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GRANTING OF CREDIT FACILITIES BY COMMERCIAL BANKS PROSPECTS AND PROBLEMS (A CASE STUDY OF SKYE BANK PLC)
The study examined the problems and prospects associated with granting of credit facilities by commercial banks. To assess this situation questionnaire were distributed to low members of staff of skye bank pIc. 20 of the questionnaire were given to 5 departments using stratified random sampling. The data was analysed using descriptive statistics and chi-square distribution.
The findings revealed that granting credit to customers’ facilities economic activities by providing foods for the needs sectors. It was therefore recommended among others that a good credit department of any bank should ensure that credit policies are in place.
TABLE OF CONTENTS
1.0 Background to the study
1.1 Statement of the Problem
1.2 Objective of the study
1.3 Research Question
1.4 Research Hypothesis
1.5 Significance of the study
1.6 Scope of the study
2.2 The role of banks in Nigeria and its economic Developments
2.3 Sources of loanable funds for banks
Classification of bank lending
Principle of banking lending evaluation
Problem of bank extending credits
Strategies-for loan recovery
Sampling procedures and design
Data Collection Procedure
Statistical tools of analytics employed
DATA ANALYSIS AND INTERPRETATION
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATION
Summary of finding
1.0 BACKGROUND OF THE STUDY
Over the years it has been a difficult task to find an acceptable definition of a bank or a banker. Several attempts have been made to offer a comprehension and acceptable definition. According to J.W. filbert who defined a bank as a dealer in capital or more properly a dealer in money. He stresses further that bank can be also called an intermediate party between the borrower and the lender. i.e. he borrows from surplus party and lend to deficit party. He observed that this definition emphasizes on the two traditional function of bank. i.e the mobilization of deposits and the granting of loans and advances in recent times. Banking business has expended considerably and as a result Gulbert's definition cannot be regarded as a complete or comprehensive statement.
Several other attempts have been, especially in United Kingdom to define what a bank is. For example, the bankers book Evidence Act 1979 defines bank as: any person; partnership as company carrying out the business of bankers and having daily made a return to the commission of island revenue. And also any savings banks certified under the acts relating to saving bank and also to any past office.
In Nigeria, the first banking legislation was enacted in 1952 and defined bank as the business of receiving from the public on current account money which is to be repayable on demand by cheque and of making advances to customers. This definition later modified is 1958 and 1962. until when the banking act of that year defined banking as the business of receiving monies from outside sources as deposits irrespective of the payment of interest and, the granting of money, loan and acceptance of credits, or the purchase of bills and cheques or the purchase and sales of securities for the account of others or the incurring of the obligation to acquire claims in respect of loans prior to the maturity or the assumption of guarantees and other warrantees for others or the effecting of transfer and clearing and such other transaction of the commissions may on the recommendation of the central bank by other published on the federal gazette designate as banking business. This is the Nigeria context any -Derson carrying in banking business as defined above can be called a banker.
Bank can be classified in Nigeria into retail or commercial bank, which is described as a bank whose business includes the acceptance of deposits withdrawals by cheques. Merchants Banks; can be defined as any person engaged in wholesale banking, medium and long term financing equipment leasing investment management, insurance and acceptance to bill the management; of unit trusts. Development bank is viewed as banking institutions which attempt through their resources to increase the availability and the distribution of the basic necessities of life and assist a given economy deficits particularly in areas which that economy perceives as route to attaining ideals of modernization and more importantly long range balanced growth in the economy and central bank is defined as a state bank established to keep a country; financial system under control and close supervision. It is established to promote economic development by promoting the establishment of money d capital markets, banking habit and supervision and controlling the commercial banks.
