Evaluation---------- 61
2.10 Policy on Loans Classification and Recovery
Procedure -65
2.11
Summary------------------------------------------------- 71
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Chapter III
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RESEARCH METHODOLOGY
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3.1
Introduction---------------------------------------------- 72
3.2 Research
Methods--------------------------------------- 73
3.2.1 Historical Research Method
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3.2.2
Descriptive Research Method
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3.2.3
Experimental Research Method
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3.2.4 Survey
Research Method
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3.3 Methods of Data
Collection----------------------------
84
3.4 Methods Data
Analysis--------------------------------- 90
3.4.1Correlation Coefficient Analysis
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3.4.2 Linear
Regression Analysis
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3.4.3 Ratios
Analysis
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3.4.4 Time
series Analysis
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3.5 Justification of Methods and
Techniques----------- 90
3.6
Summary------------------------------------------------- 90
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Chapter IV
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DATA PRESENTATION, ANALYSIS
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4.1 Introduction
--------------------------------------------91
4.2 Analysis of Profitability; Loans and
Advances-----91
4.3 Analysis
of the effects
of Credit Management on
Profitability among Nigerian Banks------------------117
4.4 Analysis of the effects of Classified
Loans and the Quality
of Loan Assets.---------------------------------120
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Chapter
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V.
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SUMMARY,
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CONCLUSIONS
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&
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RECOMMENDATION
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5.1
Summary--------------------------------------------------123
5.2
Conclusion------------------------------------------------126
5.3
Recommendation-----------------------------------------127
5.4 Frontier for Further
Research--------------------------128
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CHAPTER ONE:
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GENERAL INTRODUCTION
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1.1 Background of the Study.
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In every economy,
there exist facilities for
the
creation, custodianship and
distribution of financial
assets and
liabilities (Mohammed, 2002). These facilities
make up the
financial system in any economy of which
banking is a
sub-sector. Banks are global
phenomena, a
universal
institution. In fact, banks intermediate between
surplus and
deficit economic units,
thereby, acting as
machinery for
the allocation for the allocation of scarce
financial resources.
(Mohammed, 2002). Consequently,
banks occupy a
primary position in the economy as it is
the fulcrum of
the money market and the central nervous
system of the
economy. The banking industry world wide,
and in Nigeria
particularly, had been witnessing a lot of
structural changes.
These changes are
meant for the
improvement of
services for the betterment of it operators
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and for the
benefit of the customers, shareholders as well
as the economy
at large.
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In Nigeria, the
business of banking
has not been
Stagnant, the
advent of the British political and economic
influence brought
about the evolution
of banking in
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Nigeria. This
is as far
back as the
last decade of
19
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th
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Century,
precisely in 1892. The first
Commercial bank in
Nigeria
“the British African
Banking Corporation
(BABC)” was formed in that year (Onanuga, 1998.) Ever
since the
first bank was
formed, the banking
industry
had witnessed a
lot of changes. In July 1958 for instance,
in recognition
of its importance at that time, the Central
Bank of Nigeria
was formed as the apex bank in Nigeria
under the
Central Bank of Nigeria Ordinance cap 30 of
portfolio
olio 1958, (Agom, 2000). The bank is saddled
with the
responsibility of supervising
and monitoring
banking activities
in Nigeria.
Another boost of
the
industry came
up in 1961
when another history
was
recorded in the
banking arena with the establishment of
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the first Merchant Bank – PHILIP HILL
LTD. Though the
bank was more
or less like the branch of a UK Merchant
Bank – HILL SAMUEL & CO. It paved the way for the
establishment of
the JOHN HOLT
LTD’S finance firm
–
NIGERIAN
ACCEPTANCES. These two firms later
merged
under the name
NIGERIAN ACCEPTANCES LTD in 1969.
The Nigerian banking
arena witnessed yet another
change in
1990 when the
Community and Peoples
banking systems
(a form of
unit banking) were
introduced to
further promote and
instill the habit
of
banking in the
Nigerian populace (Mohammed , 2002).
The most recent of the
development in the banking
industry came
up when a
new method of
banking was
introduced, the
Universal System of Banking. Otherwise
referred to as “The Universal Banking
System” It is the
latest of all
banking practices globally, although in some
economies they
do not use the term Universal Banking,
but practice it
through a partial or complete removal of
the differences
among the various banks which hitherto
specialized in
a narrow range of banking.
