EVALUATING THE DETERMINANTS OF BANKSâ€™ LENDING BEHAVIOUR (A CASE STUDY OF SOME SELECTED COMMERCIAL BANKS IN NIGERIA)
1.1 BACKGROUND OF STUDY
In Nigeria today the term bank lending is the most discuss among most of the commercial banks; this lending maybe classified into three categories which are:
1. Short term
3. Long term
According to Adedoyin and Sobodun (1996), stated that “lending is undoubtedly the heart of banking business. Therefore, its administration requires considerable productive skill and a kind of dexterity on the part of the bank management”. These are some of the service that is rendered by most commercial banks to their esteemed customers. One may also say that banks do grant loans and advances to individual, business men and women and also business organisation, even the federal government of Nigeria benefit from such services so as to enable them embark on investment and other development activities as a mean of contribution towards the economic development of Nigeria. Commercial banks are mostly regarded as the most important savings, mobilization and financial resource allocation institutions.
This made them one of the major contributor to the Nigeria economic growth and development; for these commercial banks to be able to perform this role as a contributor to the Nigeria economy, it must be realized that these banks have huge potential, limitation and prospects for continuous movement of financial resources and allocating most of these resources to productive investment. Considering the fact that these income came from a particular source or from the economic policy of Nigeria, the only thing that matters to the commercial banks is giving out loans and advances to their numerous customers knowing full well the three major principles guiding the operations of commercial banks which are namely: profitability, liquidity and solvency.
The major factor to be considered by most commercial banks in giving out loans are the interest rate and the volume of deposit, the significant level of their domestic and foreign investment, banks liquidity ratio, prestige and public awareness to mention a few.
Lending practices came into play during the period of industrial which increases the speed of commercial and their rate of production thereby bringing about the need for large capital outlays for most of their projects. Many leaders of most industries at this period were unable to meet up with the sudden turn up in the financial needs and therefore turn to the banks for a kind of assistance in the form of loan, grant and advances. However, since the proliferation of banks in Nigeria in 1872 with the establishment of the African Banks Corporation (ABC) and later appearance of other banks during the colonial era were able to witness the beginning of banks lending practice in Nigeria. Though, the lending practices of the then colonial banks was not the same as it is now the lending practice those days were biased and discriminatory and could not be said to meet up with the standard of a good lending practice as only the expatriates were given loans and advances. Because of these happenings other indigenous banks were established in Nigeria.
Before the advent of Structural Adjustment Programme (SAP) in the country in 1986, the lending practices of banks were strictly regulated under the close surveillance of the bank’s supervisory bodies. The SAP period brought about some negligence of the stringent rules guiding the operation of the banks. The Bank and Other Financial Act Amendment (BOFIA) 1998, requires banks to report large borrowing to the CBN. The CBN also require that their total value of a loan credit facility or any other liability in respect of a borrower, at any time what so ever, should not be more than 20% of the shareholders funds without any losses in the case of commercial banks. Other banking enactment stipulated that banks loans should be directed to choose sector of the economy in order to promote the economic growth and development of the country. In the complete observation of all these regulations the banks resorted to importance guidelines necessary to avoid failures and to increase maximum profitability in their banks lending and other activities. These generally depend on type of bank, the capital base, the deposit base and density of the deposit, the credit guidelines issued from time to time by the controlling authority and internal policies of the banks since loans and advances accounts for the highest percentage of the total assets of the banks.
1.2 STATEMENT OF PROBLEM
The major problem faced by most commercial bank is the issue of loan recovery. In Nigeria today, loan recovery is the major source of most commercial banks profitability, the growth of the bank, the suitability and lastly the liquidity. Osayameh (1991), supported this view by stressing that” the days of armchair banking are over and that the increasing trend in bad debts and absence of basic business/corporate advisory services in most Nigerian commercial banks, suggest an apparent lack of use of effective lending and credit administration techniques in these banks”
The issue of most commercial bank inability to recover loans and other lending services has been ongoing for a period of time now. Most commercial banks now understand the consequences if these loans are not fully recovered.
This made most of the commercial bank to be stricter and overly defensive in giving out loans and grants. When this loans and grant or advances are not recovered, this can cause high rate of illiquidity, high rate of insolvency and even discomfort in the working condition of banks. This shows that there need for commercial banks and other banks to develop strategies for effective and efficient loan recovery process since this is the major problem faced by most commercial banks in Nigeria.