Olalusi F. (1989: 101) posits that banks are buyers and sellers of funds, this depository function enables bank customers to save with the banks under different arrangements. Funds deposited by customers. He further mentioned that bank customers are in turn rent out to needy investing customers. He further mentioned that bank customers borrows. For a number of reason some which will be dealt with in subsequent chapter precisely in the review of literatures. Suffice to say that customer borrowing from the banks can do so for the following reasons such as transaction purpose. Investment opportunities and foreseen contingencies. A pertinent question he further asked is what basic principles guide the banks in their lending decision? The various factors that influence the banks in their lending decision can be classified as the lending policies of the banks, the general principles of bank lending and general economic policies of the state.
The banking system of any country as an internal part of the structure of that economy. This banking institution is regarded as engine of growth in an economy. Banks provide invisible funds and perform some other socially desirably services on behalf of the government of the country.
The attainment of government macro-economic objectives of economic growth, price stability, full employment and equilibrium balance of payment can be a function of the relative effectiveness of the growth and development of the country.
Omega Bank PIc as a commercial bank performs the following roles:
· Mobilization of savings
· Extension of credit facilities
· Money transfer services
· International trade services
· Business advisory services
· Commerce financing
· Development sources Status services
The focus of this research is extension of credit, therefore the bank is a financial intermediate source for fund from the surplus unit and in turn lends to the deficit units.
Onuigbo O. (2007: 158) stresses that there has been a tremendous expansion of bank lending with different techniques of recovery thence, lending has gradually changed to a gentlemen's agreement between a lender and a borrower to a set of procedures that are guided by different policies and principles, which are full but, need to be supplemented. He further maintained that appraising a bank loan on a loan-run proposition, therefore should be taken with caution, there is the need for a bank to make funds available only on a safe ground as this involves creating proper lending policies and criteria applying the appropriate credit analysis and techniques.
This will focus on the degree to which the total asset and some keys sources of fund affect the volume of loans and advances. It also lead into the strategies conforms to the background. In addition, the project appraises these strategies in terms of reducing credit default and bad debts. Since the activities of the commercial banks in Nigeria are stereo typed, the analysis of data or Skye bank PIc will give a clear picture of the general practice of commercial banks in the Act of lending and loan recovery.
Omolehinwa,E. (2008:124) views bad debt as a debt that can no longer be recovered because the debt does not have the capacity to pay. As a result, the amount of the debt must be written off the account of the customer such debt that cannot be recovered must necessarily be a loss to the business. As a result bad debt is regarded as an expense of running the business just like salary expense and depreciation expense in the case of this study, bad de bt emanated from either approved facilities or unauthorized. Facilities granted to the customer by the head office or the branch manager. It is difficult to eliminate bad debt completely in the business of the banking but, it can be managed to comfortable level which will not endanger the life of the banking business.
Bad debt in the books are traceable to the outstanding list of unserviceable risk assets of customers. Majorities of bad debt arise from unauthorized facilities granted by the bank officer. Oluwatoyin, R.K. (2007: 121) argued that it is now generally agreed that financial sector of an economy matter in economic development. It assist in the transition from a depressed economic performance to an accelerated growth. If the financial sector is repressed and distorted, it can intercept and destroy impulsed of development and argued that bank lending performed a lot of role on the economy, which are stated as:
Credit serves the lender: This is because in our modem individual societies, individual needs to defer the use of part of income they receive in any period in order to accumulate purchasing power for later use. Such a deferral (by factor) is made possible through credit management. Credit enables lender to defer immediate consumption.
Credit serves as benefit to the borrower: This is because some individual and group in the society wish to acquire more goods and services in a given period than they can from their own receipts of money those people (i.e. borrower) can finance these acquire by means of credit arrangement.
Credit serves the need or trade: For example an individual or a company may sell its goods and services not for money but for buyer's promise to pay money at sine future date. As a result it enhance steady flow of goods and services acquired for the satisfaction of people's daily needs.
