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CHAPTER ONE

INTRODUCTION

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 borrowers.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 loan administration. 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?

1.6 HYPOTHESIS

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.

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