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EFFECT OF BAD AND DOUBTFUL DEBT ON THE LIQUIDITY ASSET OF BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

The 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 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 of capital:

1. Owners 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.

2.   Borrowed 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.

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.

1.2     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 QUESTIONS

1 What is the nature of bad and doubtful debt

2  What is bank liquidity asset

3  W hat  is the effect of bad and doubtful debt on the bank liquidity asset

4   What is the effect of bad and doubtful debt on UBA PLC liquidity asset.

1.4       OBJECTIVES OF THE STUDY

1   To determine the nature of bad and doubtful debt

2   To determine the nature of bank liquidity asset

3   To determine the effect of bad and doubtful debt on banks liquidity asset

4   To determine the effect of bad and doubtful debt on UBA PLC liquidity asset.

1.5   SIGNIFICANCE OF THE STUDY

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

5  To emphasize the importance of bank liquidity asset for the overall well being of the bank.

1.6      STATEMENT OF HYPOTHESES

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

BAD AND DOUBTFUL DEBT: 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.

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