Increase in credit (debt): Whether public or private, appears to the essential to finance the deficits (public or private) need for rising Gross National Product (GNP) expenditure overtime. In other words, credit increase aggregate demand. Again, because the purchase of durable real estate is financed in substantial degree by bo-n o-irig, the growth of debt is intimately related to the increase in the productive capital and real wealth of the economy. As a result of the roles performing be classified into three ways, viz-a-vis.
i. According to maturity
ii. According to the degree of security or the loan and
iii. According to usage and nature of the loans.
All the above classification will be discussed fully in Chapter two of this project. Iture, C.E. (2006: 1330) maintain that loan recovery is the process undertaken by a bank to recover the money borrowed out to their customer as at when due. It involves a lot of procedure which includes such as the security position of the bank borrower’s ability to pay, recorded by induced concession, use of debt collectors, debt renewal of Rescheduling, appointment of a receiver, recovery by legal proceedings.
In order to. minimize the increase in bad debt there are a lot of control or strategies by the bank such as demanding for collateral securities from the borrowers, visiting the customer always i.e. relationship management etc. some, of the collateral accepted by banks are land building, stock and shares. The life insurance policy, guarantee etc. certain principles guide banks in making prudent lending decisions; these principles are mere guides hence, each application for loan is treated on its own merits.
A basic problem of lending bankers is obtaining adequate and right information on the client, this can however be obtained through relevant statements, submitted by the customers trade reference, state's inquiry from professional companies and banks personal visits, major customers and competitors. Different classes of people are interested in the operation of banks for different objectives. However bank's basic problems in developing countries centre ground unwillingness of bank customers to honour their loan obligations. To reduce bad debts, Banks are advised to examine critically the adequacy of their provisions for bad and doubtful debts, their credit policies and the quality of personnel in credit departments. Nwankwo, G.O. (2003:1) opines that although the number of services a modern commercial bank offers has increased immensely, risk taking which is a fundamental nature of banking remains unchanged. It is inherent in maturity transformation, which is another fundamental feature of banking. Although other sources exit, the main source of investable funds remain bank deposits and loans and investments the main source of income and profitability of banking remains the spread or difference between the rate or loaned out. In these circumstances, bank management becomes coterminous with risk management. Bank management, in other words, is no more than managing risk, the risks of mismatches between assets and abilities and between borrowing and lending rates.
In managing the risks, the bank was has to satisfy five main constituencies; one is the surplus units from which it borrows. These units demand the best possible term, in the rates of interest and maturity structures and maximum liquidity to enable them to have the funds back when they deficit units which borrow from the banks. They want to borrow when they wants them or agreed. The second constituency is the deficit units, which borrow from the banks. They want to borrow when they need funds and as cheaply as possible. Like the lenders, the borrowers also imposed the obligation of maximum liquidity on the banks to enable them to obtain the funds when they need them.
In addition to satisfying the surplus and deficit sectors, the shareholder must also be satisfied. These require maximum or adequate return on their investments, in order to remain invested in the bank and to be willing to continue to provide additional resource's as and when needed. To these is added the fourth consistency, the regulatory authorities, whose interest is to ensure that the bank does not undertake excessive risks and that it operate prudently and within stipulated regulatory requirements. There is finally, the community at large as the providers of their environment within which is operates, the bank owes an obligation to the community to be a good corporate of the opportunities available and minimizing the threats in the environment.
1.1 STATEMENT OF THE PROBLEMS
Asika, P.R. (2001: 100) expressed that a problem is recognized when a doubt is raised, difficulty is created or dissatisfaction occurs and a solution is need. The lending and recovery activities of the commercial banks constitute the dominant activities yielding the highest percentage of income to enable them earn enough profits and provide adequate returns to the shareholders. On this note, the foundation upon which any research work is based on the proving questions initiated by the numerous problems which this research is set to address, some of them are mentioned below:
· The commercial banks can not satisfy loans demanded because the banks’ capital, its earnings, its liquidity, the size, structure, maturity and volatility of its deposits and the quality and competence of management.
· The banks are usually faced or comforted by borowers before they are given loans by the bank (lender).
