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APPRAISAL OF THE PERCEPTION OF REAL ESTATE INVESTORS’ ON THE LENDING REQUIREMENTS OF FINANCIAL INSTITUTIONS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

An investment in real estate development requires a huge sum of money, most at times exceeding six (6) figures as such only a hand full of individuals could venture into this form of investment. This financial insufficiency naturally turns investors to financial institution for possible credit advancement. Mbanefo (2002) observed that the importance of banks in our economy lies in their monopoly of the resources to provide loans for industrial and commercial developments. The provision of this loan however, carries the risk of default in repayment hence the need to take adequate, reliable and appropriate security for the purpose of insulating default risk associated with credit transactions in banks. According to CBN (1995) out of every N1.00 loan granted by Nigerian Banks only 57 kobo were capable of being realized representing 57%.

Lending which may be on short, medium or long-term basis is one of the services that commercial banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general. Commercial banks are the most important savings, mobilization and financial resource allocation institutions.

Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. Therefore, no matter the sources of the generation of income or the economic Policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency. However, commercial banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition to mention a few.

Chodechai(2004) while investigating factors that affect interest rates, degree of lending volume and collateral setting in the loan decision of banks, says:“Banks have to be careful with their pricing decisions as regards to lending as banks cannot charge loan rates that are too low because the revenue from the interest income will not be enough to cover the cost of deposits, general expenses and the loss of revenue from some borrowers that do not pay. Moreover, charging too high loan rates may also create an adverse selection situation and moral hazard problems for the borrowers.” Therefore it is not an easy task for real estate investors’ to secure loan from either commercial bank or mortgage institution to finance their development, according to Agbola(1986) the procurement of necessary finance is sine-qua-non to the acquisition of adequate housing and the most probable source open to investor is through mortgage financing. This research work is set to appraise the perception of real estate investors’ on the lending requirement of commercial banks and mortgage institutions in Abuja metropolis

1.2  STATEMENT OF THE PROBLEM

The huge capital that is been require to kick start most real estate development and the high interest rate which is being use by commercial banks as lending criteria tends to leave most real estate investors’ flat footed. Chodechai(2004) asserted that “banks’ lending decisions are also influenced by the past relationship with the borrowers”. Past relationship according to him can help banks to obtain more private information, leading to a more accurate understanding of the borrower’s business and financial situation. Load demanded by financial institution in recent times is another major source of constraints in real estate development where the rate of inflation has a direct impact on interest rate. However, with respect to this research work, they are various challenges which are been faced by both parties involve, that is the financial institutions involve in real estate financing and the real estate investors, as the real estate investors depends on the financial institution for funds and most of them find it difficult to meet the requirement which is use by this financial institutions.     

1.5 JUSTIFICATION OF THE STUDY

With regards to this research work which would appraise the perceptions of real estate investors towards the lending requirements use by commercial banks and mortgage institutions, this research would analyze particularly the several lending requirements use by the above mentioned financial institutions and determine how they affect real estate investors. As the use of financial leverage by real estate investors can significantly increase the rate of return investors earn on their invested equity. This expected magnification of return often induces investors to partially debt finance even if they have the accumulated wealth to pay all cash for the property.

1.6 AIM AND OBJECTIVES

The aim of this study is to APPRAISAL OF THE PERCEPTION OF REAL ESTATE INVESTORS’ ON THE LENDING REQUIREMENTS OF FINANCIAL INSTITUTIONS IN ABUJA, NIGERIA.

OBJECTIVES

To ascertain the lending requirements of financial institutions.

To examine the views of real estate investors on meeting-up with the lending requirements of financial institutions.

To identify the problems being encountered by real estate investors’ when securing loan from financial institutions and recommend probable solutions.

1.5 RESEARCH QUESTIONS

What are the lending requirementsof financial institutions?

What are the views of real estate investors in meeting the lending requirements of financial institutions?

What are the problems being encountered by real estate investors’ when securing loan from financial institutions?

1.7 SCOPE OF THE STUDY

The scope of this work would be within the purview of Abuja metropolis and    it would focus on the real estate investors’ within the following areas; Garki District, Wuse District and Central Area. This areas where selected due to the high concentration of commercial activities and the location banks within this areas. Attention will be on the lending requirement being used by commercial banks and mortgage institutions and the perception of real estate investors’ on such lending requirements. This research work would cover the period (2007-2011).

1.7 SIGNIFICANCE OF THE STUDY

This study will be of importance to both the financial institutions which are involve in real estate financing and real estate developers’ since it analyses the lending requirement use by commercial banks and mortgage institution. This study will also help real estate investors’ in ascertaining the most appropriate option to source for fund in financing their real estate investment as well as the financial institution in monitoring their lending activities.

