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Introduction
The role of credit facilities in any modern economy can not be over
emphasized. This could be best appreciated when it is realized that the
rate of development of the economy would be showed down without credit,
lack of credit is often the greatest single impediment to the growth and
diversification of most industries (bolt small and large) in Nigeria
first bank 1997. Further more, the availability of credit facilities
influence what is produced and how much of each product is produced
Bank-lending serves as a major avenue for resources allocation. This is
by mobilizing credit from surplus economic unit (Orji, 1997) it allows
for the survival of the debtor of maintaining resources. This helps the
two parties to optimize their position, because creditor obtains returns
for parting with their resources, while debtor makes profit on the
resources borrowed. The function of credit derived from the fact that
individual and firm on their own have very limited resources to carry on
the activities of production, commerce and development of nation
economy lending discourages accumulation of sterile money as available
capital is full utilized (Nwanchukwu, 2008). This is especially
important in a developing economy like Nigeria and particularly in this
period of economic recession and political long Jam where foreign
investors are scared to invest in crises prove environment. The increase
in the involvement of banks in the domestic economy as a result of the
Nigeria enterprise promotion degree of 1973 (popularly known as the
indigenization degree) and the amendment made in 1975 have result in the
emergence of various sector looking into the commercial bank and other
financial intermediaries as the sources of find to finance their project
(Owosho, 2002). A total of N4268.1million credit was granted by
commercial bank at the end of June 1977 as compares to the N242.7million
granted in December 1968 more importantly increasing shares of these
loans and advances have been persistently channel away from less
preferred factor (General commercial and consumption loans) to the
preferred sector of the economy manufacturing, mining, construction and
agriculture (CBN Bullion, 2003). According to credit guidelines a
minimum of 50% of loans and advances of commercial banks should be made
available to the preferred sector (Business time 1988). Lending aids the
credit of money that is in the process of lending commercial banks
credit money; they create a liability in form of demand deposit against
themselves in favour of the debtors (first bank 1997). This money
created by commercial bank to the money supply which help in stimulating
the level of economic activities in various sector of the economy
lending bellows flexibility on payment structure and consequently on the
economy. The lending through bank and other financial institution
involves the collection of liquid funds not currently in use and placing
them through its ending activities at the disposal of persons,
institutions and government in need of liquid funds to elect payment of
different kind (Drucker, 1964). This way, those with enterprise kill and
know-how without personal wealth who find it extremely difficult to
acquire control of production assets will find a saving grace in the use
of credit facilities or lending, therefore, their rave and invaluable
human ability will not waste (Funess, 2005). Agene (2004) notes that
lending can be used as a powerful instrument by monetary authorities to
turn the economy abound depending on what they want or intend to achieve
most fluctuation in the flow of credit can have large consequences on
the price level employment and the rate of economic growth for instance.
In order to reduce the rate at which commercial bank grant loans and
advances to their respective customer, Agene (2004) says that the
central bank have a crucial role to play in achieving macro-economic
objective of full employment potential growth and output and price
stability. On the other hand, this can also be raised to curb excessive
borrowing and hence reduced inflation. From this fore-going, it is
obvious that layman’s view of bank lending is only in term of cash loans
and overdraft granted to a customer is too narrow in view of the
phenomenal develop0ments which as been taken place in the field of
finance, banking, commerce, industry and general economic activities of
modern society.
- Major causes of bank failure
According to Dare (2003), the problem in many banks arises from the
inefficiency, of the board and management or wrong choice of personnel
who rather than being committed to the progress of these institution
where careless, self centered and greedy. In view of the committee on
banking and regulation and supervision practices report of 2004, the
head of the committee chaired by Umoh P.H. reported that decline in
assets quantity where often associated with the depressed condition in
the general economy, external consideration of these were the sole
clause of failure in the small minority of causes. Also, the Nigeria
Deposit Insurance Corporation (NDIC) in its 2001 annual report viewed
that the important subject, particularly the role of the board and
management of some insured banks have played in their depositors bank
failure and what they and their depositor can do to assist the banks to
come out of the failure, for many banks the processes of deterioration
in their financial condition, (especially those already liquidated)
began with poor lending practices. For example, management lack of
attention to the details of the loan function concentration of credited
extended to director, shareholders and related companies opened the door
to credit weaknesses and left many banks venerable to economic changes,
some of these issues which are common to both commercial and merchant
bank are discussed below.
