AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON PROFITABILITY BANKS

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

Attempts to explain the operation of commercial banks began with the inception of banking institution. Lending has become a vital role in banking operations because of its direct effect on economic growth and business department. In most countries, banks and their lending activities have useful integrated into government policy formulation. As far as banks are concerned, their role as lenders is important as that of deposit taking into consideration; the interrelationship in banking system. All commercial banks have common attributes, they keep deposits for their customers, permit certain deposits to be transferred by cheques from an individual account to other accounts in any bank in the country, make loans and invest in government securities.

It is these common features particularly the holding of demand deposits that distinguished commercial banks from other financial institutions, banks like all other business organization have the commercial objective or primary to objective maximize profit, they do this through granting of loans and generate interest from such loans, this translate into profits to banks in their bid to maximize profit.

According to Clarke (2009) problem loans crises as a result of default in the payment agreement caving undue delay in payment and or possible loss. In the banking industry, problem are often inheritable consequence, which have serious cost implication for banks, conservative lending through suppresses profit while supportive leading the possibility of default.

We are Nigeria’s leading retail bank, we emerge from the largest merger and consolidation in Nigeria’s banking industry following the landmark banking consolidation spearheaded by the Central Bank of Nigeria (CBN) mire financial institutions with competences in investment banking corporate and retail banking came together in January 2006 to form ECO Bank.

The banks have 216 business officers spread across the country and we are working to increase this number in the nearest future it has 7 largest bank by business locations with Head Office at 785, Herbert Macauley Way, Central Business District Abuja, while the Head Office is at Annex 290A Akin Olugbade Street, Victoria Island Lagos.

The Bank have seventeen (17) regional offices in Lagos Island, Lagos Mainland Ibadan, Benin, Port Harcourt, Kano, Abuja, Kaduna, Bauchi, Minna, Maiduguri, Apapa, Enugu, Makurdi, Yola, Dutse, and Sokoto. This helps it to maintain one of the fastest decision making processes in the industry today.

As the Nigerian financial sector grows we are gradually transforming into a financial super-market with subsidiaries covering insurance, pensions fund management, share registration and stock broking. In this regard, we have majority shareholding in Fug Pension Limited, Insurance Brokers, Caranda Management Services Ltd, Pelican Press and Unity Registration Ltd in consolidating this strategic business direction. Eco Bank has equally acquired majority shares in Unity Capital Assurance Plc a leading Insurance Company.

Today the bank is one of the largest employers of labour in Nigeria and contributor in Nigeria and contributor to its gross domestic product (GDP). The bank and its subsidiaries employ about 5,000 people. In the first year of operation the bank grew other balance sheet size 29% profitability also grew by 418% to N2.57 billion which is equivalent to USD 20.43m. The result of the second year of operation also holds great promise.

Services Offered

Eco Bank in line with its mission statement to remain the best in providing financial services and create superior wealth to their shareholders has developed numerous in tech. services and product apart from the traditional product such as saving, current and time deposit accounts. Eco bank provides a lot of other products and services both locally and foreign grouped as follows:

a)   Core Banking Services

i.             Deposit Accounts, Current Account, Saving Account

ii.           Domiciliary Accounts

b)   International Banking

i.             Foreign exchange transaction

ii.           Travelers cheque

iii.         Export banking and finance

c)    Corporate Finance

i.             Equipment leasing

ii.           Loans and advances

iii.         Cash management services

iv.         Import financing / issuance of letter of credit

v.           Consumer, retail and e-banking

d)   Special Banking Services

i.             Issuance of borides, guarantee and indemnities

ii.           Collection of custom duties

iii.         Acceptance of payment of m-tell bills

iv.         Financial advisory services

1.2    Statement of Problem

Banks occupy a critical position in a complete financial system that supply the money and credit need of the economy.

Empirical evidence exist which suggest a positive correlation between real economic growth and bank; asset and between money supply, banks asset and economic development are both financial liberalization and repression school of thought see the development of banking as a critical factor in economic development of developing countries like Nigeria, this fact is evident in the assertion that no other financial institution contributes more significantly to the successful functioning of a nation economy than that of commercial banks.

