EFFECT OF BAD AND DOUBTFUL DEBT ON THE LIQUIDITY ASSET OF BANKS IN NIGERIA
The research is an appraisal of the effect of bad and
doubtful debt on the liquidity asset of banks in Nigeria. It analyses the
concept of bad and doubtful debt and highlight the effect of bad and doubtful
debt on the liquidity of banks in Nigeria.
bad and doubtful debt is used in the
banking sector 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 errors by lending officers and subsequent improper administrative handling
of the facilities among other factors.
The 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 depositors 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. A business has two basic source
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.
Funds: 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 research.
BACKGROUND OF THE STUDY
Through 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 respectively.
The 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.
Also, with the advent of CBN
prudential guidelines, non performing loans and advances whose 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 is regarded as negative contributors to the profitability of
commercial banks. So banks should be expected to be the most relevant to
provide for bad debts unless it is unavoidable.
Another 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. AkintundeAsaw. He alleged that
some of the official of Wema Bank acted outside the specified authority and
schedule by irregularly approving loans. He therefore gave the bank up to 1990
to recover all irregular loans while assuring that those involved in irregular
disbursement of loans would be punished.
The final accounts 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 is decreasing in the case of some commercial banks for
other, it is increasing.
The view of the provisions for bad and doubtful debts by banks in the country
has necessitated an in-depth study into the fundamental factors for such losses
by the bank. The research therefore seek to determine the effect of bad and doubtful
debt on the liquidity asset of banks in Nigeria
STATEMENT OF PROBLEM
The granting of loans and advances by banks constitute a
fundamental function aimed at providing funds to customers when needed to
execute projects and implement viable businesses and economic activities
towards the development of the nation .However it is perplexing to note that
volumes of such loans and advances are never recovered due to either poor
administrative process of recovery or bad management of such loans and advances
by the customers. This as a result leads to bad and doubtful debt, a greater percentage
of which are never recovered. The implication is a loss to the bank and a drain
on the banks financial resources. The problem confronting this research
therefore is to determine the effect of bad and doubtful debt on the liquidity
asset of banks in Nigeria with a case study of UBA PLC
1.3 RESEARCH QUESTION
1 What is
the nature of bad and doubtful debt
What is bank liquidity asset
W hat is the effect of bad
and doubtful debt on the bank liquidity asset
What is the effect of bad and doubtful debt on UBA PLC liquidity
1.4 OBJECTIVE OF THE STUDY
1 To determine the nature of bad and doubtful
To determine the nature of bank liquidity asset
To determine the effect of bad and doubtful debt on banks
To determine the effect of bad and doubtful debt on UBA PLC
1.5 SIGNIFICANCE OF THE
1 To project the implication of poor management loans and advances
2 To show the effect of bad and doubtful debt
on banks liquidity asset
3 To profer possible measures to reduce the
volume of bad and doubtful debt in banks
To emphasize the importance of bank liquidity asset for the
overall well being of the bank.
1.6 STATEMENT OF HYPOTHESIS
1 Ho liquidity asset in UBA is low
Hi liquidity asset in UBA is high
2 Ho bad and doubtful debtinUBA is low
Hi bad and doubtful debt in UBA is high
3 Ho the effect of bad and doubtful debt on liquidity asset in UBA is low
Hi the effect of bad and doubtful debt on
liquidity asset in UBA is high.
1.7 SCOPE OF THE STUDY
The study focuses on the appraisal
of the effect of bad and doubtful on the liquidity asset of banks in Nigeria
with a case study of UBA PLC.
1.8 DEFINITION OF TERMS
DOUBTFUL DEBT DEFINED ;Bad and doubtful debt is used in the banking
sector 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.