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Iyari, (2001:1)
opined that “The
whole idea of
Universal Banking
was spurred by
the forces of
globalizations, deregulation of
financial markets, trade
liberalization, internationalization of
economic activities
and the
phenomenal impact of information technology on
business process and decision – making”
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The Universal banking
system is a
system of
banking that
permits any bank to determine its portfolio
offerings, which
may involve non
– financial services.
The approval
in principle given
by the Central
Bank of
Nigeria for the
practice of Universal banking in Nigeria in
January, 2000
was well appreciated
in the industry.
Merchant banks
are already converting
to Commercial
banks to
be able to
access the relatively
cheaper and
stable deposits,
also given the
diminishing investment
banking business
in the weak
economy. Considerable
prospects for
the re-alignment of activities and forces will
be explored to
achieve economics of scale and to enhance
profitability.
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Generally, banks render a number of services to the
economy, foremost
of which is
the provision of
finance
which has
been described as a lubricant
for economic
growth (Carmero
et al, 1967). A
critical factor in
this
growth process
is adequate supply of credit to the various
sectors of the
economy to carry on their activities.
The
role of
the banking system
in this regard
is that of
financial
intermediation which entails moving funds from
the surplus
unit to deficit
unit of the
economy, to
facilitate
trade and capital formation.
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Banking as a service industry is organized to make
profit for
the shareholders vide
provision of banking
services and
supply of financial needs to individuals and
cooperate
bodies. In order to achieve this,
banks accept
deposits from
customers and lend to others.
According
to Sayer,
(1970:175), banks seek to make themselves as
attractive as
debtors and as
efficient as creditors
that
they can
earn a substantial gross
income from the
difference
between the interest they charge as
creditors
and the interest they pay as debtors”.
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Statutorily, Banks and Other Financial Institutions
Act (BOFIA,
1991), Section 61, defines Banking Business
as business
of receiving deposits
on current account,
savings
account, or similar accounts, paying or collecting
cheques, drawn
by or paid in by customers, provision of
finance or such
other business as
the Governor of
Central Bank of
Nigeria (CBN), by order published in the
Gazette,
designate as banking business. Through
credit,
banks promote
investments and sale of a wide range of
goods and
services. Banks in
Nigeria have been
performing this
financial intermediation role
in the
economy. Thus, loans and advances today constitute
a
major asset of
the total asset structure of banks in the
country. (Banks’ Annual Report and
Accounts)
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An asset constituting a
significant proportion of
total assets
deserves nothing less
prudent and efficient
management if
the economy impacts
of banks on
the
economy are
to be optimally realized. In addition,
banks
are expected
to derive their
income principally from
lending/credits
(loans and advances) and investing, and
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to a
lesser extent, from
fees and charges
received from
services rendered. According to
Crosse (1962:66),
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Income from
loans and advances should constitute more
than 60 percent of the total income of
the banks”.
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Developments in the
Nigerian economy in
the last
decade, specifically, from
1992 to date
have had
considerable
impact on the functioning of the banks and
other non
financial institutions. The decade witnessed a
down
– hill trend
in the Nigerian
economy, occasional
dwindling oil
revenue and the global economic recession.
Banks as
a sub-system of
national economy is
not
immune and
is having its
own share in
the form of
increasing loan
defaults because of
the inability of
borrowers to
redeem their loans, which resulted in banks
failure and
subsequently banks distress.
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1.2 Statement of the Problem:
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One of the
major problems confronting the banking
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industry today
is the increasing
incidence of loan
defaults and
consequent loan losses which manifested on
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the profitability of
the banks. Sequel
to increasing
incidence of
huge bad debts
in the Nigerian
banking
industry,
insider’s abuses, management’s competence
have been
called to question.
Bad debts, it
must be
noted
occur due to
the inability of
the bank’s
management to
recover loans granted to customers.
It is reported in the NDIC 1989 Annual Report and
Accounts that
the deteriorating health
of the banking
industry is
on the increase.
With reasons adduced
for
this development
in the report
to include the
following
amongst
others:-
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i.
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huge
uncollectible loans and advances;
the financing
of long-term assets
with short-term
funds;
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ii.
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iii. over trading;
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iv.
v.
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unsound
management practices;
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reliance on
volatile deposits;
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vi.
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non-standardization of
accounting practices and
financial
reportage.
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These prompted the
issuance of CBN
Prudential
Guideline in
1990, to sanitize the banking system.
