LOAN DEFAULT IN NIGERIA BANKING INDUSTRY

project3

 

 

ABSTRACT

       This project work was principally embarked upon to give an insight into the cause and effect of loan default in Nigeria Banking industry. In study, loan default is seen as a situation where borrower fails to comply with the terms of a loan specifically the date and time of repayment. The objectives of this project work were to fine out causes of loan default and possible ways of reducing or eliminating the high incidence of loan defaults. The study further aims at examining the lending policies of the central bank particularly the prudential guidelines and how it has been adhered to by the merchant banks. Various related literatures were extensively reviewed to give a better insight into the causes and effect of loan default in the banks. Primary and secondary source of information were used. The study sample population was made up of 10 selected merchant banks located in Lagos and Port Harcourt. The information and data collected were analyzed using tables and the pearson product moment correlation coefficient (r) to measure the degree of relationship or association between the dependant and independent variables. The research finding revealed that merchant banks apply the generally known Principles of the lending in their loan administration. Where the character of the borrower was the most emphasize factor. Also it was discovered that even though merchant banks have their own institution lending policies , that the bank officials and lending personnel give priority attention to government policies in their loan administration. Based on the above finding , we concluded that the adoption of the good credit is a must for the survival of any bank in maintaining high level of profitability and low level of loan default. We therefore recommend as follow: Merchant banks should establish special monitoring and supervision of loan, ensure that control mechanisms adapted are capable of checking problem loan, adopt corporate planning strategies and ensure proper forecast and prediction of business and behavioral element , which cause loan defaults.

 


  CHAPTER ONE

                               INTRODUTION

 

  • 0VERVIEW

Experiences have shown that lending has become a vital function in banking operations because of its direct effect on economic growth and business development . This is been pursued in most countries particularly Nigeria where banks and their lending activities have been usefully integrated into government policy formulation in the national economic development process.

For any lending decision and activity to be worthwhile, there must be enough assurance that it will lead to the banks growth in terms of addition variety of services yielding a good income to the bank. If lending carries greater risks than are considered reasonable it is likely that it could turn a problem at a future date and therefore fail to contribute to the banks resources in terms of quality and profitability.

In lending activity the bank is concerned with the safety of the loan since it represents a bulks of deposits money and a source of income to the bank. The inability of the manager and credit porsonnel to establish special monitoring and supervision of these loans is a major attribute to frequeut cases of bad debts loan defaults. Therefore if becomes important and essential that special control and correction of the causes of loan defalt in our bankks should be carried out immediately a loan proposal is improved by the manager of the bank.

 

 

  • STATEMENT OF THE PROBLEM

The case of loan default have been on the increase over the year, especially among Nigeria merchant banks. This has gone a long way to affect the operational efficiency and profitability of these banks. For instance past records of lending shows that loan default and doubtful debts considered as total loan outstanding, increased from 7.91% in 1977 to 9.34% in 1988 for the banks involved in lending practice.

This shows that the bank’s loan portfolio are predominantly non-performing. This ugly trend puts a big challenge before the managers and lending officers of these banks. It is true that good bank lending assures high profits in meeting its social responsibilities to the benefits of the society while in other ways lending can affect banks negativity.

Despite the fulfillment of the profit objective extent, the rate at which borrowers are defaulting in the loan repayments has reduced the activities of merchant banks. We do not know why cases of loan default in Nigeria merchant banks are still on the increase despite the control measure adopted to curb this problem .Given the phenomenon of loan default, there is therefore the need to study lending patterns of merchant banks with a view to obtaining an insight into how best to reduce the incidence of the loan default.

  • OBJECTIVE OF THE STUDY

The objective of this research study will cover the lending pratice carried out by selected Merchant banks in Nigeria and their problems of loan default. Additional the emphasis of

This research will also be based on the following.

  1. To find out the effect of the deposit on lending decision of merchant banks.
  2. To examine the lending policies of the central banks particularly the prudential guidelines and how it has been adhere to by the merchant banks.
  • To examine the causes of loan defaults and possible ways of reducing or eliminating the high incidence of loan defaults.
  1. Family into the phenomenon so as to improve the knowledge of understanding the subject matter.

 

  • RESEARCH QUESTION

For the purpose of this study, a number of pertinent research question will be addressed. They include:

  1. Why are loan default problems still on the increase in merchant banks despite the existence of professional lending personnel?
  2. What else in addition to loan default can adversely affect merchant banks profitability?
  • Are the controls mechanisms capable enough to check problem of loan default in all its ramifications?
  1. Should the aim of reducing cases of loam default rests solely on the ability and experience of lending personnel?
    • HYPOTHESIS

The hypothesis of this study is going to be state in the directional form after which statistical tests will be carried out. They include:

HA2: There is a positive relationship between cases of loan default and credit worthiness of the borrower.

HA3: There is a direct relationship between merchant banks lending and the level of interest rate.

  • SIGNIFICANCE OF THE STUDY:

The outcome of this research study will add to already available work that has been carried out in bank lending patterns loans default s most especially in merchant banks. Moreover the findings of this study will be in immense benefit to merchant banks lending personnel and other allied institution of the same objective with those of the banking industry. It will also examine the causes of loan default and possible ways of reducing its occurrence.

Subsequently it will contribute to existing knowledge and act as a source of reference to other interest researchers on related topics . This work will therefore aid our corporate financial manager and lending personnel in adopting a sound safe and profitable loan administration pattern.

  • SCOPE OF THE STUDY

The scope of the study covered appraisal of loan default situation and lending patterns of ten (10) merchant banks to the extent that it enhanced the accomplishment of the research purpose of this study.

  • LIMITATIONS OF THE STUDY:

The major limitations of this study were the difficulty that was encountered in soliciting  information from the merchant banks due to the secrecy of certain aspect of their operation.

This little access to some vital information acted as a hindrance to an extensive study.

Other limitations encountered in this study were that of finance and time .This because the respondents of this work more based in Lagos port Harcourt and this required the research to shuttle between both cities. Finally the short period of time for this study was also another constraint to the research work.

  • ORGANISATION OF THE STUDY:

The study is made up of five chapters with particular emphasis contained in each chapter, chapter one, dealt with the introductory aspect of the study and was discussed under the following heading including over view, statement of the problem, purpose of the study research question, hypothesis, significant of the study scope of the study limitation of the study and definition of terms.

Chapter two deals with the literature review ,discussion were made under specific headings related to the research topic subsequently. chapter three embraced the research methodology, where the research design, sampling procedure, questionnaire design, data collection method and statistical tools of analysis were handled.

Additionally chapter four concentrations on the research findings. And finally, chapter five being the last chapter covered discussion, conclusion and recommendations based on the findings of the study.

1.9 DEFINITION OF TERMS

Bank lending :bank lending is the process by which a bank extend credit to borrowers (in vestors) such a manner as would guarantee repayment by unit that is accommodated.

Loan default: loan default is a situation where a borrower fail to comply with the terms of a loan specifically the data and time of payment

merchant Bank: A merchant bank is a bank that concentrate on wholesale banking and carry out specialized service including provision of medium and long –term lending; equipment leasing, project financing, loan,. Syndication, debt factoring, corporate financial services etc

Credit control mechanism: credit control mechanism are the techniques and methods adopted by managers and lending officers through loan supervision and monitoring to ensure that loans given out to bprrowers are are repai at the specified date.

 

 

 

CHAPTER TWO

LITERATURE REVIEW

  • INTRODUTION

Basically every piece of research include a review of relevant study……”The review of literature serves several important purpose. It reveals what has been done previously in the study area place the researcher in a better position to interpret the significance of the study and aids the effectiveness of data analysis Adbelleh and Leveine (1979).

Bearing then above in mind, review of the available literature in the fields of merchant bank lending the loan default was undertaken, the material on these field of study is indeed enormous and close to conformity, however it proves very useful in given the study a sound theoretical base.

The literature as reviewed is presented under the following headings;

  1. Regulation of bank lending in Nigeria
  2. Management of lending

Lending principle and practices

Lending concepts

Concept of loan default (cause and control)

Prudential guideline for license

Evolution and evaluation of licensed banks

Lending rates of Merchant banks

REGULATION OF BANK LENDNG IN NIGERIA

Regulation and control of lending function of banks did not gain due significant until the promulgation of the central bank Act 1958, and the banking Act 1969.

