Abstract
This study examined the bank lending
policies and financial performance of the banking industry between 2000 and
2010. It specifically determined the effect of lending rate and monetary policy
on the performance of banking industry in Nigeria and analyzed how banking
lending policy affect the performance of Nigeria banking industries. This study
utilized primary data econometrics in a regression where time-series and
quantitative design were combined and estimated. The result confirmed the
lending rate and monetary policy rate has significant and positive effect on
the performance of Nigeria banking industries. The implication of these is that
lending policies are true parameters of measuring bank performance, we
therefore recommend that government should adopt policies that will help the
Nigeria banking industries to improve on their performance and there is need to
strengthen bank lending policies through effective and efficient regulations
and supervisory framework.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table
of Contents vi
Chapter One: Introduction 1
1.1
Background
to the Study 1
1.2
Statement
of Problem 4
1.3
Research
Questions 5
1.4
Objectives
of the Study 5
1.5
Statement
of Hypothesis 6
1.6
Significance
of the Study 7
1.7
Scope
of the Study 8
1.8
Limitations
of the Study
8
1.9
Definition
of Terms 9
Chapter Two: Literature Review 11
2.1
Introduction 11
2.2
Concept
of Banking in Nigeria 12
2.3
Basic
Principles of Bank Lending 15
2.4
The
Impact of Bank Lending on the Nigerian Economy 19
2.5
The
Control of Banks by the Central Bank 22
2.6
Managing
the Banking Port-Folio 25
2.7
Risk
Assessment and Credit Analysis 30
2.8
Sources
of Credit Formation 32
2.9
Financial
Constraint 35
2.10
Major
Financial Statements 36
2.11
Profit
and Loss Account 38
2.12
Funds
Flow Statements and Cash Budget 38
2.13
Cash
Budget 39
Chapter Three: Research Methodology 41
3.1
Introduction 41
3.2
Research
Design 41
3.3
Population
of the Study 41
3.4
Sample
and Sampling Technique 42
3.5
Instrument of
Data Collection 42
3.6
Method
of Data Collection 43
3.7
Method of Data
Analysis 43
Chapter Four: Data Presentation, Analysis and Discussion 46
4.1
Introduction 46
4.2
Data
Presentation and Interpretation 47
4.3
Data
Analysis Hypothesis Testing 56
4.4
Discussion
of Findings 61
Chapter Five: Summary of Findings, Conclusion and Recommendations 62
5.1
Introduction 62
5.2
Summary
of Findings 62
5.3
Conclusion 64
5.4
Recommendations
64
References 67
Appendix I 69
Appendix II 70
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The
financial system of most developing nations have come under stress as a result
of the economic stock of the 1980s. the economic stocks largely manifested
through initiate distortions of sizes of the financial system relative to
non-financial magnitude (Davidson & Gabriel, 2009). Rasheed (2010) states
that Nigeria’s economy saw different interest rate for different sectors in
1970s through the mid-1980s (Regulated Regime 1960 – 1985). The preferential
interest rates were based on the assumption that the market rate, if
universally applied, would exclude some of the priority sectors. Interest rates
were, therefore adjusted periodically with visible hands to promote increase in
the level of investment in the different sectors of the economy. For example, agriculture
and manufacturing sectors were accorded priority and the commercials banks were
directly from the Central Bank of Nigeria to charge a preferential interest
rates (vary from year to year) on all loans and advances to small-scale
industries. Since 1986, the inception of interest rates deregulations, the
government of Nigeria has been pursing a market determined interest rate
region, which does not permit a direct state intervention in the general direct
economy (Adebiyi & Babatope-Obasa, 2004).
Lending
which may be on short medium or longtime basis is one of the services that
deposit money banks do render to their customers. In other words, banks do
grant loans and advance to individuals, business organizations as well as
government in order to enable them embark on investment and developed
activities as a means aiding their growth in particular or contributing towards
the economic development of a country in general (Felicia, 2011).
