1.0 INTRODUCTION

This chapter deals with the back
ground of the study, statement of problems, objectives of the study, research
question, significance of the study, hypothesis, scope limitation of the study
and definition of items.

1.1       BACKGROUND
OF THE STUDY

     
The banking system in Nigeria has undergone radical changes during the 35
years since independence. Banking developed from an industry which in 1960. was
dominated by a small number of foreign owned banks into, one in which public
sector ownership predominated in 1970s and 1980s and in which Nigeria private
investors have played an increasingly important role since the mid 1989’s 
government polices had a major influence on developments in the banking
industry. Extensive government intervention characterized financial sector
policies beginning in the 1960s and intensifying in the 1970s, the objective of
which was to influence resource allocation and promote indigenisation. Since
1987 financial sector reforms have been implemented, encompassing elements of
liberalization and measure to enhance prudential regulation and tackle bank distress.

     
The effect of government polices on the commercial bank lending in Nigeria in
the period since independence all examine how banks were affected by public
ownership and polices of financial repression the reasons behind the growth of
Local Private sector banks, to causes of the financing distress in the banking
industry and the efficacy of financial reforms undertaken. We aim to explore
two related issues first, that government control on financial markets. Public
ownership of banks and the neglect of prudential  regulation as opposed to
allocative regulation had detriment effects on the banking lending, especially
in terms of the quality of banks loan portfolio. Efficiency and competition
second, that the efficacy of financial liberalization and other financial
sector reforms to enhance the efficiency of intermediation in banking market
has been limited. In part because of the legacy of pre-reform intervention ion
banking lending, which left large sections of the banking industry in financial
distress, but also because some of the reforms were inappropriately sequenced
and other were not implemented in a consist ant manner.

      On
the commercial banks. Although other financial institution have been set up in
Nigeria including development finance institution  (DFIS),  insurance
companies and plethora of finance houses, hire purchase companies and mortgage
companies, banking dominates the financial and merchant banks together
accounted for 85 percent of the total asset of the emerged during the 1980.
Some of these banks were set up banks by state governments but the majority
were stated by Nigeria private investors. The tensive growth of the local
private banks was very rapid after 1986, particularly in merchant banking
sector by 1992 there  were 66 commercial banks operating in Nigeria.
Despite the growth of new entrants however the three largest banks have
retained their dominance of banking market, accounting for 48 percent of the
total deposits of the commercial banks while Afric bank accounts for a further
7 percent.

     
The banking industry has been afflicted by wide spread  financial
fragility almost half, the total number of banks in operation, were regarded as
distressed or potentially distressed by the regulatory authorities in 1995. The
state government owned most of the distressed banks.

1.2       STATEMENT
OF THE PROBLEM

The environment in which
commercial banks operate has been the direct result of the banking sector has
been subject to extensive regulation of the banking sector of the Nigerian
government lending. There is competition among banks and non-banks financial
institution. It is now the survival of the fittest the central bank of Nigeria
as well as direct participation by the federal government and state government
during the post independence period economic nationalism and developmental
aspirations were important motivation for interventionist polices. The
character of these polices was that of financial repression in that control
depressed interest rate and cancelled resources away from areas where private
rate of return would have been maximized. The allocate control have been
liberalized to some extent since 1986, although controls over lay areas remain
in force. This section outline the efforts made by the Union Bank of Nigeria to
influence resources allocation in banking lending through the use of
administrative controls polices pertaining to public ownership of banks.

     
The denomination of banking by expatriate banks during the colonial period
provoked considerable resentment among Nigerian, including businessmen and
politicians. The expatriate banks were perceived as acting solely in the
interest of their foreign owners rather than in Nigerians and of the Nigerian
economy in particular they were accused of discriminating against indigenous
businesses in the allocation of loans and falling to finance the developmental
needs of the country, instead concentrating on the provision of short term loan
related finance to foreign companies. Consequently government objective following
independence included securing greater local control over the banking lending
and ensuring improved access to credit for indigenous businesses and priority
sector.

     
During the 1960s the union bank of Nigeria was given extensive powers to
regulate the quantity cost and direction of bank credit. These powers were used
to further monetary control a priority throughout most of the post independence
period because of inflationary pressures in the early 1990s by the issuance of
stabilization securities by the Union bank of Nigeria to those banks with
excess liquidity. The consequence was a reduction in the aggregate liquidity of
the banking system which contributed to a sharp rise in interest rates on later
bank deposit. Inter bank rates rose to us percent the availability of funds on
the inter bank market diminished sharply when some banks began to default on
their inter bank lending obligation. As the scale of the fragility in the
industry become apparent depositors withdraw funds from banks suspected of
being more secure. The difficulties involved in deposit mobilization combined
with the non servicing of a large share of their loan portfolios meant that the
distressed banks became increasingly illegal and overdrawn on their accounts
with the union bank of Nigeria.

     
The problem in the effect of lending have effectively mobilized deposits for
the banks, this work is aimed at finding the night answer to the question
raised.

1.3     OBJECTIVE
OF THE STUDY

The purpose of the study is to
find out.

1.     
Effect of lending policy on commercial bank ability to grant loan.

2.     
to assess the effect of government policy on inflation rate in the country.

3.     
if monetary policy will, in any way reduce inflation in the country.

4.     
how government policy on commercial bank affect its ability to grant loan

1.4             RESEARCH
QUESTIONS

1.              
How does lending policy affect the commercial bank ability to grant loan?

2.                              Did
government policy affect inflation rate in their country?

3.                              How
does monetary policy affect inflation?

4.                              How
does government policy on commercial bank affect its ability to grant loans?

1.5             RESEARCH
HYPOTHESIS

1.              
Ho:      Lending policy does not affect the commercial
bank ability to grant loan.

                 
Hi:       Lending policy affect the commercial
bank ability to grant loan.

2.  
Ho:           
Government policy does not affect inflation rate in the country.

     
Hi  :          
Government policy affect inflation rate in the country.

3.  
Ho:            Monetary
policy has nothing to do with inflation.

     
Hi  :           Monetary
policy has something to do with inflation.

4.   Ho:           
Government policy on commercial bank does not affect its

                       
ability to grant loan.

     
Hi:            
Government policy on commercial bank  affect its

                       
ability to grant loan.

1.6       SIGNIFINCANCE
OF THE STUDY

The study is significant for the
fact that many banks has been introduced and more are scheduled to hit the loan
government progress on its efforts.

      It
is of great importance to the operation in the banking lending in that it would
enable them assess the degree of the successes of their banks and be able to
identify unprofitable ones. It will also serve as the first information for new
comers in the bank and those intending to lend some. In determining their
targets in bank lending, again it will be beneficial to student  in
banking and finance and research who may be interested in this area of study.

1.8       DEFINTION
OF TERMS

1.   COMMERCIAL
BANKS:        This is an
institution set up to do banking business accepting deposit from public and
make profit by lending money out of the public.

2.   LENDING:         
The giving of money to the customer by a bank with interest on the ground that
such bank has enough security to back up such loan when the due time is
matured.

3.   INTER BANK
CLEARING:    This is an arrangement by which banks settle
instrument drawn on them by their customer in the clearing house,
representatives of commercial bank deliver cheques drawn on other banks
and receive instruments drawn on them by the bank.

4.   LIQUIDITY:      
The liquidity of an assets means the ease with which it can be turned into cash
with certainty a bank has to keep adequate volume of non-earning assets such
as, cash call money, treasury bills and other short term maturing instruments
in its portfolio

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