The central bank decree No.24 of 1991 and banks, and other financial institutions decree No.25 of 1991, thereof have repealed these acts with their amendments. These acts specify precise provisions on loans and advances granted banks. Other tools of control are monetary policy circulars, which the central bank issues at the beginning of every year.

In addition to these are the budget and other policy statements, which include the prudential guidelines, exchange control decree 1977, companies and allied matters decree No. i of 1990 and others.

These tools are the creation of the government and its agencies with the administrative responsibly resting on the shoulders of the central bank and where necessary, the federal ministry of fiancé, it would be worthy to state here that that regulatory tools have been able to instill sanity in the lending activities of Nigeria commercial and merchant banks.

  • MANAGEMENT OF LENDING

This is concerned with the disbursement of funds by lending personnel based on the safety and profitability requirement need to be considered before granting loans to prospective borrowers. It also entail the monitoring and supervision of ensure that borrowers are able to comply with their loan repayment schedules.

According to Enarkeyarhe (1993, p. 30)

“Credit have been granted merely to preserve relationships without due regards to capacity to the inability to repay these loans when they fall due”.

Proper credit management means that due attention should be paid to the terms of the credit. In the way individuals and organization are assigned credit limits and this is monitored so that further loans are not given to those that that have not repaid their previous loans. The management of lending therefore occupies a strategic position in loans administration in banks.

 

In appraising loans application, loans officers may be influenced by friendship, business, or family connections.

According to coms(1982.p2 257)

“A bank may be ambitious to build up the bank and be willing to exchange credit for additional deposits in the hope that loans granted will be repaid at maturity. Banking therefore requires the lenders not to sell something, but that they also get something back in return”. Thus it becomes easy to lend money but not always easy to get it back from borrower and white the bank must be prepare to take some risk when lending money, it deals not want not to incur bad debts.

 

From the above ideas it becomes important to state here that a successful bankers is a successful lender expressed in the same sense in the tools used manage lending are credit analysis, budgeting and supervision. Lending also has to be enlightened by a competitive but reasonable policy for interest charges on loans budgeting in management of lending involves projecting sources of funds from depositors and stockholders and the determination of the percentage in various types of loan. Where the bank can best place funds it has available for loans so that there is a combination of maximum profits and minimum losses.

Also supervision involvers the constant monitoring of loan which has been guaranteed to ensure protection for such loans.

The analysis of financial statements is another useful way for evaluating the prospectus of a banking business. Although it will not give an absolute answer to every question of doubts, but could point out the direction in which further enquiries should be made financial analysis as expressed by pandey (1981, p62)

“is the process of identifying the strength and

Weakness of a firm by properly establishing relationship

Between the items on the balance sheet and the profit and loss account”.

After, a bank has considered the pre-requisite factors for credit extension and feels satisfied, he then proceed to release the funds.

However, experience of most bank indicates that loan losses are often the result of a lack of attention to information that develops during the life of the loan, such as changes in business circumstances. Based on this therefore, we can express that lending generally does not only require credit analysis budgeting and supervision but also requires the exercise of judgment and hard thinking geared towards achieving the banks landing objectives.

 

2.3   LENDING, PRINCIPLES AND PRACTICES

In literature all banks landing depend directly or indirectly on the three basis factors namely safety, suitability and profitability. A banker in his lending attitude tries to make sure that the loans is safe.

The demands that a given amount of loans will be granted to a worthy borrower who can repay from reasonably sure sources within the agreed time or a relatively short period of time

Downey (1986, p68) explained this point when h stated as follow:

“First, all of these loans are on the principles of

Safety. This means that the bank manager will generally

lend to a reliable borrower who able to repay from

sources of funds, which are reasonably certain and that this

repayment will be within short time ideally

this loans should be supported by customer depositing

an approved security which the bank accepts as an

insurance against non-repayment by the customer”.

 

In effect the liquidity of the advance and the safety requirement will be satisfactorily unquestionable moreover, in the same vein Holden (1986, p143) identified six canon or principles of good lending which guide bank officials in determining whether or not security is offered.

These canons are:

  1. Purpose of the advance
  2. Amount of the advance
  3. Duration of the advance
  4. Sources of repayment
  5. Profitability of the advance
  6. Security of advance

a.Purpoes of the advance

This is a convenient point for a banker to start within making credit analysis. Here the banker asks the questions; why do you want the loan? What are you going to do with the money? What is the reason for your request?

From these questions, the banker understands the borrower’s intention. Answers on these questions may also shed some light on the management.

The advance must be consistent with the lean policy of the bank. Apart from the issue of policy, the purpose of an advance, which deviates from the traditional and practice of the bankers will only loan proposal unattractive to the bankers.

  1. Amount of advance
  2. The amount of advance is another important point to consider in credit analysis. Consideration in respect of these criteria would usually focus on the sufficiency of the required facility to complete the transaction and the reasonability of the proposed amount in relation to the customers own resources.
  3. Duration of the advance

Under this aspect as a canon of good lending as identified by holden, it is a point to note that three kinds of facilities are usually distinguished in the light of the principle/criteria. They are short term (repayment with 1 year) medium term (repayment between 1 and 5 year)and long-term (repayment after 5 years).

In Nigeria, it is traditional for commercial bank to provide short term financing while merchant bank are expected to arrange medium term financing developmentr banks to finance long-term transactions. The duration of the advance thus determines which banks to approach.

  1. Source of repayment

The repayment factor ask certain question such as when will the loan be repaid?

How will be repaid (whether install monthly or enable) from what source shall the loan be repaid?

Examining these question reveals that repayment is the mainstay of every lending activity. It is a question in lending. Since the aim of every credit analysis is to ensure that there are at least high prospect for repayment.

Repayment source and terms are important consideration that a prudent banker makes before agreeing to extent credit facility to a borrower. The source of repayment must be sure, certain reliable.

  1. Profitability of advance

The profitability of the advance be easily ascertainable to a reasonable extent that the bank could accept such advance proposal. Also alternative sources of advance or other investments are considered and compared to such loan so that the profit from such other investment are below or the same with the advance in question before the loon is given out to the borrower.

  1. Security of advance

Security could also be referred to collateral, and is required to guarantee the repayment of a given loan, unless the lending officer have a lot of confidence in the possible outcome of a given proposal security represent his safely net. The type of security available to a banker are land, stocks and shares guarantees, life polices. gain Philips quoter in Clements (1973:p211 )that:

Credit worth of a borrower which may be defend as the

Amount which he will be able to repay at maturity or to the

Reasonable satisfaction of the lender depends on three factors

-capital, capacity and character”

’’While advance adewunmi (1983, p23) when making a general comment about bank lending practice said:

Banks are uniquely multipurpose lenders satisfying the needs of commerce, industry and agriculture etc for different functional operations. This therefore necessitate some common element found among banks in the principles that give lending rather in actual practices”

 

However Ezrim (1999;p142) identified that ’’ Not withstand the regard for the three bare head of lending which are safety, suitability and   and profitability. Certain other factors are paramount in the evaluation of any give proposal.

These factor are referred and to as the 5cs of credit analysis namely- character, capacity, capital, condition and collateral’’.

Character

The character of the borrower is a paramount factor to consider in any lending decision.       It is a vital factor, which is sometimes considered to be superior to the other c3 of lending.

It is highly subjective to the extent that it rests on ethics, character is said to             encompass other virtues like honesty, reliability, integrity, trust, worthiness, mortality and courage etc. the extent to which a borrower posses these good virtues would determine whether or not a loan decision would be in his favour.

Capacity

Capacity in the foregoing analysis is synonymous with the ability or capability of the customer to generate income sufficient to liquidate or meet the loan/advance repayment agreement. It tells how a business has been in the past and how it will possibly be in the future.

The management of the business that lacks the know how and determination to      succeed, no matter how favourable the environment is would find himself failing before   long. This is why it is necessary to establish the capacity of the borrower before making loan available to him.