1.3 AIMS AND OBJECTIVES OF STUDY
This research work has the following as its major objectives:
- To identify the determinants of commercial banks’ lending behaviour.
- To determine the effects of the identified determinants on commercial banks’ lending behaviour.
- To identify probable variation from the initial lending principle and to locate the need for proper monitoring of the lending practice of commercial banks in Nigeria.
- To test and confirm the effectiveness of the determinants of commercial banks’ lending behaviour and how it affects the economic growth and development in Nigeria.
1.4 RESEARCH QUESTIONS
In order to arrive at the following objectives, the research work came up with the following questions
- What are the determinants of commercial banks’ lending behaviour?
- What are the effects of the identified determinants on commercial banks’ lending behaviour?
- What is the probable variation from the initial lending principle and to locate the need for proper monitoring of the lending practice of commercial banks in Nigeria?
- Is the determinants of commercial banks’ lending behaviour and how it affects the economic growth and development in Nigeria effective?
1.5 STATEMENT OF HYPOTHESIS
H0: Interest rate, cash requirement ratio and liquidity ratio does not affect loans and advances
H1: Interest rate, cash requirement ratio and liquidity ratio affects loans and advances
H0: Deposit rate and interest rate have no significant effect on the liquidity rate
H1: Deposit rate and interest rate have significant effect on the liquidity rate.
1.6 SIGNIFICANCE OF STUDY
The essence of this study is to evaluate the loan recovery in commercial banks in Nigeria. The outcome of this study will be of immense importance to students, researchers, the federal government of Nigeria and even the bankers in the development of policy for a better system of service and recovery process for loan, grants and advances. This study will also discuss the effects of the identified determinants on commercial banks’ lending behaviour; finally it will discuss the probable variation from the initial lending principle and to locate the need for proper monitoring of the lending practice of commercial banks in Nigeria.
1.7 JUSTIFICATION OF THE STUDY
This research work will go a long way to cater for the yearning need and aspirations of the people about the need for commercial banks to re-examine their lending behaviour and propositions in the face of economic changes witnessing sporadic explosion of knowledge, technological breakthrough, fast finance services, increasing needs of financial reserves and paramount of all, the speedy pace of economic growth and development
This re-examination is very necessary as the development of the Nigeria economy remains partly dependent upon increasing productivity of commercial banks in particular and the banking sector in general. The sector is expected to contribute in no small way, to the transformation of the Nigerian economy. The role the commercial banks are expected to play in the Nigerian economy therefore makes it imperative to go into this research work. Over the years, emphases are or have been shifted from the core banking services to general commerce and other activities that are not of particular importance to growth and development of the economy; to activities such as housing, agriculture and manufacturing. With this development, it is clear that bulk of the commercial banks credits are in the short term period. This makes them very unsuitable for productive use in agricultural, manufacturing and industrial sectors which are themselves long term in nature. The need to re-structure the lending to suit the need of Nigerian economy cannot be over-emphasized.
1.8 SCOPE OF THE STUDY
The study will only cover evaluating the determinants of banks’ lending behavior in guarantee trust bank, access bank, diamond banks, zenith bank, and first bank plc from the year 1990 to the 2015.
1.9 LIMITATION OF STUDY
FINANCIAL CONSTRAINTS: Financial constraints tend to impede the study ability to get all the materials needed for the study, but the researcher was able to get meaningful information about the topic with the materials available.
TIME CONSTRAINTS: the researcher being a student will be involved in other departmental activities such as seminar presentation, submission of assignment and so on but the research student was able to meet up with the time allocated for the completion of the research work.
1.10 DEFINITION OF TERMS
LOAN: In accordance to the study is the act of allowing a borrower to make a temporal use of funds given to him or her by the commercial bank at its disposal. It is also a more formal arrangement by which a commercial bank agree to lend certain amount of money to a customer usually for a given period.
GRANTS: is simply a kind of subsidy or a gift given to individuals by banks.
DETERMINANT: a factor which decisively affects the nature or outcome of commercial bank lending in accordance to the study
LIQUIDITY: This is the word that banks used to describe their ability to meet up with demand for cash in exchange for deposits.
PROFITABILITY: It is used as index for measuring managerial performance. It means yielding or bringing profit or gain.