· The banks cannot examine how the loan part folio IS damaged to achieve the desired objectives.
Loan policy put in place to monitor insider transactions in recovering loans in maintain the integrity of the bank
1.2 OBJECTIVES OF THE STUDY
Familoni (1999:7) maintained that the purpose of objectives of any study is to set up apparatus to achieving the goals of the study. The reason for carrying out this research work is to review relevant concepts of bank fending (credits) and strategies in recovering the loan to remain the business of banking.
The high degree of defaults has made ending in banking a very high-risk ventures therefore, the ability of the bank managers and loan officers to minimize the occurrence of bad debts, to the desirable level reflects their success as a good leader. True to provide the service as this generates the highest earning of the bank. Hence, this study will be focused on the following:
· To evaluate the general principles of bank fending procedures of Skye bank PIc as it affects the general practice of lending and recovery of commercial banks.
· To evaluate the procedures of bank lending and the formulation of credit policies.
· To assess how the total assets and other sources of funds affect the volume of loans and advances
· The banks cannot projecting the future loans and advances of Skye bank PIc and the provision for debits to be set aside for such loans and advances
1.3 RESEARCH QUESTIONS
Research questions serve as a guide to the researcher in her quest, for answers to the problems being investigated in the problems being. Among all the services provided by the commercial banks, the most profitable service IS the mobilization of deposits and provision of credit, facilities to their customers.
These facilities come in form of an overdraft loan, debenture commercial papers and bankers’ acceptance.
Research questions in this study are listed below:
· Do your bank respond positively to loan request from the ultimate users of funds?
· Is bank lending the highest sources of income to your bank because of interest earning in the funds lent out?
· Do your customers meet the requirement of loan -policy your bank before giving loan?
· Are the loan repaid as agreed upon by the two parties?
· Is there any close relationship and monitoring between money from the borrowers?
· Is there any procedure put in place in receiving your money from the borowers?
Based on the above, the study is entailed to sensitize the batik manager (lender) and the loan officers on the fir principles of lending, the procedures involved and strategies in the recovery of the loanable fund from the customers. It will also involve the procedures that would tower the level of loan default and factors that have direct effect on the availability of loanable funds and to investigate the frame work of lending and recovering options available.
1.4 RESEARCH HYPOTHESIS
Rigby (2003:26) defines hypothesis as a valuable convention used by science in exploring regularities that is a tentative statement a scientist makes when he believes he has discovered the 'existence of a relationship(s). He runner viewed that hypothesis is used to indicate that a statement, of a relationship is considered to be tentative and one to be tested and proven.
Hypothesis are usually classified into two, namely:
· Null hypothesis - Ho
· Alternative Hypothesis - Hi
For this study, the following hypothesis are formulated:
Ho: Granting credits do not depend largely on the liquidity base of the bank.
Ho: Granting credits depend largely on the liquidity base of the bank.
Ho: Granting credit to customers do not facilitate economic activities by providing funds for the needs sectors.
Hi: Granting credit to customers facilitate economic activities by providing funds for the needs sectors.
Ho: Credit should not be granted to safe, sound, honest, capable, responsible individual and business that cannot repay loan.
Hi: Credit should be granted to safe, sound, honest, capable, responsible individual and business that cannot repay loan.
Ho: Bank loan is not to satisfy the credit need of the individuals or community the Bank stands to serve.
Hi: Bank loan is to satisfy the credit need of the individual or community the banks stands to serve.
1.5 SIGNIFICANCE OF THE STUDY
Omorode (2002: 133) stresses that the significance of the study is to state for whom the study will be useful in meaningful end give some indication of its value for others. This is because the essence of a research study is to provide solutions to identify problems and to contribute to the body of knowledge in the particular area of investigation.
The reason for this study is to examine the "granting of credit facilities in a commercial bank, the prospects and problems" A case study of Skye bank PIc. The main service of commercial bank is the mobilization of deposits and lending as it forms the major part of the asset structure of the banks.