 

Capital

Capital is an essential requirement for any business. It is important that bank customers or borrowers do not have mistakes in their own business before going to the bank for loan. This is because customer who have none of his money to lose in the business is likely t o be more careless than one whose capital (probability his life savings) is tied to the       business. Capital is the measure of credit that may be granted to those who have the right to borrow.

Condition

Condition relate to the general trend of business and the the status of a particular industry.

The lending personnel (credit analyst) cannot accurately determine whether the season would be good or bad but at least he can predict.

Some authors have referred to the condition factor as the stability factor. For atypical merchant bank issues affecting its stability, relate to the banking industry and to the banks financial structure.

Collateral

Collateral means security (other than personal security such as guarantee)taken by a bank when it makes advance to a borrowing customer and which the bank is of entitled to claim in the event of default.

 

2.4     LENDING CONCEPT

Despite the fact that literature reveals a lack of consistency adherence as regards the theories of the banking from, attempts made in the development of lending theories have give rise to certain conceptualization as commonly but inappropriately referred to as theories such concepts have evolved from the early day of the banking industry.

Adewunmi (1983,p.27) contends that “Although time concept are not generally of great academic interest, of a preoccupation, their practical influence is enormous. Also the changing circumstance of the lending, legal institutional, monetary, and economic systems have prompted bankers to update but discard these items tested ideas some other recongnized concepts of lending so far developed have followed a loigcal historical order and are identified as follows:

  1. The real bill doctrine
  2. The shiftability theory

iii.     The anticipated income theory

  1. The   liability management   theory

 

  1. THE REAL BILL DOCTRINE

This is also called the productive loan theory or loan theory of credit. The real bill doctrine holds that banks liquidity can be assured as long as it assets are held in the traditional duration of loans that would be liquidated in the normal course of business.

 

According Roussaki (1977, p.98) “Remark that the doctrine emphasizes the direct relationship between the quality of money and the of business as the banking process is held to be a firmly noted business activity.

The doctrine advocates that banks should restrict their asset (lending) to real bill of exchange, the is bill supported by good in transit

 

  1. SHIFTABILITY THEORY

This theory assumes that assets ned not be tried on self liquidating bill but also held in order shiftable open market assets such as government securities.

The shiftability theory gained recognition during 1920s, when bank lending behaviour, especially those of developed countries, started turning away slightly from the prescription of the real bill doctrine. In the word of Adewunmi (1983, P41) “All these changes leds to the assets shiftability”

  1. ANTICIPATED INCOME THEORY

This theory opines that a bank should make long term and non business loan since even a real bill is repaid out of the future earnings of the borrower i.e. out of the anticipated income.

If anticipate of future income is the source of a bank loan repayment, they there is no reason of confine bank lending to the traditional commercial loan. Since what is critically an issue is the borrower’s ability to repay the loan out of future earnings and nothing more

Therefore, Anyawu (1993, p 218) stated that “under this theory, it became acceptable for bank to engage in a much broader range of lending including long terms to business, consumers instalment loans and amortised real estate loans. One striking thing with this theory is its future oriented approach to bank loan and advances. It is known generally as “cash flow approach to lending.

  1. LIABILITY MANAGEMENT

This theory emerged following the launching in 1961 of certificate of deposits (CDs) by the new York money market made bank to introduce a new dimension into bank lending. This therefore establishes the fact that bank should not over mindful of the size and term of their loans.

Adewunmi (1981, p.42) opined that “the doctrine of liability management, thus tries to explain that a good liability management should generate enough liquid resources for the bank to eliminates the constraints of the earlier theory” it should be noted that the CDs are not the only source of acquiring liquidity by a bank though increased in liability. The specification of the CBN as to liquid as to assets is a good example.

2.5 CONCEPT OF LOAN DEFAULT

A plethora of forces operating in the financial environment act in certain ways that affect the lending activity. Such risk that arises in lending include default risk, liquidity risk, interest rate risk and financial risk.

A default risk for instance could occasion a loss of income to the bank, should the borrower fail to repay or unable to meet up with precise date of payments. The problems associated with debt recovery are not too pleasant to many bankers.

Owing to the above ideas, it becomes ideas to establish a definition of loan default. Loan default is an unpleasant situation to a banker (lending personnel) which arises from the failure of the borrower to pay back the loan at the specific date and time of repayment more technically, put loan default is the deficiency that arises when a borrower fails to provide the loan borrower from a lender at the required data he is expected to pay back Credit is usually given by the lender, to the borrower in anticipation of the borrower abiding by the agreement in the transaction, that he will satisfy his matured obligation to the lender. Due to one of quite a number of reasons (which are later discussed). The debtor might fail to meet his obligation thus creating a loan default scenario. However competent bank manager in his lending practice there is not doubt from time to time defaults will arise or the repayment of an advance will become doubtful.

Accordingly Nwachukwu (1988, p53) sated as follows “Average performance ratio measure as provision for bad and doubtful debts, shows that total loss outstanding increased from 6.91% in 1982 to 8.64% in 1983 for the banks involved in lending practice.

Furthermore, the ability of the industry at attaining the objective of safe, sound, and profitable lending decision, requires an understanding of the nature of the lending decision task under conditions of uncertainty. As well as the factors, which may influence the bank loan officer in the process of some decision aids that could enhance the degree of professionalism and thus the judgement accuracy of the bank loan officers. Most loan defaults passes through some stages prior to real loss of money occurring and there are a host of reasons for lending becomes unsatisfactory.

Thus Onyebula (1989, p47) state that: ‘Bank managers must lean the skill of preventing the worst possible situation occurring in order to do so; he must learn to recognize only signs of a potential loan default. It then becomes important for lending personnel to implement the control measures available to prevent frequent cases of loan defaults and problem loans.

  1. 6 CAUSE OF LOAN DEFAULT

The resurgence of problem loan and loan defaults in Nigeria banking industry in the 1980s and 1990s has been attributed to a number of reasons:

  1. Incipient poor analysis and bad judgement on the part of the banker (lending personnel during the time the proposals were first submitted and loans subsequently granted. The result of this has-been summarized by Osayemeh (1986) as “garbage in garbage out” what you put into a lending decision is what you get
  2. Bad management of customers accounts and failure to identify irregular accounts operation
  • Custometic reporting of this analysis is bound to be predicted on falsehood and the result in most cases is lending error translated into loan defaults.
  1. Inadequate credit monitoring. This arises when bankers fail to visit the customer or the project so financed on a regular basis to supervise and monitor the performance and progress. Thus ruining many a good project and breeds conditions of loan defaults.
  2. Misrepresentation of facts and dishonesty on the part of the borrowers.
  3. Excessive lending on security values that is clear evidence of anachronian and unproductive orthodoxy giving rise to loan default scenarios for the bank Ezirim (1998, p.26)
  • Insensitivity to economic and environmental development is another factor that lend support to the incidence of loan defaults. Such factors are granting of credit in times of economic recession or depression without thorough analysis.
  • Matters beyond the control of the customers. Osayemeh (1986, p.19) gave examples of such matters to include.
  1. Occurrence of fire outbreak, burglary and holocaust
  2. Show take off of project, cost over-run inadequate funds, technical equipment deficiencies, raw materials arises and reduced demand are some of the general risk that may give rise to problem loans and loan defaults.

 

 

  1. 7 CREDIT CONTROL TOOLS AVAILABLE TO BANKERS

The mechanism of credit control and administro enation represent the methods adopted by bankers after granting a loan to ensure that repayment of the advances does not fail among the various methods as identified by zeal et al (1984, p.17) include the following:

  1. Regular communication with the borrower
  2. Regular visit and monitoring
  • Regular review of account operations
  1. Regular analysis and re-evaluation of financial performances.
  2. Control through drawdown’s or take downs or disbursement

These control tools highlighted above are briefly discussed turns.

  1. REGULAR COMMUNICATION

It is prudent practice banker to periodically write letters of reminders to the customer during the life of the credit and after the term expire. These letters may not always overstress the life fact that the borrower owes the bank. They can be diplomatically co structured to give the borrower the impression that the bank identifies with his operations problems and success. Regular communication may also take the form of telephone calls and e-mails, depending on the circumstances involved.

