CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Lending which may be on short term,
medium or long term basis is one of the services that money deposit banks
usually render to their customers. In other words, banks do grant loans;
overdrafts and advances to individuals, business organizations as well as
government in order to enable them embark on developmental activities as a
means of aiding their growth in particular or contributing towards the economic
development of a country in general. The customer may be in need of the fund
for the various purposes which may spread through new capital venture bridging
loan, farming, contract jobs, and business expansion among others.
Money deposit banks are the most
important savings mobilization and financial resource allocation institutions.
Consequently, these roles make them important institutions in economic growth
and development. In performing these roles, it may be realized that banks have
the potentials, scope and prospects for mobilizing financial resources and
allocating them to productive investment. Therefore, no matter the sources of
the generation of the income or the economic policies of the country, money
deposit banks would be interested in giving out loans and advances to their
numerous customers bearing in mind, the three principles guiding their
operations which are profitability, liquidity and solvency. However, money
deposit banks’ decision to lend out loans are influenced by a lot of
determinants such as the prevailing interest rate, the volume of deposits, the
level of their domestic and foreign investments, banks’ liquidity ratio,
prestige and recognition to mention a few.
Lending practice in the world could
be traced to the period of industrial revolution which increased the pace of
money deposit and productive activities thereby bringing about the need for
large capital outlays for projects. Many captains of industry at this period
were unable to meet up with the sudden upturn in their financial requirement
and therefore turned to banks for financial assistant. However, the emergence
of banks in Nigeria in 1972 with the establishment of the African Banking
Corporation (ABC) and later appearance of other banks in the scene during the
colonial era witnessed the beginning of banks’ lending in Nigeria. Though, the
lending practice of the then colonial banks were biased and discriminatory and
could not be said to be a good lending practice as only the expatriates were
giving loans and advances. This among other reasons led to the establishment of
indigenous banks in Nigeria.
Prior to the advent of Structural
Adjustment Programme (SAP) in the country in 1986, the lending practices of
banks were strictly regulated under the close surveillance of the banks’
supervisory bodies. The SAP period brought about some relaxation of stringent
rules guiding banking practice. The Banks and Other Financial Institutions
Decree (BOFID) 1991 required banks to report large borrowings to the Central
Bank of Nigeria (CBN). The CBN also requires that the total value of
loan/credit facilities or any other liabilities in respect of a borrower, at
anytime, should not exceed 20% and 50% of the shareholders’ fund unimpaired by
losses in the case of money deposit banks and merchant banks respectively.
Other banking enactment stipulated
that banks’ loan should be directed to preferred sector of the economy in order
to enhance economic growth and development. In full consideration of all these
regulations, the banks resorted to prudential guidelines necessary to avoid
failures and enhance maximum profitability in their lending activities, hence
the need for good lending behaviour. Banks Lending activities generally depend
on type of bank, the capital base, the deposit base and the diversity of the
deposits the credit 13 guidelines issue from time to time from the controlling
authorities and internal policies of the banks since loan and advances account
form the highest percentage of the total assets of the banks.
1.2 STATEMENT OF THE PROBLEM
It is a widely accepted fact that
lending as a service of money deposit banks is of paramount importance to
economic growth and development, since the capital outlays needed for most
developmental projects come majorly from these banks. However, there is
inefficient arrangement with respect to the most appropriate strategy to be
adopted by these banks for recovering loans and stopping the high waves of
default in payments on the part of borrowers.
The most pressing problems that
money deposit banks face in their lending
behaviour are as follows:
i.
What
constitutes a good lending behaviour?
ii.
What
are the needs for security and other requirements before granting loans?
iii.
Does
this practice enhance promptness in the repayment of borrowed funds by the
banks’ customers?
iv.
How
effective are their lending principles and behaviours in the face of financial
distrust and impropriety in the economic system of the country?
v.
What
are other adjustments needed to ensure that the principles and lending
behaviour achieve the needed objectives?
These
problems facing money deposit banks have made it very difficult for the sector
to make its expected contributions to the economy.
It is therefore the intention of this
researcher to delve into the matter to enable him establish the determinants of banks' lending behaviour in
deposit money banks.
1.3 OBJECTIVES OF THE STUDY
This research
work has the following as its major objectives.
1. To
identify the determinants of money deposit banks’ lending behaviour.
2. To
determine the effects of the identified determinants on money deposit banks
lending behaviour.
3. To
identify probable variations from the initial lending principles and to locate
the need for proper monitoring of the lending practice of money deposit banks
in Nigeria.
4. To test
and confirm the effectiveness of the determinants of money deposit banks
lending behaviour and how it affects the economic growth and development in
Nigeria.
1.4 RESEARCH HYPOTHESIS
The researcher formulated and put
forward the following research hypothesis for the successful of this work.
i. H0: Volume of deposits of
money deposit banks does not have a positive effect on their lending behaviour.