The best way in which the bank contribute to economic growth of a country is by lending to product or preferred sectors of the economy. As there are many industrials competing for those credits and the banks itself are being faced with problems of distress syndrome, there is need to evolve basic lending criteria that will sort out genuine case of lending from the lots.
This research work will also be of significant use to the students of the Nigeria Universities, for the well sort out relevant and well-articulated literature reviewed. This study will also be of significant and valuable use to Skye bank PIc, because of the study has been able to reveal and evaluate the lending activities of the bank understudy and credit.
Appraisal techniques that will assist banks managers and loan officers in their lending decision.
This study will also recommend and suggest ways of minimizing if total elimination is not recovering loan. Considering, the significant of bank lending to the growth of the economy of a country, the bank and the beneficiary of such loans, manufacturers, traders and the populace contribute in assisting growth of the industry by creating employment opportunity for the masses.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
Goode and Hatt (1983:317) views scope of the study as more than a mere designation of the population being studies, however, it must also include the level of generality of the study.
This study focuses in the granting of credit facilities to a commercial bank, the prospects and problems. Skye bank as a case study this project is aimed at providing affective solutions to practical lending problems which will involve vigorous analytical calculations.
The scope of the study will be based on level of management (i.e. top management, branch managers and credit officers) that are involved in the process of lending to the customers. The granting of credits process will depend on the bank policy as regard the preferred sectors. The sectors to be allocated funds also depends on the banks policy in respect of which is more profitable or not. The analysis is based on the data gathered from the head offices of the bank and the branches including analysis real life. Proposal submitted to the bank highlighting the decision taken as at the time in view.
Idisi, P. et al (1998:30) regards limitation of study as those factors inherent in the research situation that might affect the result which, the researcher must recognize and acknowledge such as:
· Delays in filling of the questionnaires by the respondents. D Uncooperative attitude of some interviewees who are in position to supply the researcher with relevant data and information.
· Inadequate financial resources occasioned by economic hardship or situation.
· Time factor - the time specified for the completion of the study could militate against the researcher's effort.
However attempts would be made as much as possible to include relevant vital information to aid in understanding the study.
1.7 DEFINITION OF TERMS
Asika, P.K. (2003: 121) expressed that definition of terms serves as the dictionary of the research, the terms are defined to enable the initiated reader to understand the research work more clearly.
1. BANK: Is a financial institution where money and valuables are kept.
2. LOAN: Is money advance to credit worthy person(s) for a specific period on specked terms.
3. OVER DRAFT: This is a lending facility to current account holders on an agreed line of credit.
4. BAD DEBT: This is a debt that can no longer be recovered because the debtor does not have the ability to pay.
5. DOUBTFUL DEBT: Is a mere allowance for debts that are not bad at the moment, but may be bad in the future.
6. INCOME STATEMENT: Is a document that, ascertain the net profit or loss arising from trading activities.
7. BALANCE SHEET: This presents a brief summary of the assets and liabilities of a business firm in an intelligible well-arranged form.
8. LIEN: Is the right to retain property belonging to another person until a debt due from the owner of the property to the possessor is paid.
9. PLEDGE: Is a delivery of goods and documents of little to goods by a debtor to his creditor as security for a debt, or for any other obligation.
10. ASSIGNMENT: Is a transfer by a creditor to an assigned of the right of receive a sum of money or some other benefits from a debtor.
VISION OF THE COMPANY
The vision of the company is to be one of the lending financial institutions in Africa, through a progressive realization of the corporate mission.
An Ethical Organization
And Industry Leader Delivery
Excellent Customer Services
To achieve superior, well-secured stakeholders.
Reward long term
LOCATION OF BRANCHES
With branches in the key business cities and trading routes in Nigeria, the bank serves its customers whenever and however the customer wills to be served.
The strength of the bank is the branch network corporate values and customer - intimacy. Skye bank correspondent relationship with lending global financial institutions empower it to be the gateway to international business worldwide.