  1. REGULAR VISITS AND MONITORING

After approving an advance, loan officers are not expected to sit back in their officers expecting the customer to bring him necessary information about his operations and performance. In the real fact when certain customer notice that the bankers is not sufficiently monitoring their activities, the tendency is for them to act fast either or divert funds or to perpetrate one fraudulent act or the tQ the detriment of the banker. To stop these credit officers must make regular visit to the customers and the project to monitor performance. Such visit may reveal certain problems that requires his attention and subsequent action.

III. REGULAR REVIEW OF ACCOUNTS OPERAIONS

After approving an advance it is wise for the banker to review the accounts of the borrower and his operation. Also the lender has to source effective information on the progress of the borrower. Bankers while watching the operations of customer’s accounts usually take not of the following direction of cheques paid and of the account, nature of payment into the accounts, account turn over, in term of how soon and often larges sums paid in are withdraw, operation discipline of customers in terms of excessive request, poor debts, servicing etc.

  1. REGULAR ANALYIS AND REVIEW OF FINANCIAL PERFORMANCE

Banker need a credit analyst to analyse and review periodically the financial information affecting the borrower activities on a regular basis. Since the bank may not wait till audited accounts are produced at the end of the year. He can call for raw unaudited account of balance sheet and income statement at regular intervals. He could ask for updated cash budget and cash flow projects. These figures would allow the banker to compare the bank account s operation with working capital development in reviewing and analyzing financial statements, bankers are interested in such conditions as:

  1. Variances in respect of production, sales, gross and net profit
  2. Quality of balances sheet items, which will help the banker to determine the financial strength and stability of the firm.
  3. CONTROL THROUGH DRAW DOWNS OR TAKE DOWS OR DISBURSEMENT

This kind of control measure are useful and effective to bankers. In this mode, the lending personnel of a bank disbursement funds to the credit customers in sums as per need and performance.

A useful document in use by banks to enable this is the draw downs documentation form. Using this methods, for instance in a housing loan case it may be established that there will be no release of funds until say, the builders agreement has been signed.

2.8 PRUDENTIAL GUIDELINES FOR LICENSED BANKS

The apex institution in the Nigeria banking system the central bank of Nigeria (CBN) is not silent on the issue of loan asset classification.ina bid to moving banks in the country towards compliance with international banking standard and practices. To this end of banking supervision Department (BSD) issued on November 7, 1990 circular letter No. BSD/DO/23/Vol. 1/11 to all licensed banks and their auditors. This circular and titled “prudential guidelines for licensed banks” introduced new but technical critical critters for recognizing debts performing faculties in the portfolio of banks.

The classifications are shown in the diagram below and explained a well

 

CREDIT PORTFOLIO CAHT

Performing facilities                                     Non-performing facilities

 

 

Sub-standard                          Doubtful                                lost

Source:- CBN Credit policy guidelines 1990

The classification are explained below:

  1. Performing facilities are those where payments of both principal and interest are on schedule.
  2. Non-performing facilities are those where either
  3. Principal or interest is overdue 90 days or more
  4. Interest payment equal 90 days, interest or more have been capitalized rescheduled or rolled into a new loan.
  5. Substandard non-performing facilities are thoe:
  6. On which unpaid principal and/or interest remain outstanding for 91 and 179 days (i.e. more than 90 days but less than 180 days)
  7. In respect of which the customer show
  8. Inadequate cost flow to service debt
  9. Under capitalization or insufficient working capital
  10. Absence of adequate financial information or collateral documentation
  11. Inactive account where withdrawals exceed repayment and hardly cover interest charges.
  12. Doubtful Non performing facilities are those:
  13. On which unpaid and or/and interest remain outstanding for between 180 and360 days and which are not secured by legal title to leased assets or perfect realization collateral in the process of collection or realization
  • In-respect of which the customer shows (a) weakness (b) that full repayment of debts is uncertain (c) that realization collateral will be insufficient to cover the banks exposure.
  1. Lost no performing facilities are those
  2. One which unpaid principal and interest are outstanding for 36o days or more.
  3. Not secured by legal title to leased assets or perfected realization collateral in the coursed of collection or realization
  • In respect of which the customer show weakness in (d) ii and which are considered and are of such little value that continuation as a bankable asset is unrealistic.

The prudential guidelines of November 7, 1990 have been able to introduce some measure of technicality into the concepts of loan defaults in Nigeria banking industry. It is rightly predicted on the just need for accountability and efficiency in the corporate financial management of lending in commercial and merchant banks.

  • EVOLUTION/EVALUATION OF THE ACTIVITIES OF MERCHANT BANKS IN NIGERIA

Evolution: the history of merchant banking in Nigeria date back to 1960 when the first two financial institutions were registered for merchant business. In September 1960, Philip Hill (Nigeria) limited was registered while Nigerian Acceptance Limited (NAL) was registered 1960. The two companies performed identify functions which include:

  1. The financing of commodity export by granting credits to the marketing boards.
  2. The acceptance of large deposits from institution and wealthy individuals
  • The extension of credit in the form of loan and advances and
  1. Acting as issuing houses.

The two companies merged in July 1969 to avoid unnecessary competition and to strength their capital base. At the end of the merger process. Philip Hill absorbed NAL. But the name of the absorbed institution NAL was retained and to the institution because it was more acceptable as a Nigeria company. Following the merger, Nigerian Acceptance limited the only merchant banking system was issued to U.D.T. Bank (Nigeria) limited. Restructured and named Nigerian merchant Bank limited in 1977. In 1974, two American Bank First City Bank of New York and First National Bank of Chicago were licensed and started operating in the same year.

The former pulled out and the later has remained on the scene as international merchant Bank (Nigeria) limited (IMB). In 1975, ICON limited merchant Bankers and chase merchant Bank limited changed its name to continental merchant Bank.

In September 1979, the Nigerian American merchant Bank an affiliate of First National Bank of Boston was licensed to operate as a merchant in Nigeria. It was the first merchant Bank to be sponsored by private Nigeria investors in collaboration with foreign banking interest. There was no other establishment until 1982, when the merchant banking corporation Nigeria limited and the Indo-Nigeria merchant banks operations.

In the same year additional licenses were issued to merchant Bank of Africa (Nigeria) limited, First City Bank limited and ABC merchant Bank limited. The first two started operations in 1983, while ABC merchant Bank was officially opened for business operations in 1984. Both First City merchant Bank and ABC merchant. Are fully owned by Nigerians. In 1986, grind lays merchant bank limited joined the merchant bank industry. By 1987, the number increased to 46 and as at 1996, the number of merchant Bank in the country was reached in a recent study (Asinobi, 1986) the upsurge of merchant banking in the mid 1970s could be accounted for by the indigenousation decree, the oil boom and the third natural development plan. These opened up opportunities which merchant banks did not hesitate to make up. The coming of the merchant banks in the 1980 was as a result of the specialized factor made services of merchant banks, particularly loan syndication, project financing, financial advisory services to accelerate the dace of industrialization.

  • SERVICES OFFERED BY MERCHANT BANK:

Merchant Bank traditionally concentrate on wholesale kind of banking and carry out specialized services which covers the following:

  1. Okereke (1988, p119) identified the services of merchant banks as:
  2. Acceptances
  3. Treasury and deposit taking function
  • Short-term investments
  1. Loans and Advances
  2. Equipment leasing
  3. Corporate finance services including project financing, trade financing

L.O.P. Financing, commodity brokerage issuing house services, investment and financial advisory services.

  • Loan syndication and
  • Foreign exchange services and international banking operations.

Particular emphasis is going to be given to loans and Advance because it is the basis of this research work.

2.92. MERCHANT BANKS LOANS AND ADVANCES:

Merchant banks provide financial assistance by granting short-term and credit facilities to customers.

Credit or lending function simply involves the advancement of monies to customers for profitable use by such customers. It is called financial accommodation, which the bank renders to customer. Credit is the hub of banking operations, by virtue of the structure of their deposits; merchant banks in Nigeria are known to grant short term loans and advances and term lending facilities to their various customers.

Merchant banks in their credit operations also provide the working capital needs of operate customers.

According to Okereke (1988.p.126)

“A crucial reason for the creation of merchant banks considering the gap thesis, is for the provision of medium and long term loans to all relevant sectors of the economy.”