Many
banks even
after the liquidation of several banks in 1998,
still
paraded inexperience and
“glaucoma” visionary
managers. Also many banks lack well articulated credit
policies,
efficient and effective internal control, and high
quality
professional and motivated staff.
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In 1996 and 1997, the
number of frauds reported
by Nigerian
banks were 127 cases involving about N1006
million and
587 cases involving N1543
million
respectively
(NDIC, 1997). There are also several
cases of
insider abuses
and even board
tussles. Many of
these
cases bordered
on corrupt tendencies, which
led to the
failure of many
banks a few years ago.
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As earlier pointed
out, loans and
advances
constitute the
largest proportion of
the banks’ earning
asset hence
loan defaults which
results in bad
debts,
destroy this
asset and subsequently reduce
banks
profitability as
bad debt or
provision for bad
debt are
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charged to
profit and loss
account. Thomas (1964),
described loans
as being vital both to the banks and to
the general
public in that it is the source of
earnings as
well as the
essential items that determines the liquidity
and ultimate
solvency of the banks. Bank credits in
form
of loans and
advances are funds transferred to the deficit
unit of
the economy for
investment purposes and
any
lowering of
banks asset (loans and advances) due to bad
debts will
affect the amount available for future credits.
Consequently, this
will affect production,
employment,
taxes due
to the government
and funds available
for
social
services, and also affect the bank growth.
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The incidence of huge bad
debts resulting in non-
profitability
and subsequent bank failure/distress in the
banking
industry has not only attracted the attention of
the monetary
authorities but the public at large.
Igwesi,
(2005) observed
that,
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“The issue of
distressed bank is a very great concern
to the entire
people of the country and indeed some of us
in the House of
Representatives. We feel so bad
about
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the so-called
liquidation squeeze and
other things
attached to
it based on
the fact that
we are
representatives
of the people and most of the people who
are worst
hit in this
matter are the
electorate, the
masses”.
He went further
to say; “The
problem to me
really borders
on whose responsibility it is to regulate the
sector and
check the liquidity rate in our
banking sector
and also the
issue of re-capitalization. This
problem is
really causing
untold hardship on
our people, it
is
certainly not in the interest of the
nation’s economy and
it is
capable of sounding
a very bad
signal to potential
investors and the private sector too.”
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There is a
growing concern of
increased bank
failures and
bank distress if the problem is not
urgently
addressed. This
fear may not be out of place when viewed
against recent
developments in the industry. Between the
years 2001
and 2002, the
CBN and NDIC
closed the
gates of
Savannah Bank and
peak Merchant Bank
for
problem of
liquidity. Others, SGBN
and AIB were
suspended from
the clearing House. In August, 2003
the
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Central Bank of
Nigeria took over control of Bank of
the
North Limited,
one of the
oldest indigenous bank
in
Nigeria which
was established by
the default Northern
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Region and
incorporated on 9
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th
September, 1959 as a
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private limited
liability company engaged, in commercial
banking
business. These take over and
suspension from
clearing House
were attributable to
their distressful
situation and
liquidity ratio of
less than 20
percent,
occasioned amongst
others by poor
management
resulting in
huge uncollectible debts
and consequently
affecting
the banks profitability.
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Thus, it is within this setting that growing concern
emerged regarding
increased potential of
bank failures.
As
Marshall (1980:113) observed
that “a commercial
bank failure
implies a loss of stockholders investment in
the bank;
however, the general
public may loss
the
insured portion
of its deposit as well as other bank debt
owed to the public. Further-more, a banks’ failure may
seriously shake the public confidence in
other banks”.
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In a report by a World Bank staff who noted that,
banks as
an institution will
remain dominant in
the
Nigerian
financial system for sometime and can be made
more efficient
by improving their
management system.
According to
the report, better management requires new
lending /credit
policies and
better loan recovery
procedures. (FIRST BANK, Monthly
Business Economic digest,
June, 1990).
The task before
this study is
to make an
empirical analysis
of the management
of loans and
advances and
its effect (positive, negative or both) on the
profitability of
Nigerian banks and
the causes of
the
problem if
any, so as
to be in
a position to
proffer
solution to aid
management performance towards better
profitability.
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1.3 Objective of the Study
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The basic objective
of the study
is to assess
the
performance of
Nigerian banks in
managing loans and
advances in
their asset structure and
how the
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