Banks
are the most important savings, mobilization and financial resource allocation
institutions. Consequently, these roles make an important phenomenon in
economic growth and development. In performing these roles, it must be realized
that banks have potential scope and prospect for mobilizing financial resources
and allocating them to productive investments and return promote their
performance. Therefore, no matter the source of the generation of income or the
economic policies of the country, bank will be interested in giving out loans
and advances to their numerous customers bearing in mind, the three principles
finding their operation which are profitability, liquidity and solvency
(Adolphus, 2011).
However,
banks decisions to lend out are influenced by a low of factors such as the
prevailing interest rate, the volume of deposits, the level of their domestic
and foreign investment banks liquidity ratio, prestige and public recognition
to mention but a few.
Lending
practice in the world could be traced to the period of industrial revolution
which increase the price of commercial and production activities thereby
bringing about the need for large capital outlays for projects. Many managers
of industries were unable to meet up with the financial requirement and thereby
turn to the banks for assistance (Ezirim, 2005). However, the emergence of
banks in Nigeria where Zenith Bank was one of, through the lending after the
establishment of the African Bank Co-operation in 1873 (ABC) during the time
lending practice in Nigeria was biased and based on discrimination and could
not be said to be a good lending practice of the only colonial banks were given
loans and advances. And these leads to the establishment of indigenous banks in
Nigeria, prior to the advance of Structural Adjustment Programme (SAP) in 1986.
The lending practice of banks become strictly regulated under the close
surveillance of the banks supervisory bodies the SAP period brought about
relaxation of the stringent rules finding banking lending.
The
Bank and other Financial Act Amendment (BOFIA) 1998, requires banks to report
large borrowing to the CBN. The CBN requires that their total value of a loan
credit facility or any other liability in respect of a borrower, at anytime,
should not exceed 20% of the shareholders funds union paired by losses in the
case of commercial banks (Felicia, 2011).
1.2 STATEMENT
OF PROBLEM
This
study will attempt to address some specific issues that serve as barriers to
the application of bank lending policies with respect to the following
questions amongst others.
i.
Does
the level of loans granted to customers dependent on the degree of reliance
banks have no the security of customers?
ii.
Does
the high rate of interest on lending scare investors from obtaining loan and
advances from the banks?
iii.
What
constitutes government (CBN) regulations on cash reserve requirement and
liquidity ratio on loans and advances?
iv.
Which
sector do you consider most profitable for your banks to invest in?
1.3 RESEARCH QUESTIONS
The
study shall be guided by the following research questions;
1. What are the lending policy objective
and financial performance in the Nigeria bank industry?
2. Does lending policy enhance financial
performance in Nigeria?
3. What are the issues that are relevant
to the effective maintenance of lending policy in Nigeria?
4. What are the challenges facing the
lending policy and financial performance and how they could be tackled in
Nigeria?
1.4 OBJECTIVES OF THE STUDY
The
objectives of the study are to ensure that banks can perfectly compete locally.
The following are some of the objectives of this study:
1.
To
ascertain the level of reliainance bank place on the security supplied by
customers before granting them loan.
2.
Find
out if the interest rate demanded by the banks restricts the members of
customers intending to borrow from the bank.
3.
To
know the sector that is more profitable for banks to invest in by highlighting
the sector with the highest default.
4.
To
know the extent to which the cash reserve requirement and liquidity ratio of
Nigeria banks affect its lending policies.
5.
To
highlight the policy of maturity pattern of loan and advances so that the
particular area the banks lay emphasis on will be known with ease.
1.5 STATEMENT OF HYPOTHESIS
The
hypotheses for the study are in null and alternative form; where (HO)
null hypothesis implies a rejection of the alternative hypothesis and
alternative hypothesis (HI) implies rejection of the null
hypothesis. And this research was guided by the following hypotheses;
Hypothesis One
HO: The
level of loans granted to customers is not dependent on the degree of reliance
banks have on collateral security supplied by customers.