Short-term credit facilities available in the portfolio of merchant banks include bringing finance and secured and unsecured business loans.

A typical customer who needs long term financing may approach a merchant bank for a temporary facility pending the conclusion of the formers arrangement with the same bank or another bank. For instance, if a corporate customer is in the financial stages of long term loan negotiations with a development bank or merchant bank, it can approach a merchant bank for temporary credit to meet the dictates of urgency attending its project.

Apart from bringing financing merchant banks offer short term business loans, and at times, personal loans to considered customers. In some cases these loans secured seared while at other times they are not. Security for the loans may range from the customers depositing an investment certificate with the merchant bank or other financial institutions to landed property, stock and shares and guarantee-unsecured loans are granted to well known and valued customers who are adjudged financially strong and credit worth. In Nigeria, the banking regulation presently discourages banks form unsecured loans.

TERM LENDING:

The lending is basically a tradition of merchant banks: A term loans is an industrial or commercial loan possessing incipient maturity exceeding on year. It is visual to put an upper limit to say, five or seven year to distinguish it from long term loans. It also distinguishes from short term loans that are basically repayable within one year. Banking theory has advance a number of reasons for increased term lending among merchant banks. First it is argued that increased lending capacity and higher operating expenses usually include banks to search out other outlets for loan able funds primarily to boast their income. Term loans are considered one of one of those outlets.

Second term lending is give further impetus in view of the greater confidence increasingly

Accorded to the stability of deposits coupled with assure willingness on the part of bank to relinquish excess liquidity. thirdly the charging attitude of supervisory and examining authorities (such as ABN and NDIC) toward bank lending provides another reason for growth of term loans.

2.9.3 LENDING POLICES OF MERCHANT BANK:

The lending or credit policy of a merchant bank specifics guidelines and blueprints designed to give direction to and provide focus towards the issuance of sound, safe and profitable decisions. in the words of Reed et al (1980,p.242) “it is desirable to have plicate lending to establish the direction and use of funds from stockholders, depositors, and others of control the composition and sized of the loan portfolio, and determine the general circumstances which it is appropriate to make a loan”

the loan plaices provide guideline guidance for lending offices and thereby establish a greater degree of uniformity in the lending practices of a particular merchant bank. No matter the liquidity position of a customary to have more loan request that the resources can accommodate. the officers expected to discriminate in their lending decision in a pure objective manner as specified in the policy. Thus policy guidelines provide the framework to deal loan proposal. Related factors that influenced merchant banks loan policies include the capital position, risk and profitability of various types of loans, stability and exposure experience of bank personnel and credit needs of the area or customer served.

2.10 LENDING BATES OF MERCHANT BANK

In the position of need of al (1980, p211)

“The parlaying of bank loans invoices to helloing of interest rates, the establishments of a compensation internet balance requirement5 and the imposition of loan fees.

Internet rate may either be fixed or variable. As the term implies a fixed or variable one that remains the same during the term of the loan. A variable rate is one that change during the period of loan contract. the most popular variable rate is prime rate which banks change their credit worthy borrower or customers.

merchant banks are required to link their lending rates of their average cost of funds. this requirement was aimed at fostering competition and efficiency in the allocation for resources. a spread of 4% above their average cost of funds subject to a maximum lending rate of 21% and to observe a floor of 13.5% on saving deposits. this requirement was in place until 1992, when ceiling on interest rates were removed. although a maximum spread of 5% is required between their average cost of funds and their lending rates.

generally the factors that should be considered in pricing loans as identified by Ezirim (1998) includes:

  1. the cost funds
  2. the degree of risk in the loans
  • the maturity of the loan
  1. the cost of originating and administering the loans
  2. rates available to the borrower form competitive sources of funds
  3. the overall relationship between the bank and the borrower
  • the rates of return that can be earned or alternative investment Currently the policy on bank lending as specified by central bank of Nigeria is that of deregulation which suggests the fixing of rates by forces of demand and supply. As a result banks and credit customers can agree on any suitable for their purposes.

2.11 SUMMARY

From the literature review, we have been able to see various contributions of different scholars in this field of study and findings have enable us to know that bank lending is basically associated with defaults.

This chapter has adequately x-rayed the dynamic topic under study and this was done looking critically at the regulation of bank lending in Nigeria, management of lending principles and practices, lending concepts, concepts of loan defaults (causes and control) prudential guidelines for licensed banks, evolution and evaluation of the activities of merchant banks in Nigeria and lending rates of merchant banks.

The chapter reveals that the incidence of loan defaults.

In Nigeria merchant Banks is as a result of inadequate monitoring and supervision of loans on part of lending officers of these banks. However some control tools were highlighted in the chapter with these controls measure it is hoped that frequent occurrence of loan defaults in the lending activities of Nigeria Merchant Banks will be reduced.

 

CHAPTER THREE

METHOD OF STUDY

3.0     Introduction

The overall aim of any research is to provide solution to the problem at hand. In an attempt to analyze the source and nature of such problems, various techniques and strategies were employed.

The methods include the research, design, sampling procedure, Questionnaire Data collecting method, and statistical tools of analysis.

They are going to be explained further in this chapter.

3.1 RESEARCH DESIGN

From the nature of this study, it was thought appropriate to use survey research design. The data was therefore gathered from both primary and secondary sources for the purpose of achieving the objectives of this research.

Oral interviews were conducted since the research designs is aimed at bringing the study subjects or respondents into the study so as to obtain the required data. The respondents were mostly bank personnel from the credit department of the merchant banks.

3.2 SAMPLING PROCEDURE

Out of about fifty one merchant banks existing in Nigeria today, ten of them were selected and studied. The critical that was used for the selection of these banks are

  1. Those merchant banks that commenced operations before1992. The reason for choosing 1992 as a base year was for the purpose of ensuring that banks selected have been in existence for a minimum of five years.
  2. A total of about fifty one merchant banks is existing in the country. A simple random sampling of these banks was carried out; it is from this sample that the ten (10) merchant banks were selected. Six were located in Lagos while the remaining four in Port Harcourt.

3.3   QUESTIONNAIRE DESIGN:

The questionnaire is structure into three parts: the first parts is about the personality of the respondent while the second and third are for bank lending and loan defaults respectively.

The questions were a mixture of open-ended multiple choice and dichotomous types which include the Yes/No answer was despised by the research and was limited to those relevant to the scope of the study.

These questionnaires sought answer to questions related to the hypothesis stated in chapter one (1) and will be used.

3.4   DATA COLLECTION METHOD:

The data of this study were collected mainly from two sources namely primary and secondary sources.

The primary data that was employed were the use of relevant questionnaires and personal interviews from some of the respondents. The questionnaire were dispired, pre-tested validated and administered to the various bank that were selected for the study. Multiple choices were provided and respondents were given freedom to choose the answer they consider appropriate.

The secondary data were based little access to personal records of the merchant banks under study. However additional were gathered from journals. Annuals report of the various banks and also central Bank of Nigeria annual publications.

3.5   STATISTICAL TOOLS OF ANALYSIS:

The statistical tools of analysis involve the mathematical and statistical formula used on analyzing and testing of research questions and hypothesis respectively.

To enable conclusion to draw on the research’s findings, some hypothesis were formulated and stated in chapter one. Based on the relationship established in the hypothesis, the choice of statistical troll that was used in analyzing the data is the Pearson product moment correlation coefficient (r) which is a perimetric test. It was used measure the degree of relationship or association between the dependent and independent

Variables. The correlation coefficient varies between

-1 And + 1. it is a summary measure and not a test significance.

Its basic formula is

 

R =  n

 

Where:

r      =      Pearson duct moment correlation coefficient

n      =      Number of observations (sample size)

=      The sum of the squared scores on variable X

2   =      The sum of the squared scores on variable X

=      The sum of the scores on dependent variable   Y

2     =      The sum of the squared scores on variable X

=      The sum of the scores on variable X

=      Greek letter for summation.

Additionally to test for the existence of significance between the dependent and independent variable i.e. the significance of ‘r’, the t-test was used since the number of observation was less than 50

The formula for the t-test is symbolized mathematically by

T = r         n-2

 

  • r2

 

With n-2 degree of freedom

Where,

t         = t-test

r         = correlation coefficient calculated

n       = sample size

SUMMARY.

