ABSTRACT
This research work was undertaken to assess the Loan granting and its
recovery problems on Commercial Banks. The research was intended to
achieve the following objectives: To find out the several problems facing loan
recovery, the effects of loan default on commercial banks and the measures
that will be used in reducing the incidence of loan default. Relevant data were
collected from both primary and secondary sources. Questionnaires were the
main primary data collection instrument employed while data from various
relevant publication constituted the sources of secondary data. Upon the
analysis of data, the following conclusions were drawn: That problem of loan
default stemmed from the fact that there is unavailability of security to be
disposed by banks to realize funds. And also customer’s attitude towards
loan payment. On the basis of the above findings, it was recommended that
commercial banks should use some risk control measures to guide against
loan default. Also, before granting loan, they should examine critically the
project statement submitted by the customer or borrower which will help them
to find out the realistic repayment pattern and also help them in knowing if
the projects are realistic based on the customer’s past performance. Also, the
Central Bank of Nigeria should create a conducive environment for the
successfully operation of commercial banks in Nigeria.
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TABLE OF CONTENTS
Title page——————————————————————————–ii
Approval page————————————————————————–iii
Certification—————————————————————————-iv
Dedication——————————————————————————-v
Acknowledgment———————————————————————–vi
Table of contents——————————————————————-vii-ix
Abstract———————————————————————————-x
CHAPTER ONE
1.1 Background of the study—————————————————————
1
1.2 Statement of problems—————————————————————–
3
1.3 Objectives of the study—————————————————————–
4
1.4 Research question———————————————————————-
4
1.5 Research hypothesis——————————————————————–
5
1.6 Scope of the study———————————————————————-
5
9
1.7 Significance of the Study ————————————————————-
6
1.8 Definition of terms———————————————————————-
6
1.9 Limitations of the study—————————————————————-
7
CHAPTER TWO
LITERATURE REVIEW
2.1 Brief introduction——————————————————————— 8
2.2 The nature of loan and advances granted by banks—————————–9
2.3 Problems of loan default————————————————————-13
2.4 Causes of loan default—————————————————————14
2.5 Effects of loan default—————————————————————-19
CHAPTER THREE
RESEARCH METHODOLOGY
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3.1 Research design——————————————————————— 21
3.2 Definition Population ————————————————————–21
3.3 Sample size————————————————————————–21
3.4 Sources and method of data collection——————————————22
3.5 Method of data presentation and analysis————————————–26
CHAPTER FOUR
4.0 Data presentation and analysis—————————————————23
4.1 Presentation and interpretation of data——————————————23
4.2 Data analysis and findings——————————————————–31
4.3 Discussion of the findings———————————————————32
4.4 Recovery measures——————————————————————33
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of findings—————————————————————- 39
5.2 Recommendation———————————————————————40
5.3 Conclusion—————————————————————————–41
5.4 Suggestion for further research—————————————————-42
Bibliography ————————————————————————–43
Appendix A—————————————————————————-45
Appendix B———————————————————————–46-48
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CHAPTER ONE
1.1 BACKGROUND OF THE STUDY:
Virtually, every business has a credit relationship with a financial
institution, especially banks. Some rely on periodic short term loans to
finance temporary working capital needs. Others primarily use long-term
loans to finance capital expenditure, new acquisitions or permanent
increases in capital. Regardless of the type of loan, all credit request
mandate a systematic analysis of the borrower‟s ability to repay as at when
due.
Commercial banks carry on ordinary banking business with the general
public, changing cash for bank deposits and bank deposits for cash,
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transferring bank deposit from one corporation to another, giving bank
deposit in exchange of bills of exchange, providing of trustees and executor‟s
services, providing safe custody of funds and valuables as well as foreign
exchange remittance.
Though commercial banks differs from country to country, their profit and
banking motives are the same. Their activities are of interest to their
customers, workers (staff), and above all, shareholders. The commercial
objective of the bank is to maximize profit, though other social and
economic functions tends to deflect banks from profit maximization.
The aims and objectives of commercial banks have therefore paved way for
their customers to make and obtain credits, in form of loan of which the
researcher is interested in.
Lending has become a vital function on operation because of its direct effect
and impact on economic growth and business development.
In a market oriented economy, there are two main participants that move
the economic growth; these are the suppliers of invisible funds and the
users of the funds for productive purposes. These two participants are
spread widely in the economy and may not have direct relationship with
each other. For this, there is the need to have an intermediary to link them
up. The banking sector mobilize surplus funds from small and big savers
who have no immediate need for such funds. The users of these funds are
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the business entrepreneurs and investors who have brilliant ideas on how to
create additional wealth in the economy but lack the necessary capital to
execute their ideas. These groups of people approach banks to obtain loan.