HI: The
level of loans granted to customers is dependent on the degree of reliance
banks have on collateral security supplied by customers.
Hypothesis Two
HO: The interest rate demanded by banks
does not restrict the number of customers intending to borrow from the bank.
HI: The
interest rate demanded by banks does restrict the number of customers intending
to borrow from the bank.
Hypothesis Three
HO: Cash reserve requirement does not
affect its lending policies in banking industries.
HI: Cash
reserve requirement affect its lending policies in banking industries.
1.6 SIGNIFICANCE
OF THE STUDY
This
research work will attempt to investigate the contributions of bank lending
policies in Nigeria and Zenith Bank of Nigeria Plc was used in this study. The
significance of this study is to examine the extent to which bank lending has
geared up the growth of the Nigeria economy through loan and advances for
investment. The following are some of the importance of the study;
1.
It
helps the surplus sectors of the economy to channel the abundance fund to the
deficit unit.
2.
Lending
policies helps to minimize the rate of bad and doubtful debts in the banking
sector.
3.
The
bank lending policies aids easy repayment of loan i.e. the security deposited
with the bank motivates the borrower for easy payment.
1.7 SCOPE
OF THE STUDY
The
area of importance as far as this research work is concerned is that this
research work will cover bank lending policies generally against the background
of the Central Banks of Nigeria’s monetary policy circulars, and guidelines
issued periodically to ascertain the effectiveness of banks lending policies
with particular references to Zenith Bank of Nigeria Plc. It shall also cover
the extent to which loans and advances over a period that is carefully chosen
to reflect the lending pattern.
Challenges
and implications with the period, for example, they check the efficiency of
banking operations, the maturity pattern of loans and advances, method of
payment and the percentage of bad and doubtful debts by the debtors as recorded
in the schedule of returns to the Central Bank of Nigeria.
1.8 LIMITATIONS OF THE STUDY
This
project work is centered on the banking industry in Nigeria. It is concentrated
on bank lending policy as it aids in the advancement of development of a
country. However, some of the limitations identified in carrying out this
research are as follows:
i. Insufficient books in the library
limited the effort of the researcher in carrying out an in-depth research on
the project work.
ii. The rules and regulations guiding the
case study of the researcher that is, Zenith Bank Plc did not allow the
researcher to carry out personal observation and probably interview bank
lending officers.
iii. Another limitation is that some of the
information or answers given in the questionnaire are incomplete.
1.9 DEFINITION
OF TERMS
1. Maturity Pattern: This is the
time taken for the loan and advances given by the bank to mature.
2. Analysis: A
systematic examination and evaluation of data or information, by breaking it
into its component part to uncover their interrelationship.
3. Bank: An establishment
authorized by the government to accept deposit, pay interest, clear cheques,
make loans, act as an intermediary in financial transactions and provide other
financial services to its customers.
4. Loan: Written or oral agreement
for a temporary transfer of a property usually cash from its owner (the lender)
to a borrower who promises to return it according to the terms of the
agreement, usually with interest for its users.
Note: If the loan
is repayable on demand, it is called demand loan. If payable in equal monthly
payments, it is called installment loan. If payable in lump sum on the loans
maturity, it is called time loan. Loans are characterized into; customer,
commercial and industrial loan, construction and mortgage loans, secured and
unsecured loans.
5. Lending Policies: Standard or
guidelines that the employees must observe in granting or refusing a loan
request.
6. Cash reserve requirement: Minimum
amount of cash or cash equivalent (computed as a percentage of deposits) that
banks and other depository institution are required by law to keep on hand and
which may not be used as lending or investment.
7. Liquidity Ratio: Calculation
of a company available cash and marketable securities agents outstanding debt.
A high ratio indicates a company with a low risk of default and
vise-versa.
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