This chapter has specified the procedure and tools with which the study was carried out it focused on the research design.

Sampling procedure, questionnaire design data collection method and statistical tools of analysis.

All these are fundamental to the conduct of the research and interpretation of results.

 

 

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS:

4.0      Introduction:

  The purpose of this chapter is to analyze the data collected through primary and secondary sources of data collection. This is to enable the researcher to provide answer to the research questions, as well as to test the hypothesis stated in chapter one. The need for this analysis is to enable us establish and explain perfectly, bank lending and loan of faults in the banking industry particularly among Nigeria method merchant banks. The chapter therefore gives framework upon discussion, conclusion and recommendations are based.

The analysis made is going to be given under the following headings:

  1. Presentation of data.
  2. Questionnaire analysis and interpretation
  3. Testing of hypothesis using statistical tools.

4.1      PRESENTATION OF DATA

  In order to find out whether the annual deposits of merchant banks have any effect on the lending patter or decision of these banks, we examined a five years record of the total deposits and total loans and advances of the ten merchant banks taken as a study for this research work.

4.2       QUESTIONNAIRE ANALYSIS AND INTERPRETATION

    In this study, ten merchant banks are selected and visited in Lagos and Port Harcourt. A total of 40 sets of questionnaire were administered to the ten merchant banks. Four questionnaires were distributed to each of the banks.

The questionnaires were administered to the managers and lending officers of the merchant banks that was studied and the exact numbers of questionnaires distributed were returned back to the researcher. The analyses of questionnaire distributed and received are given in the table below.

    As earlier stated the questionnaire was designed only for the bank officials with three sections in duding personality profile, bank lending, and loan defaults respectively.

To address the fundamental point’s races in research questions, the questions were in duded in the questionnaire. The analysis of the reactions and answer form the respondents are presented in the following tables.

Question No. 18 simply asked, why are loan default problem still on the increase deposit the existence of professional lending personnel? The answers from respondents are show in the table below.

 

 

TABLE 4.2.1

LOAN DEFAULT AND EXISTENCE OF PROFESSIONAL LENDING PERSONNEL

INDICATEION NO OF RESPONDENTS PERCENTAGE
(a). Improper supervision and monitoring of loans. 14 35
(a) Excessive lending to friends and relatives without and consideration on collateral 9 22.5
(b). Insensitivity to economic

trends

11 27.5
(d) Poor analysis of financial statement  

6

 

15

Total 40 100

 

SOURCE; Research question No. 1

Out of the 40 respondents asked 14 representing about 35% were of the opinion that the reason for increased problems of loan defaults is improper supervision and monitoring of loans. While 9 representing 22.5% say it is because of excessive lending to friends and relative ness without any consideration on collateral security to economic trends. Finally 6 respondents representing 15% agreed that it is as a result of poor analysis of financial statements.

We can conclude based on the respondents response that the reason why there is loan default problems even with the presence of professional lending personnel is because of improper supervision and monitoring of loans.

This has addressed our question No. 1

Question No. 20 was directed at the respondents with the view of knowing what else in addition to loan default can adversely affect their bank’s profitability?

The responds to this question are show in the table below:

 

 

 

TABLE 4.2.2

LOAN DEFAULT AND OTHER FACTORS THAT AFFECTS

BANKS PROFITABILITY:

NO OF RESPONDENTS PERCENTAGE%
(a)Bad debt 20 50
(b)Illiquidity 8 20
(c) Problem loans 12 30
           TOTAL 40 100

SOURCE: Research question No. 2

In fact 20 out of 40 respondents representing 50% opined that bad debt is another factor that can adversely affect their banks profitability. While 8 respondents representing 20% believed it is illiquidity (inability to convert assets to cash) that can also affect their bank is profitability. The remaining 12 respondent representing 30% agreed that problem loans could also adversely affect their bank is profitability.

From the above analysis we can deduce that it is debts that can adversely affect the merchant banks profitability in addition to loan default; thus our research question No.2 has been answer. Question No. 21 simply asked the respondent whether the control mechanisms adopted by their bank is capable enough to check problems of loan default in all its ramifications the responses to this question are given in the following table below:

TABLE 4.2.3

CONTROL MECHANISM AND CAPABILITY TO CHECH PROBLEMS OF LOAN DEFAULT

INDICATION NO.

RESPONDENTS

PERCENTAGE
(a)Yes 22 55
(b)No 18 45
Total 40 100

SOURCE: Research question No.3

The above table shows that shows that out of the 40 respondents, the questionnaires were administered to, 22 presenting 55 percentage agree that the control mechanism adopted by their bank is capable of checking problems of loan default in all its ramification while 18 representing 45 percent did not agree to the question asked. From the response we could confirm that the control mechanism adopted by the banks are capable enough to check problems of loan default in all its complexities. But these control mechanism are subjected to failure in most cases. This is why thee difference in percentage between those that agreed and those that do not is just 5percent.

This response has addressed our research question N0o. 3 question no 23 was tailored towards knowing whether the aim of reducing case of loan default should rest solely on the ability and experience of lending personnel?

 

The responses given by the respondent are shown in the table below:

TABLE 4.2.4

AIM OF REDUCING CASES OF LOAN DEFAULT AND EXPERIENCE OF LENDING PERSONNEL

INDICATION NO. OF RESPONDENTS PERCENTAGE
(a)Yes 26 65
(b)No 14 35
     TOTAL 40 100

 

SOURCE: Research question No. 4

From the table above, 26 respondents representing 65percentage of the entire sample agree that the aim of reducing case of loan default should rest solely on the ability and experience of lending personnel, while 14 respondents representing 35 percent did not agree. The analysis has thus show that the experience of the lending personnel could determined the effective control mechanism to be adopted to reduce case of loan default this has addressed our research question N. 4. The questionnaires provided data for the testing of the second and third hypothesis respectively. Question 19 and 22 were designed to provide data for testing the second hypothesis in this question the respondents were asked to what extend does loan defa ult problem arise from a creditworthy be borrows.

They extent were classified into three groups, such as large extent, moderate extent, and height extent. These groups were further, assigned some ratings. Large extent was assigned 75 percent, moderate extent was assigned 50 percent and sight extent was assigned 25 percent. It should be noted that these ratings were at interval, those who chose large extent were percent to chose between 57-75 percent, moderate extent between 26-50 percent and slight extent between 1-25percent.

TABLE 4.2.5 and 4.2.6 provides the data obtained from respondents, while table 4.2.7 provided the same date based on their ratings. It is from this table of ratings that the computation of the Pearson product moment correlation coefficient (r) for the scond hypothesis was obtained.

These tables are presented below:

TABLE 4.2.5

EXTENT TO WHICH CREDIT WORTHY BORROWER COULD HAVE CASE OF LOAN DEFAULT.

S/NO

 

1

2

3

 

4

5

6

7

8

9

10

Name of bank

 

NAL merchant bank

International merchant bank

Nigeria-American merchant bank

First city merchant bank

ABC merchant bank

Peak merchant bank

Nigeria merchant bank

Triumph merchant bank

Fidelity merchant bank

Continental merchant bank

Large extent

 

2

1

 

 

 

 

 

 

1

 

2

Moderate extent

2

3

4

 

3

3

3

2

2

2

2

Slight extent

 

 

 

 

1

1

1

2

1

2

Total

 

4

4

4

 

4

4

4

4

4

4

4

T OTAL RESPONDENTS PERCETAGE (%) 65% 65% 20% 100%

 

SOURCE: Research from N.22 of questionnaires distribution.

 

 

 

 

TABLE 4.2.6

EXTENTS TO WHICH LOAN DEFAULT PROBLEM ARISE FROM CREDIT WOETHY BORROWERS:

S/NO.