H1: Volume of deposits of money deposit
banks have a positive effect on their lending behaviour.
ii. H0:
The level of domestic and foreign investment of Nigerian money deposit banks
has a negative influence on their lending behaviour.
H1: The level of domestic and foreign
investment of Nigerian money deposit banks does not have a negative influence
on their lending behaviour.
1.5 SIGNIFICANCE OF THE STUDY
This research work will go a long way
to cater for the yearning needs and aspirations of the people about the need
for money deposit banks to re-examine their lending behaviour and propositions
in the face of economic changes witnessing sporadic explosion of knowledge,
technological breakthrough, fast financial services, increasing needs of
financial resources and paramount of all, the speedy pace of economic growth
and development.
Ø This
study will enlighten readers on the possibility of bank’s lending as an
imperative aspect of strategic activity involving money deposit banks’ growth
and development.
Ø Also,
this study will be of great beneficial to students and other researcher in such
a way that, when they pick this research work and apply the techniques to their
own work.
1.6 SCOPE OF THE STUDY
In the scope of this study, attempt
is made to focus on the determinants of money deposit banks lending behaviour.
This research work to a reasonable extent limits its scope to the money deposit
banks in Nigeria only. It was also limited in temporal scope to twenty-five
years from 1991-2015. The determinants are numerous; however, we shall limit
our assessment to five of the determinants which are volume of deposits, level
of domestic and foreign investment (investment portfolio), interest rate
(lending rate), cash reserve requirement and liquidity ratio of money deposit
banks in Nigeria.
1.7 HISTORICAL BACKGROUND OF THE CASE STUDY
Money of deposit banking activities started in the years 1892 with the
establishment of the African Banking Corporation ledger depositor and Co. a
shipping company based in Liverpool was instrumental in its formation. This
bank was however, taken over in 1984 by the bank of the British West African
which later became standard bank and now first bank of Nigeria Plc with bank on
observation.
The next was Barclay bank and company (now Union Bank of Nigeria Plc)
was established in 1917. These banks were set up to provide banking services
for the British Business interest and the colonial administration in West
African when the African currency board (Gyasi Central Bank) was set up in
1912, the bank of British became the agent of the currency board.
The National Bank of Nigeria came into existence in 1933 as the first
indigenous bank that was to survive other banks that were established before
that time including the merchant banks, failed as a result of inadequate
capital, fraudulent practice and poor management.
After the Second World War, economic activities and with high export
prices, many banks grow up in the Nigerian economy. Between 1945 and 1947, four
(4) other indigenous bank, Africa Continental Bank (ACB) Agbenmagbe, Nigeria
farmers and deposit money bank were established but only two were able to
survive the African Continental Bank and Agbenmagbe Bank (Now Wema Bank).
Nigeria money deposit banks have been divide into two (2) main
categories namely:- indigenous bank (owned 100% by Nigerians) and mixed banks
(with majority indigenous shareholders at least 60%) Nigerian law does not
allow any foreign bank with a majority foreign interest.
1.8 DEFINITIONS OF TERMS
Money
deposit Banks: Money deposit banks are described as
supermarkets of financial services. They are retail banks that take small
amount of deposits from many customers and operate wide network of branches
because of the nature of their business. Money deposit banks account for the
bulk of total institutionalized savings within the system. The most important
function of money deposit banks are the acceptance of deposits, the provision
of facilities for domestic and foreign remittance and granting of loans and
advances to their customers.
Determinants
of Lending: These are factors which influence the
lending decisions or lending principles of money deposit banks. They include
the volume of deposits of the banks, the preceding interest rate, the legal
reserve requirement of the Central Bank of Nigeria, level of domestic and
foreign investments of money deposit banks, the banks liquidity ratio, the
nature of their businesses, the prestige or goodwill of the banks, CBN monetary
policies and/or guidelines, the general economic position of a nation, the
political and socio-cultural environment in which they operate, the status of
their individual customers, the internal policies of the banks, their capital
bases to mention a few. Some have positive impact and some negative impact on
the bank’s lending behaviour.
Lending
Behaviour: These are laid down principles which guide
the lending practice of banks. These principles could be due to external or
internal factors. These principles act as a blue print to measure the
effectiveness of money deposit banks lending activities.
Short
Term Facilities: These are credits extended to customers that
are expected to be repaid within one year e.g. bridging loan, overdraft and LPO
financing.
Medium
Term Facilities: These are credits extended to customers
and repayable between 3 and 5 years. Examples include term loans and leasing.
Long
Term Facilities: This includes banks loans or debentures
which are repayable between 5 and 10 years or more depending on the life span
of the project it is spent on. The main source of long term funds for business
firms include bond, preferred stock, common stocks and hybrid securities such
as convertible bonds and convertible preferred stocks.
Loans
and Advances: These are monetary facilities advanced by
money deposit banks to their customers who may be individual or corporate.