This study centered on improving the management of loanable funds in
commercial banks. The study was comparative in nature, using Trade Bank
of Nigeria (TBN) and Inland Bank of Nigeria (IBN).
These two banks were chosen because of their accessibility, high rate of mobilization of deposits and loan defaulting.
The major instrument used for data collection included oral
interviews, bank records of daily operations, annual report and
statement of accounts. Four hypothesis were formulated in line with the
statement of the problems. The data obtained was organized and analyzed
with the use of chi square test for goodness of fit, coefficient of
correlation, percentage of loan chart and component bar chart were also
used respectively where necessary.
The study finally revealed if the incidence of loan default was
continuously on the increase/decrease and if such increase/decrease was
more in government owned banks or in privately owned banks. It also saw
if such increase/decrease was higher/lower in relation to deposit
In order to find solution to the problem, it was suggested that banks
should adhere strictly to the principles of good lending, improve on
security valuation, ensure that men of high integrity are employed at
the credit department and emphasize on prudent supervision and control
of loan accounts. Other suggestions were purely focused on advisory and
credit worthiness for effectiveness and proper management.
My greatest appreciation goes first to GOD ALMIGHTY for seeing me through and giving my family and I good health.
My appreciation also goes to my project supervisor, Mr. F.C.
Okechukwu and my Head of Department (HOD), Mr. Wilson U. Ani for all
their encouragement during this strenuous moment of my life. I will not
fail to thank the other lecturers in the department especially Sir Dave
Osuagwu, my academic adviser and indeed the polytechnics who have
collectively made me what I am today.
I am also grateful to the authorities of Trade Bank of Nigeria
limited especially Mr. Frank Edet (The Branch Manager) and his wonderful
secretary. Mr. Steve Okonkwo, Alhaji Mageri Misan and Alhaji Ibrahim
Garba of the IBN, Head office Bauchi, who did not hesistate to give me
all the material and information used in this work and as well, all the
necessary assistance I needed.
My heartful appreciation also goes to Mr. Musa Shaibu of Universal
Trust bank PLC (UTB), whom at different intervals contributed immensely
to this work both morally and otherwise and my dearest uncle Akunne
Anionwu of Central Bank of Nigeria Ibadan who linked me up with the CBN
My special thanks also goes to my pastors, Tom Obiazi and his darling
wife Sarah Obiazi and the entire members of Christ Embassy (BLW)
Onitsha especially Sis. Peace, Bro. Onyeisi, Bro. Evarist Ikeomy every
member of Excel and Diplomatic PCF and others, keep up the good fight.
My wonderful friends are not left out especially Ikechukwu Emodi who
has been there to inspire and encourage me throughout this research
work, Chinwe Okeke, Ifeoma Ogegbu and numerous others that both time and
space cannot permit their individual mention here, but will receive
God’s grace, which is ever present and sufficient for us according to
their contributions in Jesus Name, Amen.
OFOKANSI STELLA, NKEMDILIM
TABLE OF CONTENTS
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objective of the study
1.4 Significance of the study
1.5 Research question
1.7 Scope and limitations
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Commercial Banking in Nigeria: Origin and development
2.1.1 History of Trade Bank Plc
2.1.2 History of Inland Bank
2.2 Commercial banks and economic development
2.3 Banking credit facilities and the Nigerian Economy
2.3.1 The bank loans and advances
- Short term loans
- Medium term loans
2.4 Commercial Bank lending criteria
2.4.1 Basic Principles of lending
22.214.171.124 Safety of advance
126.96.36.199 Suitability of advances
188.8.131.52 Profitability of advances
2.4.2 Factor that influence commercial bank lending policies
184.108.40.206 Capital position of banks
220.127.116.11 The risk and profitability of various types of loan and advances
18.104.22.168 Suitability of deposits
22.214.171.124 The position of the Economy
126.96.36.199 Monetary and Fiscal policies
2.4.3 The commercial bank lending policies
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Source of data
3.2 Study area
3.3 Sample (Specimen Banks)
3.4 Analytical techniques.
CHAPTER FOUR: PRESENTATION AND ANALYSIS
4.1 Test of Hypotheis one
4.2 Test of hypothesis one
4.3 Test of hypothesis one
4.4 Test of hypothesis one
CHAPTER FIVE: SUMMARY OF FINDING, RECOMMENDATION AND CONCLUSION
5.1 Causes of loan default in Commercial bank lending
5.1.1 Bank customers.
- Lack of strict adherence to the principles of good lending
- Poor credit analysis
- Lack of supervision and control of loan account
- Dishonest Bank officials
- Unqualified and conservative managers and lending officers.
- Lending on political grounds.
5.2 Government policies
5.2.1 The Banks
5.2.2 The customers
5.2.3 The economy
5.3 Benefit of impending the management up loanable funds in commercial bank lending.
5.4.1 Adhere strictly to the principles of good lending
5.4.2 Valuation of security, the bank staff
5.4.3 Business advisory unit (credit agency)
5.4.4 Supervision and control of loan account
5.4.5 Training of the managing and lending officers.
5.4.6 Loan syndication
5.4.7 Ensure realistic integrity of the credit departments.
5.4.8 Rescheduling of loan
5.4.9 Privatize commercial banks with substantial government interest.
4.1.1 Relative percentage of loan defaults to total loans and advances for Trade Bank of Nigeria for the period of 1996 – 2000.