 

1

2

 

3

 

4

5

6

7

8

9

10

Name of banks

 

NAL merchant bank

International merchant bank

Nigeria American merchant bank

First city merchant bank

ABC merchant bank

Peak merchant bank

Nigeria merchant bank

Triumph merchant bank

Fidelity merchant bank

Continental merchant bank

TOTAL

RESPONDENTS

PERCENTAGE (%)

Large extent

 

1

2

 

2

 

3

1

2

1

 

1

1

 

14

 

35%

Moderate extent

3

1

 

2

 

1

2

2

 

2

2

2

 

16

 

40%

Slight extent

 

 

1

 

 

 

 

1

 

3

2

2

1

 

10

 

25%

Total

 

4

4

 

4

 

4

4

4

4

4

4

4

 

40

 

100%

SOURCE: Responses from No. of questionnaires distribute

TABLE 4.2.7

CREDIT WORTHINESS OF BORROWERS AND CASE OF LOAN DEFAULT:

 

RESPONDENTS CREDITWORTHINESS OF BORROWERS CASES OF LOAN DEFAULT      
  X Y X2 Y2 XY
1 75 75 5265 5625 5625
2 75 50 5652 2500 3750
3 50 50 2500 2500 2500
4 50 50 2500 2500 2500
5 75 75 565 5625 5625
6 50 75 2500 5625 3750
7 50 50 2500 2500 2500
8 50 25 2500 625 1250
9 50 75 2500 5625 3750
10 50 75 2500 5625 3750
11 50 50 2500 2500 2500
12 50 75 2500 2500 2500
13 50 75 2500 5625 3750
14 50 75 2500 5625 3750
15 50 75 2500 5625 3750
16 50 50 625 2500 3750
17 50 75 2500 5625 3750
18 50 50 2500 2500 2500
19 50 50 2500 2500 2500
20 50 25 625 625 625
21 50 75 2500 2500 3750
22 50 50 2500 2500 3750
23 50 50 2500 2500 2500
24 50 75 625 625 1250
25 50 25 2500 2500 3750
26 50 25 2500 2500 1250
27 25 25 625 625 625
28 25 25 625 625 625
29 75 50 5625 5625 3750
30 50 50 2500 2500 2500
31 50 25 2500 625 1250
32 25 25 625 625 625
33 50 75 2500 2500 3750
34 50 50 2500 2500 2500
35 25 25 625 625 625
36 25 25 625 625 625
37 75 75 5625 5625 5625
38 75 50 5625 5625 3750
39 50 50 2500 2500 2500
40 50 25 2500 2500 1250
TOTAL 1,950 2,100 103,750 125,00 108,125

SOURCE: derived from table 4.2.5 and table 4.2.6

For the third hypothesis question No.8 and were designed to providing support data for testing it. The respondents were simply asked. To what extent does the level of interest rate determines the leading pattern of their bank? They were also asked; to what extent does the lending pattern of their bank depends on prevailing interest rate. The extents were classified into large, moderate and slight extents, these groups were also assigned 75-percent, 50 percent and 25percent for large extent, moderate and slight extent respectively.

In this way, the analysis is a replica of the method used for establishing data for the second hypothesis

Table 4.2.8 and 4.2.9 provides the data obtained from respondents, while table 4.3.10 supplied data obtained from respondents based on their ratings. It is from this table of ratings that the computation of the peak moment correlation coefficient for the third hypothesis was established.

The response from the respondents are given in the following tables:

Table 4.2.8

EXTENT TO WHICH LEVEL OF INTEREST RATE DETERMINES LENDING

PATTERN OF MERCHANT BANK

S/NO Name of bank Large extent Moderate extent Slight extent Total
1 NAL merchant bank 3 1 4
2 International merchant bank (IMB) 3 1 4
3 Nigeriac American merchant bank 2 1 1 4
4 First city merchant bank 2 2 4
5 ABC merchant bank 1 2 1 4
6 Peak merchant bank 3 1 4
7 Nigerian merchant bank 2 2 4
8 Triumph merchant bank 1 2 1 4
9 Fidelity merchant bank 1 3 4
10 Continental merchant bank 1 3 4
TOTAL RESPONDENT 16 16 8 40
PERCENTAGE % 40% 40% 20% 100%

 

SOURCE: Response from No. 8 questionnaire distributed

TABLE 4.2.9

EXTENT TO WHICH LENDING PATTERN OF MERCHANT BANKS DEPENDS ON PREVAILING RATE:

N/SO Name of banks Large extent Moderate extent SLIGHT EXTENT TOTAL
1 NAL merchant bank 2 2 4
2 International merchant bank 3 1 4
3 Nigeria American merchant bank 2 2 4
4 First city merchant Bank 1 2 1 4
5 ABC merchant Bank 1 2 1 4
6 Peak Merchant Bank 3 1 4
7 Nigeria Merchant Bank 2 2 4
8 Triumph Merchant Bank 1 2 1 4
9 Fidelity Merchant Bank 1 3 4
10 Continental Merchant Bank 1 3 4
TOTAL RESPONDENT 16 16 8 40
PERCENTAGE (%) 40% 40% 20% 100%

 

SOURCE: Response from No. 8 of Questionnaire distrusted.

TABLE 4.2.10

LEVEL OF INTEREST RATE AND LENDING PATTERN OF MERCHANT BANK

RESPONDENTS LEVELS OF INTEREST RATE LENDING PATTERN OF MERCHANT BANK
X Y X2 Y2 XY
1 75 75 5625 5625 5625
2 75 75 5625 5625 5625
3 75 50 2500 2500 3750
4 50 50 2500 2500 2500
5 75 75 5625 5625 5625
6 75 75 5625 5625 5625
7 75 75 5625 5625 5625
8 50 50 2500 2500 2500
9 75 50 5625 2500 3750
10 75 50 5625 2500 3750
11 50 25 2500 625 1250
12 25 25 625 625 625
13 75 75 5625 5625 5625
14 75 50 5625 2500 3750
15 50 50 2500 2500 2500
16 50 25 2500 625 1250
17 75 75 5625 5625 5625
18 50 75 2500 5625 3750
19 50 50 2500 2500 2500
20 25 25 625 625 625
21 75 75 5625 5625 5625
22 75 75 5625 5625 5625
23 75 70 5625 2500 2500
24 50 50 2500 2500 2500
25 50 75 2500 5625 3750
26 50 75 625 2500 3750
27 25 75 625 5625 1857
28 25 50 625 2500 1250
29 75 50 5625 2500 3750
30 50 50 2500 2500 2500
31 50 25 2500 625 1250
32 25 625 625 625 625
33 50 75 2500 5625 3750
34 25 25 625 5625 1875
35 25 25 625 625 625
36 25 75 625 625 625
37 75 75 5625 5625 5625
38 50 75 2500 5625 3750
39 50 75 2500 5625 3750
40 50 25 2500 625 1250
TOTAL 2,200 2,225 135,000 139,375 129,375

SOURCE: Derived from table 4.2.8 and table 4.2.9

4.3 STATEMENT OF HYPOTHESIS ONE

       HO2: Null Hypothesis

HA2: Alternative Hypothesis

HO2: There is no positive relationship between cases of loan default and the creditworthiness of the borrower.

HA2: there is a positive relationship between cases of loan default and the creditworthiness of the borrower we tested this hypothesis by the use of Pearson product moment correlation coefficient ® which is symbolized mathematically by:

 

R=n (EXY)- (EX) (EY)

                    (nEX2) – (EX)2 ][n (EY2) – (EY)2]

 

Where:

                            r= Pearson product moment correlation coefficient.

  1. = Total number of Respondents

=      Respondent scores on independent variable X

X2                =      Respondent squared scores on variable X

Y            =      Respondent scores on dependent variable Y

Y2           =      Respondent squared scores on variable Y

XY          =      Respondent squared scored on variable X and Y

=      Greek letter for summation.

We use the figures in table 4.2.7 and substitute in the above statistical formula as follows:

N              =      40

=      1,950

X2                =      103,750

Y            =      2,100

XY          =      108,125

Y2           =      125 000

we therefore inset the figures in the formula:

 

R=40 (108125) – (1950)(2100)

     [ 4 (103750) – (1950)2 ] [40 (125,000) –(2100)2

 

=40 (4, 325, 00-4, 095, 00)

     [ (4,150,000-3,802,500) ][ (5,000,000-4410,000) ]

 

 

=    230,000

       [ (347, 000) (590,000) ]

 

 

=     230,000

       2.05025×10

 

 

r=  230,000

               452,796.864

 

r =   0.508. Since Pearson, product moment correlation coefficient varies between- 1 and +1, and the calculated “r” of 0.508 falls within this rage. It shows that thee exist a positive relationship between cases of loan default and the creditworthiness of the borrower.

