The major energizer of economic and development
since independence is the financial industry. The government has been
formulating various monetary and fiscal policies commercial banks under the
strict supervision of the Central Bank of Nigeria. To be able to pursue these
policies towards ensuring methodical, economic, industrial and socio-political
development, the need enough fund to support lending to various individual and
corporate customers, so when any of the loan facilities granted become bad or
doubtful debts for commercial banks are not able to fulfill perfectly this
responsibility and this has been the effect of mounting bad debt in book of
commercial bank especially with the recent withdrawal of deposits by government
department and parastatals. Deposits now are expensive, and the banks need money
to back up their lending. This research study is on “effect of bad and doubtful
in commercial bank”. The study was carried out through administration of
questionnaire on both employees and customers of Unity bank. The aim was to
find out the effect and control of bad and doubtful debt in commercial bank.
And interview was also conducted the only cheapest source of loanable fund for
commercial bank is the amount on their bad and doubtful account, this is shown
by the findings effects towards recovering substantial portion of such debt
becomes imperative and compelling on the bank. It also shows the slip shot
manner with each loan facilities granted, and treated by bank employees and
customers alike, additional control of new debts have been identified and
recommended for adoption by banks.
TABLE OF CONTENTS
page- - - - - - - - - - i
Declaration - - - - - - - - - ii
Certification - - - - - - - - - iii
Dedication - - - - - - - - - - iv
Acknowledgement - - - - - - - v
Abstract - - - - - - - - - - vi
of Contents - - - - - - - - vii
Introduction - - - - - - - - 1
Historical background of unity bank - - - - 6
Statement of problem - - - - - - - 9
Aims and objectives of the study - - - - - 10
Hypothesis - - - - - - - - 11
Significance of the study - - - - - - 11
Scope of the study - - - - - - - 12
Definition of terms - - - - - - - 13
2.0 Literature Review
2.1 Introduction - - - - - - - - 15
of Bad and Doubtful Debts - - - - 16
In Commercial Banks - - - - - 26
of Bad Debts - - - - - - - 37
3.0 Research Methodology
3.1 Introduction - - - - - - - - 40
3.2 Sources and Methods of Data Collection - - -41
of data analysis - - - - - 46
3.4 Data analysis
techniques - - - - - 48
4.0 Data Presentation,
Analysis and Finding
Size - - - - - - - 50
presentation - - - - - - 50
4.2.1 Analysis of bank employees responses - - - 51
of bank customer (respondents) - - 64
4.3 Findings - - - - - - - - 71
5.0 Summary, Conclusion and Recommendation
5.1 Summary - - - - - - - - 76
- - - - - - - 8
5.3 Recommendations - - - - - - 79
Bibliography - - - - - - - - 82
I - - - - - - - - - 84
II - - - - - - - - 90
word “bad and doubtful debt” is used in the banking to refer to the portion of
loans, advances and over drafts granted by bank which has proved difficult and
seemingly impossible to recover in full from the respective committed customer.
Such debt do not emerge instantaneously but rather are a gradual result of
“lending errors” by lending officers and subsequent improper administrative
handling of the facilities among other factors.
commercial banks are in the services industry. They are aimed at providing
financial assistance to individuals and corporate bodies without underplaying
the importance of profitability to the shareholders and deposits alike. A bank
is therefore expected to ensure that sufficient liquidity of funds meet cash
demand by its customer at short notices. This in addition to maintaining
sufficient profitability hold through proper and efficient management.
business has two basic source of
Owner’s Capital: That
is equity contributed by shareholders (including retained earnings) which is
essentially used for he purchase of the initial assets of the business and its
initial working capital.