Apart from promoting the payment mechanism, banks after an efficient mechanisms or channel for the mobilization of savings and their allocation to the problem of most commercial banks is in the area of loan default. Banking distress occurs when a bank experiences liquidity or insolvency resulting in a situation where depositors fear the loss of their deposits and a consequent breakdown of contractual obligation.

1.3    Objective of the Study

Although there are certain basic condition and procedures necessary for consummating transaction between the lender (the bank) and the borrower, none of these conditions completely protest the lender against the risk of default if the borrower became irresponsible and unable to pay.

The primary objective of this research will be to find practical means of minimizing the incidence of default on loans in our banks.

To achieve this, the following secondary objectives have been specified:

a)   To identify causes of loan default on operation of the bank

b)   To recommend measures for reducing cases of loan default

c)    To access the impact of loan default on the profitability of the bank

d)   To review existing literature on problem of loan default

1.4    Significance of the Study

The importance of this study lies in the fact that the performance of the banking industry mirrors the performance of the economy an efficient financial service industry is a pre-requisite for the efficient functioning of the economy.

A failed financial system is an indication of a failed economy. A study of bank default therefore will go a long way in expressing the underlying cause of the distress phenomenon and contribute towards eliminating obstacles to growth and development in Nigeria.

This research work will also seek to enlighten the general public, investors in the banking industry customers of banks, the government and regulatory authorities of the Nigeria banking industry as to the cause and implications of loan default problem.

This research enhance the operation of commercial bank in area of loan and credit management as well as to positively affect the quality of services provided by Eco Bank to the public. The study is significant in that it would serve as a base for future researchers who will like to carry out a research on similar topic.

1.5    Research Questions

The research will seek to find answers to the following research questions:

a)   What are the practical means of minimizing the incidence of loan default in the bank

b)   What are the causes of loan default on the operation of the bank?

c)    Are there measures for reducing cases of loan default?

d)   Is there any impact of loan default on the profitability of the bank

1.6    Scope of the Study

This research will focus on commercial banks with reference to Eco Bank Plc Kaduna. Data for the study will be within the year 2009 to 2011 it is limited to the operation efficiently as regards credit and the management of credit, loan recovery and the impact of loan and suggested solution default to Eco Bank.

In other to attain the objectives of this research, the scope of the study will be defined to embody all relevant aspect of loans and default in banking operations. The different types of loans, frequency, amount involve, measure of loss to banks, causes level of effectiveness and preventive measures.

1.7    Limitation of the Study

The major limitation of this study research risk stem from the difficulty in obtaining classified information on Nigeria Eco Bank in particular consequently all relevance drawn must be seen from this perspective as the sample may not cover the whole industry.

Since ration are to be used in the analysis of data another limiting factor is the shortcoming of the performance of a business concern financial rations do not give out up to date to current position of things in the bank financial statement.

1.8    Definition of Terms

For proper understanding of this research work by the researcher, the researcher have defined some relevant terms used in the research work.

Loan: An agreed amount made available to a customer transferred from a loan account in the customers current account.

Interest: The amount of money charged by the bank for the use of its money by the way of loan.

Liquidity: It is the ability of a bank to meet its current obligation as they fall due, if measures short term debt paying ability.

Distress: Is the process whereby bank is unable to meet its financial obligation that fall due, such as inter-bank indebtedness and deposit funds

Credit Worthiness: This is the assessment of the customer’s ability to pay and test that the credit will be attended to him will not him bad.

Overdraft: This involve allowing the customers current account to be overdrawing by the customer as a type or a loan.

Credit Period: Length of time which credit is allocated or granted.

Collateral: These are security pledge for repayment of loan. It consists of property that can be valued easily and converted to cash.

Advance: These are money level by the bank inform of order, draft on current or by personal loan.

Statement of Account: This is a document showing the position or the statement of the account owns the bank.

Reserve: Amount set aside out of profit other surplus that one designed to meet any liability contingency, commitments in value of assets know to exist at the date of balance sheet.

Monetary policy: The actual management of the money supplied to achieve national economic goal.