1.8 LIMITATION OF THE STUDY

During the course of the study, some difficulties were encountered, they include the following

1. Inadequate data from the selected financial institutions

2. Difficulties in accessing the real estate investors financed by the selected financial institutions

1.9 THE STUDY AREA

Abuja is the capital city of Nigeria. It is located in the Centre of Nigeria, within the Federal Capital Territory (FCT). Abuja is a planned city, and was built mainly in the 1980s. It officially became Nigeria's capital on 12 December 1991, replacing Lagos, which is still the country's most populous city. At the 2006 census, the city of Abuja had a population of 776,298, making it one of the top ten most populous cities in Nigeria. However, Abuja has witnessed a huge influx of people into the city which has led to the emergence of satellite towns such as Karu Urban Area, Suleja Urban Area, Gwagwalada, Lugbe, Kuje and smaller settlements to which the planned city is sprawling towards, the unofficial metropolitan area of Abuja is well over three million. According to Dermographia, the population Abuja's Urban Area as at 2012 is 2,245,000  making it the fourth largest urban area in Nigeria only surpassed by Lagos, Kano and Ibadan while PortHarcourt's urban area which is projected to be almost 2,000,000 is the fifth most populous urban area in Nigeria.

1.9.1 GEOGRAPHICAL DESCRIPTION OF THE AREA

Abuja is located in the Centre of Nigeria and has a land area of 8,000 square Kilometers. It is bounded on the north by Kaduna state, on the west by Niger state, on the east and south-east by Nasarawa state and on the south-west by Kogi state. It falls within latitude 7 45' and 7 39'. One beautiful feature about Abuja which it derives from its central location is that it shares the savannah grass with the north. And the overall effect of this is that Abuja has rich soil for Agriculture and enjoys an equable climate that is neither too hot nor too cold all year round.

The FCT experiences two weather conditions in the year. These are the rainy season which begins around March and runs through October, the dry season (usually characterized by bright sunshine) which begins from October and ends in March. Within these periods, there is a brief period of harmattan occasioned by the north east trade wind, with a resultant dusty haze and intense coldness and dryness. Nevertheless, the high altitude and undulating terrain of the FCT act as a modulating influence which makes the weather always clement.

1.9.2 HISTORICAL DEVELOPMENET OF THE STUDY AREA

The present Suleja was formally known as Abuja, a sparsely populated town with a population of about 500,000 people; it was completely rural with little or no infrastructure until the enactment of Decree No. 6 of 1976. Before the 1976 Decree, a committee ('The Aguda Panel')was commissioned to go round the country in search of a suitable location for the New Federal Capital with two major points of reference; a region that is sparsely populated and that is centrally located. And the region now known as Abuja met these requirements and hence became the recommended location for the New Federal Capital.

The acceptance of the recommendation of the committee, led to the enactment of Decree No. 6, of 1976, the Federal Capital Territory Act, and this became the blueprint for the re-location of the new Federal Capital from Lagos to Abuja. The town originally known as Abuja was later renamed Suleja, while the name “Abuja” was reserved for the capital-to-be. In order to realize the objective of developing Abuja, the new Capital City, into a masterpiece on the African continent, the Federal Government established the Federal Capital Development Authority (FCDA) as the sole agency vested with the responsibility of planning, designing and developing the city.

1.9.3 ADMINISTRATIVE STRUCTURE

Administratively, the Federal Capital is structured into six area council namely, Abuja municipal, kuje, kwali, bwari, Abaji and gwagwalada. Each of the area council is administered as a local government under the general supervision of the FCT minister. The infrastructural planning and development of Abuja is handled by Federal Capital Development Authority (FCDA) with among others control the various development and maintenance units from 1992, when the federal government officially moved to Abuja from Lagos. The development has been so rapid and had to increase its manpower to meet the demand of housing, offices and infrastructural development required in the civil services workforce. During the precolonial period, the various ethnic groups in the area which now forms the FCT were administered as autonomous kingdom in their various locations. Such kingdom had some diverse interethnic, political and economic relations. Such external influences as slave trade, the jihad and colonial administration changed the pattern and structure of this indigenous administration. With the coming of the colonial administration, administrative heads were created for the various units. Under this set up, commonly referred to as the Native Authority (NA) system, emirates were established with emirs and chiefs as heads of the various administration units that were designated as emirates. These units were later broken into districts, Headed by districts heads.

1.9.4 ECONOMIC BASE OF ABUJA

Abuja has a GDP of $ 5.01billion and GDP per capital of $ 3,649 of the 2007 (estimate), it has one of the highest standards of living as compared to other cities in Nigeria. However, today the federal capital city economy is a public sector driven dominated economy which is driven by government patronage and the federal capital territory has attract serious business ranging from international firms to individual service provider.  

1.9.5 LOCATIONAL CHARACTERISTIC

Abuja is located just north of the confluence of Niger and Benue rivers. It is bordered by the state of Niger to the west and north, Kaduna to the northeast, Nassarawa to the east and south and Kogi to the southwest. Lying between latitude 8.25 and 9.20 north of the equator and longitude 6.25 and 7.35 east of Greenwich meridian, Abuja is geographically located in the Centre of the country. It is situated within the savannah region with moderate climatic condition.

Figure 1.1: Map of Nigeria showing FCT

Source: Federal Capital Development Authority (FCDA), 2012

Figure 1.2: Map of FCT showing Abuja

Source: Federal Capital Development Authority (FCDA), 2012

Figure 1.3: Map of Abuja showing Central Area District, Garki District and Wuse District, the study area.

Source: Federal Capital Development Authority (FCDA), 2012.

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