Which refers to external fund required and injected into the business by
management subject to the articles and memoranda of Association. It is here
that the commercial bank play an important role by granting long and short term
loans and advances. It is in the process of granting those loans facilities
that error occurs. Losses resulting from such errors will be the focus of this
the proper use of interest rate banks are able to attract depositors of various
terms. Such depositors include, short term deposits ranging from 7 days to 6
months, long term, deposits current account. This is regarded as special
borrowing by the bank since the bank of any purpose(s) could use any deposits
without recourse to the depositors, and such depositors are only payable on
demand or at any agreed date. It is these depositors, which provide the basis
for banks lending to various customers. This is subject of the reserve ratio
set by the central bank of Nigeria (CBN). The interest rates charged on loans
by banks are usually higher than the rates they pay on deposit and are
determined by the federal government. It was the interest rates chargeable and
payable on loans facilities and deposits
numbers of volume of good loan and advance seriously determine the degree of
profitable commercial banks. Consequently, profitable commercial banks have to
limit or eliminate the number of bad account in their lending portfolio. It is
necessary to note that all funds tied up in bad and doubtful account are not
accountable for further onward lending.
with the advent of CBN prudential guidelines, non performing loans and advances
who interest have been outstanding on these account are not reflected in the
earnings of commercial bank, but charged to interest suspense and charged
income when realized. Bad debt regarded as negative contributors to the
profitability of commercial banks.
banks should be expected to be the most relevant to provide for bad debts
unless it is unavoidable.
dimension however is that critics are quick in pointing out that the high bad
or doubtful debts figures in final accounts of commercial banks could be
realistic. It is also alleged that banks could use such provision to evade tax.
It also demonstrate the incompetence of the lending bankers in the management
of loan able funds on the other hand, it is held that this provisions shows the
level of convenience by the bank officer system. This views was expressed by
the president of Association of Shareholders of Wema Bank, Mr. Akintunde Asaw.
He alleged that some of the official of Wema Bank acted outside the specified
authority and scheduled by irregularly approving loans. He therefore gave the
bank up to 1990 to recover all irregular loans while assuring that those
involved “regular disbursement” of shareholders would be punished.
final accounts is of most commercial banks in Nigeria have provisions for bad
and doubtful debts of various figures while the funds of the level of such
provisions id decreasing in the case of some commercial banks for other, it is
reflected in the comments made by the Chairman of the Board Directors of such
commercial banks. In the case of the Bank of the North provision for bad and
doubtful debts were N6.8 million (1993), N6.7 million (1994) and N213.5 million
(1995). This shows an increasing trend from 1992 to 1995, which may not be
connected with the allegation of the President of shareholders of Wema Bank.
view of the provisions for bad and doubtful debts by banks in the country has
necessitated on in-depth study into the fundamental factors for such losses by
the bank. Consequently, the fundamental objective of this study is to identify
the causes of bad and doubtful debts and controls been employed by banks to
minimize or eliminate such debts. In so doing, we will be able to establish the
efficiency of the control otherwise in the banks lending system. Consequently,
appropriate recommendations could be made for improvement.
1.1 HISTORICAL BACKGROUND OF UNITY BANK
bank was incorporated on 17th September, 1957 with initial share
capital of 12500 dividends into 1200 ordinary shares of N1 each. It started
business in January, 1960 at two branches located in Kano
which operated to customers on 7th and 5th January 1960
bank is wholly owned by the Northern States of Government and Northern Nigeria
Investment Corporation, a subsidiary of New Nigeria Development Company )NNDC).
By 1989, arrangements have been completed to increase the N30 million share
capital of the bank with N22.35 million fully paid up to N100 million. The
growth of the bank from 1960 – 1970 was steady with a loss of 36,925 which was
said to have veen reversed after four (4) year of operations during which
period they there in position to declare dividends.
1970, the issued share capital was N 2.7 million, with 12 branches and staff
compliment of little over 360 employees. Also the total asset of the bank is
increased to N30 million, deposits stood at N26 million loans and advance was
1971 and 1979, the bank opened a total of 31 branches, has branches in all
states capital of the Northern States of the Federation including Federal
Capital territory, Abuja.
Consequently, with the support and patronage of northern states, marketing
boards, Ahmadu Bello University Zaria, a good number of manufacturing and
commercial business, the bank continued to grow since the 1980s. the staff
strength increased to 200 employees, total assets increased to N900 million
while net profit exceeds N10 million. Loan, advances and overdraft were also
said to have witnessed tremendous growth during the period.
bank refers the following services to its customers at both head office and
branch levels varying only according to size of each branch networks:
Personal loans, that is short term
loans for temporary commercial needs or purchase of consumer durables;
Revaluing overdraft facilities to
meet working capital needs to customers;
Project finance which could be for
short/medium and long term loans needs for viable projects
Loans syndication which is done with
Domiciliary account for customer and
acceptance of deposits of the accounts as competitiveness rates.