SC Investment limited was incorporated in 1999 while HLA Estates limited and Skye leasing corporation limited was incorporated ill 2000 and Skye centre limited was incorporated in 2001. SC Investment and trust company is engaged in the business of an investment company, trading in shares and stocks and also acts as trustees. HLA Estates limited is engaged in the business of property development and management. Skye leasing and Skye centers limited, which shall be engaged in the business of acquisition and construction of real estate properties, hospitality business, establishment of supermarkets, shopping centers, bakeries and confectioneries are yet to commence operations.
GLITTERIN ARRAY OF SKYE BANKS PRODUCT
With the launch of new personalized products Skye bank is set to take banking' operations and services beyond the imagination of its teeming clientele.
· Catch them young (CTU) Account
· Skye bank women investment scheme for entrepreneur (O'Wise)
· Skye bank savings plus
· Quality investment multiplier Account (QIMA)
The public holds 44.54% of the issues share capital, while Ekiti and Ondo state governments hold 15.34% and 13.84% respectively. Haastrup lines (W.A.) limited holds 13.84%) while the employees of the bank hold 12.440/0.
CUSTOMER SERVICE INNOVATION
At Skye bank, there is no unequalled commitment to excellence, which has motivated a unique customer service initiative, creating value - added offerings that are on the cutting edge of competition. Our "error - free banking or we pay" customer service guarantee scheme to the first of its kind to be introduced by any financial institution in Africa. With this scheme, Skye bank would compensate customers if services were not delivered as promised.
SKYE BANK ROBUST TECHNOLOGY
Skye bank invested substantially in state of the art banking application software to maintain and sustain commitment to excellent customer service. The bank branches nationwide are networked to enable the esteemed customers transact business from any Skye bank branch or from comfort of their homes or offices.
The pivot of the bank expertise is founded upon the talents training, experiences and motivation of the bank. With the bank corporate culture, the bank has a continuing obligation to recruit, develop and retain the best individuals and to support them with state of the art training and technology.
THE PLAN OF THE STUDY
The chapter one of this study will be looking into the background objective, purpose, types of credit facilities, statement of the problem, significance, scope, hypothesis, Limitation, research questions, research methodology and the plan of the study.
Chapter two of this study will cover literature review of credit policy, recent trend in loan growth and quality, the credit analysis, credit execution, administration of credit process business development and credit review, the problems of loan and leases, an overview of loan losses, measures of loan losses, controlling loan losses, cause of loan loses preventing problems of loan, detecting problems of loans and the problems loans work out.
Chapter three has the method and procedures, data selections, research design sampling, data source, method of data analysis and testing of hypothesis and decision rule.
Chapter four of this study will comprise data analysis and interpretation, introduction, analysis of question of questionnaires and testing of hypothesis.
While the Chapter five will be summary recommendation, conclusion summary of findings, recommendations, conclusion and areas for further study.
One factor that is fundamental to banking operation is granting of credit facilities to the customers. Therefore the need to have effective credit processing system and policy must be emphasized of a bank to avoid the distress monster that has become the loss of the banking sector in the recent time. Known well that this monster cannot be eliminated but they can be reduced to their barest minimum when sound credit policies are put in place.
Sinclair, Alford C. Loan Quality at Every Step The Journal of Commercial Banking (RMA) Robert Morris Associates, October 2003.
Bjork, Williams E. The Judgment Factors In Commercial Credit Analysis, The Journal of Commercial Bank lending (RMA) September 1999.
Hemderson, W. Keth Plugging a Critical Loan Training Gap, The Journal of Commercial Bank lending Robert Morris Association (RMA) February 2004.
Koch, T. W. Banking management (Second edition)
Olalusi, F. The practice of Banking Tridon Publishers, Nigeria.
Omolehinwa, E. Foundation of Accounting Pumark Nigeria Limited, Nigeria.