4.1.2 Relative percentage of loan defaults to total loans and advances for Inland Bank of Nigeria for the period of 1996 – 2000
4.2 Relative percentage of loan defaults for the specimen banks.
4.3.1 Coefficient determination for loan defaults for the specimen bank.
4.3.2 Coefficient determination for loan default for IBN
4.4.1 Coefficient determination for profits for IBN
4.4.2 Coefficient determination for profits for IBN
4.1.1 Bar Chart of rate of loan default between 1996 – 2000
4.1.2 Bar Chart of Rate of loan default between 1996 – 2000
4.2.1 A compound bar chart of percentage of loan default in the specimen bank.
1.1 BACKGROUND OF THE STUDY
banking institutions perform an enviable role of being an important
source of capital for development. This emanates mainly from the role,
which banking institutions play in mobilizing various deposits and
deploying same towards feasible and viable money yielding ventures.
Banks through the provision of loans and advances, which are the
lifeblood of the business community, occupy a very important position in
the structure of the nations economy. The size, type and level of such
profitable outlets, along with other complimentary factors contribute to
the improvement of the economic well being of the country in which
these banks are located. As a result of this, banking institutions have
been seen as agents of economic growth and perhaps economic development.
These deposits which are loanable funds can only be made available to
banks, if customers make substantial deposits, which may accrue from
loans and advances. This enables the banks to run its day to day
administration cost remain in business and pay satisfactory dividend to
its shareholders. Thus banks have a lending policy to establish the
director and use of funds from shareholders deposits, to control the
composition and size of loans portfolio and determine the general
circumstances under which it is appropriate to make advances.
Such loans and advances, are put into productive use by borrower,
which leads to increased productivity and profits. These borrowers as a
result of the increased profits are able to pay back the principal as
well as the interest on such loans and advances, while the bank in turn
will extend such repayment as loan and advances to other potential
These loans and advances are in a continuous circle. Any default in
repayment will lead to a day in the circle, and reduction in loanble
funds, and will as well affect the economic growth of the economy”.
Thus bank’s play a very crucial role in the economic well being of
the country through the extension of loans and advances. However, full
utilization of such facilities is achieved through proper management of
such loans and advances.
1.2 STATEMENT OF PROBLEM
Lending is the backbone of banking activities, because it generally
provides the larger part of banker’s profit. To ensure efficient
allocation and utilization of the loanable funds, and hence foster
economic development, the banking industry has to be efficient in the
In this period of scarce financial resources, the economy will only
be on the growth path with proper deployment of its loanable funds.
However, the banking industry in Nigeria is saddled with the problem
of loan default. This arise from the inability of the borrowers to
amortize the loans when they are due, thus constituting serious leakage
in the loanable funds and this makes it extremely difficult for other
intending borrowers to avail themselves of the opportunity on enjoying
such funding facilities among other consequences.
A look at the financial report of most banks in Nigeria indicates a
rising incidence of loan default. These default contribute a leakage in
the economy as it denies the economy the utilization of that part of the
funds, which are written off and which would have been recovered and
reinvented. Its also denies the bank the profit, which would have
accrued from the advances. This also cause puncture in the investment
tube of the economy as it rugates the complete recycling of loanable
funds. The incidence of loan default is rightly attributed to the
failure of the borrowers to repay the loans and advances. However such
failure would have been prevented if the lending policies and practices
of the banks were efficient.
Thus the increasing level of loan default can be attributed to the
inability of the lending banks to adequately install lending policies
and practices that will minimize them. The banks that are worst hit by
this problem are government controlled banks, which suffer because of
the poor lending practices.
1.3 OBJECTIVES OF THE STUDY
The study aims at evaluating the management of loanable funds in commercial banks with a view to:
a. Identifying the causes of loan default in banks,
b. Identifying the reason for the increased loan defaults in banks.
c. Examining why the increase in loan default seems to be
more frequent in government owned banks than in privately owned banks.
d. Examining the effects of the default in loanable funds
on commercial banks in particular and on the economy at large.
e. And to make recommendations on possible and functional solutions.
1.4 SIGNIFICANCE OF THE STUDY
From the perspective of the effects of loan default on the banks, and the significance of this study will fully be appreciated.
Incidence of loan default threatens the banks corporate existence.
This study will therefore, be beneficial to the banks as it will help in
reducing loan defaults and ensure greater utilization of the resources
in the economy for the benefit of both the banks and the economy. It
will also help the banks identify their wrong lending policies and
practices and ensure installation of adequate ones.
1.5 RESEARCH QUESTIONS
i. What is responsible for the loan default?
ii. Is management of loan responsible for loan default?
iii. In which type of banks do one experience loan default in Nigeria?
iv. Is there any relationship between venture of loan and loan default?
v. What are the effect(s) of management of loans on the banks and economy in general?
For this study, its an assumption that loanable funds are not
properly managed and the incidence of loan defaults is on the increase
in the banks as a result of factors derived from the above assumptions,
which of course form the main hypothesis.
The following operational hypothesis is to be treated:
1i: Ho: incidence of loan defaults due to mismanagement of loans in commercial banks is continuously increasing.
ii. Hi: incidence of loan default due to mismanagement of loans in commercial banks is not continuously increasing.
Ho: Loan default occurs more in the government controlled banks than privately controlled banks.
Hi: Loan default does not occur more in government controlled banks than in privately controlled banks.
2i Ho: Loan default occurs more in government controlled banks than in privately controlled banks.
ii. Hi: Loan default does not occur more in government controlled banks than in privately controlled banks.
3i. Ho: there is no strong and positive correlation between the volume of loans and loan defaults.
ii. Hi: There is a strong and positive correlation between the volume of loan and loan defaults.
4i. Ho: The level of profitability is not adversely affected by the level of loan default.
ii. Hi: the level of profitability is adversely affected by the level of loan default.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study will be limited to the selected banks, a government
controlled bank and a privately controlled bank, for comparative study,
which will represent the entire banks in Nigeria.
A major limitation of the study will be the question of time and
limited financial resource, which will undauntedly constitute a limiting
or constraining factor.