Subsequently, lending is a risky venture which banks only engage on after a
rigorous and satisfactory analysis of the project for which lending is being
made. The main preoccupation of banks is extending loans to their
customers. Thus, the formulation and implementation of such lending
policies are some of the important responsibilities of the management of the
bank. The lending policy of a bank must be specific on how much loan will
be made available to whom, what period and for what reason. For this
reason, lending policies should be well documented so that lending officers
will be able to know the areas of prohibition and the area of where they can
operate. Also, such policies should be subjected to periodic review to make
the banks keep abreast with the dynamic and innovation nature of the
economy as well as competing with other changing economic sector.
Therefore, the basic objectives of credit analysis t=is to assess the risks
involved in extending loans to bank customers. In financial circle, risk
typically refers to the volatility in earnings. Lenders are particularly
concerned with adverse fluctuation in net income or cash flows, which
hinder the borrower‟s ability to service a loan. Some risks can be measured
with historical and projected financial data, while others such as those
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associated with borrower‟s character and willingness to repay a loan are not
directly measurable.
1.2 STATEMENT OF PROBLEMS:
Banks in recent times has failed as a result of loan recovery problems. Loan
is the major source of bank profitability.
However, in going about their lending activities, banks have their own
objectives among which are profitability, growth, safety, suitability and
liquidity.
Loan, when not recovered could adversely affect banks. It is easily granted
than recovered. It usually needs proficiency i.e. competency and expertise in
the recovery process. It sometimes become an uphill task to recover. When
they are not recovered, the impact is often disastrous to the bank. It can
lead to illiquidity, insolvency and even distress as the case may be.
There is therefore a need for arriving at strategies for efficient loan recovery.
That is the peak of the problem.
1.3 OBJECTIVES OF THE STUDY
Having known that lending objectives of a commercial bank is to provide
growth, profitability and liquidity, and its representing chunk of deposit as a
source of income to the bank, the cumulative effect of loan default will be a
loss of confidence in the banking system.
The researcher therefore aimed at:
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1. Finding out the several problems facing loan recovery
2. The effects of loan default on commercial banks
3. The measures that will help to reduce the incidence of loan default.
1.4 RESEARCH QUESTION
1. What are the several problems faced during loan recovery?
2. What type of loan do commercial banks grant?
3. Who are the loan beneficiaries of commercial banks?
4. Are there measures to reduce the limit of loan default?
5. What are the effects of loan defaults on commercial banks?
6. What are the sectorial allocation of commercial bank‟s loan?
7. What are measures that will help to reduce the incidence of loan default?
1.5 RESEARCH HYPOTHESIS
Ho – the measures taken by banks do not reduce the incidence of loan
default.
H1 The measures taken by banks to reduce the incidence of loan default
1.6 SCOPE OF THE STUDY
The research work is to analyze the problems of loan recovery on
commercial banks (First Bank Plc) in Ojo-Alaba, Ojo Local Government Area
of Lagos State.
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Due to limited time and the level of this project work, the researcher decided
to systematically and meticulously narrow it down to a study that will cover
two distinct areas namely:
The problem of loan recovery and how to control loan default.
The researcher wants to avoid unnecessary details that are not concerned
with the problem of loan recovery in commercial banks.
The study is limited to first bank branch in Ojo-Alaba, Lagos State.
1.7 SIGNIFICANCE OF THE STUDY
This study is intended to analyze the problems of loan recovery in
commercial banks in Nigeria and their poor system of management of loan.
The result of this study will be immense important to some of us and even
the bankers in particular. Banks will become conscious in their loan
disbursement. They have to determine the kind o people that will benefit
from the loan disbursement, the type of loan to give the criteria to use in
granting loan and the procedures to be used for loan recovery.
1.8 DEFINITION OF TERMS
In the course of the study, the researcher makes use of some words that
needs to be defined so as to carry the reader along.
LOAN: This is the act of allowing a borrower to make a temporal use of
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funds at its disposal. It is also a more formal arrangement by
which a bank agree to lend an agreed amount to a customer
usually for a given period.
RISK: It is the measure of uncertainly inherent in any decision making
process.
PROFITABILITY: It is used as index for measuring managerial
performance. It means yielding or bringing profit or gain.
LIQUIDITY: This is the word that banks used to describe their ability
to satisfy demands for cash in exchange for deposits.
BANKING: It is an agency through which debts and credits are
converted and exchanged between owners.
BAD AND DOUBTFUL DEBT: Bad debts are those which are not
recoverable, though they are written off as
loss. Doubtful debts are those of which the
recovery in full or part is uncertain.
CAPITAL: It is the equity value of the bank educated to the
present value of its future earnings.
1.9 LIMITATIONS OF THE STUDY:
In the course of the study, the researcher was faced with several
constraints. One of the constraints was the short time period within which
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the research was to be completed. Another factor was shortage of cash
which prevented the researcher from traveling to source the data. Also, most
of the credit analysis criteria in commercial banks were not disclosed to
offer the necessary data required. Their frequent postponement of
appointment coupled with the fact that commercial banks in Nigeria are
vast in population i.e. First Bank Branches. The researcher could not get to
all of them, therefore a sample was taken to represent all.
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