Finance advise on how best the
customers can handle their financial matters, establishing new projects,
acquisition, capital restructuring, mergers reorganization and equipment
1.2 STATEMENT OF PROBLEM
incessant and huge cash withdrawals by individuals and corporate customers for
commercial banks rapid increase in the credit facilities extended by the banks
to meet the demands created by the Structural Adjustment Programme (SAP) and
recent transfer of accounts by governments parastatals and agencies of Central
Bank of Nigeria (CBN) has created liquidity problem and disparity in deposit
(assets) versus loans and advances (liabilities) ratio for the banks. Most of
the commercial banks in the country are now faced with the adverse situation of
uncalled liabilities (Loans, advances and bad and doubtful accounts) over total
deposits available to them. Consequently, the banks are forced to place a
temporary embargo on further expansion of credit facilities while increasing
the deposits base by intensifying exploitation, recalling some of the debts and
importantly, recover the huge figures in their bad and doubtful debt accounts,
the fundamental problem is therefore that of identifying and effectively
utilizing the most efficient and appropriate measures of recovering the bad
debts and controlling further losses due to errors inherent in the lending
processes and procedures.
1.3 AIMS AND OBJECTIVES OF THE STUDY
aims and objectives of this research study are stated below:
To find out the various causes of
continuously increasing bad and doubtful debts portfolio in commercial banks.
To find out the control measure
employed by the commercial bans to curb the emergences and growth of such
To establish the effectiveness of
otherwise of such control measures so employed by the banks.
To recommend additional control
measure toward helping the banks to drastically reduce the level of losses (bad
H1: There is adequate
security given to the loan/advances.
H0: There is no adequate
security given to the loan/advances.
H1: There is financial
regulation, which guides the management of the bank.
H0: There is no financial
regulation, with which guides the management of the banks.
1.5 SIGNIFICANCE OF THE STUDY
is incontestable that the level of loanable funds to commercial banks to large
extent determines total credit that could be granted to various customers. The
increase in money supply in the Nigerian economy of recent which was held, as
one of the major of the depreciation of the naira, and raising rate of
inflation is traceable to increase in credit facilities extended by financial
intermediaries (especially commercial banks) to customer. This was possible
because of availability of fund to commercial banks through enhanced attractive
interest rates especially the decount of government department and parastatals.
the level of profitability of commercial banks is a function of earnings
accruing from expanded good credits granted to customers. Recent withdrawals of
nearly N4 billion from commercial banks to central bank of Nigeria has
before credit liquidity problems for the banks and made inteisfy the search for
the deposit. So any deposits available to the bank call for judicious
application and adoption of central bank measures, which will ensure good
lending to the preclusion of emergence of bad accounts. Such measures will
certainly be of interest to the banks particularly loan officers and managers.
1.6 SCOPE OF THE STUDY
earlier stated, the research is aimed at finding out causes and control of bad
account by commercial banks and
recommending effective ways of minimizing or curbing the emergence of the
growth of such accounts. For the purpose of the study therefore, one bank is
selected (Bank of the North Ltd).
1.7 DEFINITION OF TERMS
Bad Debt: This
is called an irrevocable debt of a company or organization or debt that cannot
A person in an important position in the bank. He is financial doctor that stand
as intermediary between the deficit and the surplus sector of the economy.
Security of customer as a guarantee for bank loan.
A person or corporate that have some sort of account with the bank, be it current
saving or deposit.
This is a term used to define the avenue which an organization give out
financial assistance to another organization for certain period.
Is an undistributed profit of an organization kept for the unforeseen
Is a chance of drawing of cheque more than what is the current account to a
certain extent. This facility is given by commercial banks to current account
This is the money paid down by the customer for the goods he wants to purchase.