- Capital Inadequacy
Capital inadequacy according to Ebhodaghe (2004), put many financial
institutions in a questionable state. according to him, the principle
function of capital in any bank is to service as this remains a means by
which losses may be absorbed. Capital provides a cushion to withstand
abnormal losses not covered by current earning, this enables the bank to
regain equilibrium and to re-establish a normal pattern, and
unfortunately a good number of the country’s banks are still gross under
capitalized. Adekanye (2006) notes that this situation could partly be
attributed to the fact that many of the banks of the state government
owned banks operate with little capital. This problem of inadequate
capital has been worsened by the huge amount of non-performing loans
which have eroded the banks capital base. Available statistic on banks
capitalization reveal that as at the end of 1992, the 120 banks
operating in the country required an additional capital of N56billion to
support their volume of business as prudential minimum capitals funds
required by banks supervisors. By the end of 1993, the bank required
additional capital fund of about N9.1billion? (Adesuwa, 2001).
- In-depth Management
The quality of management can no doubt make an important difference
between sound and unsound banks. Poor ban management his in the past
resulted in excessive risk taking by some banks. According to Ebhodaghe
(2004), “banks were often at fault through excessive operating expenses,
inadequate administration of loan port/folio an over laying aggressive
growth policy attact deposit, interest rate speculation coupled with
other instances of poor judgment that resulted in stress for the banks.
According to Furness (2006), in-depth management was evident in credit
administration, many of the bank has poor credit policies and in case
where good polices are in place, such policies were never implemented
faithfully. Also, many of the banks management environment were often
characterized by instability of tenure of directors and key management
staff, bound room quarrel, insider abuse, weak internal control system
as well as control venations of well intended statuary regulations. All
these had contributed in no small way to the bank financial failure
(Furness, 2006).
- Frauds and Forgeries
Fraud is one of the causes of losses of many Nigeria banks. According
to Nwachukwu (2008), it is not uncommon to find bank staff concluding
with outsiders to defraud a bark and director concluding with
management. For example, which the management acquires to lend to
unviable companies related to the bank director even when they are aware
that such companies are being used as vehicles to siphon the banks
funds to the private pockets of such director. Oluyemi and Mamman posted
the management mobility to put in place, adequate control has resulted
in series of fraudulent activities by staff and huge loses the wipe out
large part of some bank income (Nwachukwu, 2008). Aggregate terms for
example, the sum of N1, 3777.15 million was involved in commercial bank
fraud and forgeries in 1993 compared with N351.9million in 1992
(N.D.I.C) 1993 this is an increase of about 291%. According to the NDIC
1993 report that aggregate actual expected loss was N241.0million in
1993 compared with N64.8million in 1999, showing an increase of about
272% (percent).
- Lack of adequate supervision and the inexperience syndrome
It has been argued that the management of banks in over regulated
credit environment, like Nigeria encourages arm chain banking according
to Agene (2004) “the failure of the management to determine whether or
not sound policies laid down by management are been carried out” such
lapse can seriously undermine a bank security arrangement as well as
international control systems. According to Adesuwa (2001), bank boards
are supposed to be composed of people with a wide range of experience in
business management, particularly financial matters, similarly the
executive management are supposed to comprise practice men and women of
proven track record in banking, who have distinguished themselves as
managers of human and material resources in banks. Unfortunately, we
observe that those standard are hardly met these days. Adesuwa states
further that these banks directors have tended to be nominee’s of major
shareholders (usually the chairman) and some of these directors are
unable and even unavailing to lean about financial matters. Their roles
are to rubber-stamp what the chairman and management present to the
board. Their major interest lies in what financial and material benefits
the board membership can bestow.
- Credit information and policy
Credit information according to Van Homes (2000) is “the decision
variables that influences the amount of trade credit that is the
investment in debtors” it provides guidelines for the determination of
the need to extend credit to customer or note the amount of credit to
extend the period of the credit term and procedure for the collection of
cash from debtors (Van Homes, 2000).
- Ownership structure/political interference in the bank management
Bank owners and directors (especially in government owned banks) in
the internal management of banks have contributed to the financial
failure in most banks. Akomaye (2006) notes that some shareholders
borrow from their band and this is usually done through direct related
companies for example, in a recently liquidated bank, it was found that
the bank even borrowed from the central bank of Nigeria to fund its
director loans (Akomaye, 2000). Most of the government owned banks were
often treated as political banks. Some of these banks were characterized
by inept management whose tenures of office were often very unstable.
Appointment to the board and key management position were usually based
on criteria other than merit (Adekanye, 2006). In most cases, as the
other state government charged frequently, so also did the board and key
management staffs of the banks one result was inconsistent, policies
due to the fact that what one board did is the succeeding (for political
reason) ever turned with reckless abandon loans and advances to owner,
government and their agencies were often not repaired either were the
loans collaterised (Adekanye, 2006).
- Loan Policy
When lending is based on guess work, credit may be extended to now and
old businesses that are inadequately capitalized, for example
speculative purpose, base on securities that can be easily realized.