 

DECISION RULE:  

The decision rule state that if the computed coefficient of correlation (r) falls within the region of 1- and +1, the Alternative hypothesis must be accepted, otherwise reject and accept the Null Hypothesis.

Based on this test, it was seen that the calculated “r” of 0508 falls within the region of -1 and +1 being the extent to which the Pearson product moment correlation coefficient varies. Thus, we can safely reject the Null Hypothesis and accept the Alternative Hypothesis, which that. There is a positive relationship between cases of loan default and the creditworthiness of the borrower.

4.4   STATEEMNT OF HYPOTHESIS TWO

         HO3: Null Hypothesis

HA3:  Alternative Hypothesis

HO3: There is no direct relation between merchant banks lending and the level of interest rate.

HA3: There is a direct relationship between merchant banks lending and the level of interest rate.

This hypothesis was tested by using Pearson product correlation coefficient (r) it is represented by the mathematical formula below:

 

R =n (EXY) – (EX) (EY)

[n (EX) – (EX)2 ][n (EY2) –(EY)2]

Where

R      =      Pearson product moment correlation coefficient

N      =      Total Number of Respondents

=      Respondent score on independent variable X

2   =      Respondents squared scores on variable X

=      Respondent score on dependent variable Y

2   =      Respondent squared scores on variable Y

=      The sum of the scores on variable X and Y

=      Greek letter for summation

We use the figure in table 4.2.10 and substitute in the above formula as follows:

N      =      40

=      2200

=      135,000

=      139,375

Y   =      129,375

We therefore inset the number in the position of their corresponding variables

R = 40(129375) – (2200) (2225)

40(135000) – (2200)2][40(139,375) – (2225)

= (5175, 000 – 4,895,000)

(5,400,000 -4,840,000)][ (5,575,500 – 4, 950, 625)

= 280,000

[ (560,000) (624,875)]

 

= 280,000

3.4993X10”

= 280,000

591,548,815

r = 0.473

The correlation coefficient ‘’r ‘’ shows that there exist a positive or direct relationship between merchant bank lending and the level of interest rate.

DECISION RULE:

The decision rule states that if the calculation coefficient (r) falls within the region of – 1 and +1.

Therefore, we can then reject the Null hypothesis and accept the alternative hypothesis which states that ‘’ there is a direct relationship between merchant banks and level of interest rate’’

 

 

 

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATION

5.0 INTRODUCTION:

In the preceding chapter, the data obtained from the select merchants banks and those from the questionnaire were analyzed using both explanatory and statistical tools. The major emphasis of this chapter therefore is discussion conclusion and recommendation, based on the finding.

5.1 DISCUSSION:

This study was aimed at investigating bank lending and load default in the banking industry particularly among Nigerian merchant banks. Chapter one of the study embraced issue relating to the introductory aspect of the study. Here, the overview statement of the problem and purpose of the study was highlighted while some research questions and hypothesis were stated. The significance, scope and limitations of the study were also being discussed in the chapter. Definitions of terms related to the study were not also left out. The review of relevant literature related to the research topic were treated in chapter three handled the methodology of the study and the tools to be used in testing the hypothesis were provided in this chapter. In chapter four the data obtained from the questionnaire were used to address the research question. The hypothesis were also tested with the correlation coefficient(r) and the t-test by employing the data obtained from the questionnaires and those from the secondary source i.e the annual reports of the selected merchant banks and CBN statistical bulletin.

The findings from this study indicate that merchant bank apply the generally known principles of lending in their loan administration. The character of the borrow was the most emphasized factor. The implication of this finding is that when loans and advances were granted to clients whose character, integrity, and management ability of high, there is the possibilities that such customers would try to meet up the repayment schedules. Such customer therefore constitutes a relatively less prone customer to the lenders but clients with low character and unreliable credit standing are regarded as high credit risk borrowers. Collateral was accorded the least importance-from the study, which shows that merchants banks uphold the view that the essence of obtaining collateral security from borrows is to provide a hedge against loss arising from failure to pay back loans. Therefore collateral should never be look upon as a source of repayment but only as a protection of fund in the event of default.

Subsequently, it was also discovered that amongst other factors considered by merchant banks in granting loads and advances that profitability and viability of a prospective project was considered of paramount importance.

This establishes the fact that banks generally make use of depositors money. In order to be able to refund such monies together with interest, they must make profit. It becomes more imperative when it is considered against the background that loan and advances constitutes the most important revenue yielding assets of a bank (merchant banks includes.) bank also make use of owner’s fund and the owner of these funds expect to earn dividends. In addition to deposit liabilities and owners fund, merchant banks also borrow from the money market at a coast. Thus, they have to sufficient, profit to remain in business. Also the visibility of projects consideration in lending decision shows that viable projects have a better potential of generating enough funds to liquidate loans obtained to finance such project.

Findings from this study also revealed that even though merchant banks have their own institutional lending policies, that the bank officials and lending personnel give priority attention to governor policies in their loan administration pattern. In this way, it follows that even where a loan request of a potential borrower may satisfy all safety and profitability requirements, a merchant bank could deem it necessary to ensure that the purpose for which the loan is given out is in consonance with the economic and monetary policy guidelines of the safety and profitability criteria of merchant banks carry out proper credit analysis before loan are granted to customers. They also inspect and evaluate business premises of their clients. Introduce special I monitoring and a borrowed finds, so that repayment of loans can be made accordingly.

5.2 CONCLUSION:

The adoption of good credit administration policy is a must for the survival of bank especially in maintaining a higher level of loan defaults. In the previous chapters. We examined what bank lending is all about and how merchant banks are practicing it. We also treated issues relating to the causes of loan default and possible ways reducing its occurrence especially among merchant banks.

This was achieved by collecting relating related materials and other data derived from the questionnaire administered among ten merchant banks in two large business centers in the country: Lagos and Port Harcourt.

Merchant banks act as catalyst for development by providing funds for viable projects to increase the level of investment and economic development through and efficient loans administration policy.

This study therefore analyzed the lending activities of merchant banks in Nigeria and case of loan defaults. The statistical test that was carried out in chapter four on the first hypothesis proved that there exist a positive and significant relationship between deposits hypothesis proved that there lending pattern. This is also buttressed by the fact that a bulky part of the deposits mobilized by merchant banks are channeled into the loans and advances they give out to borrowers.

Again, the test conducted on the second hypothesis indicated that there is a positive relationship between cases of loan default and the creditworthiness of the borrowers. This is centered on the fact that borrowers that are creditworthy could also have case of loan default because of lack of character. In addition the test conducted on hypothesis three, showed that there is a direct relationship between merchant banks lending and the levels of interest rate.

We also find out during the course of the study that the credit policy guideline of the central bank. That merchant banks on the basis of their risk avers tendencies and strong considerations for profits sometimes disobey the central bank’s guidelines by exceeding within one year while shortfall have always been experienced in the prescribed maximum target for loan of maturity period of 3 years and above it then means that merchant banks preferred short term loan to medium and long term loans even with the associated restriction.

It is with these facts that the researcher has decided to come up with certain recommendations for merchant banks and lending officers in particular, so as to establish a better lending environment free of frequent case of loan defaults.

5.3 RECOMMENDATIONS:

This research had deemed it necessary to recommend the following points, base on the result obtained from the research work.

  1. Nigeria merchant banks should establish special monitoring and supervision of loan, even with the presence of professional lending personnel. The banks should endeavor to set up monitoring and supervision department that will closely monitor and supervise the credits given not to borrowers and customers.
  2. The lending officers of merchant banks should also ensure that the character of the borrowers is of paramount important since it is superior to all other of C’s of credit analysis. This will enable the bankers to ascertain beyond reasonable extent that the terms of the loan contract will be complied with.
  3. The banks should at the same time ensure that the control mechanisms adopted by their bank are capable enough to check problems of loan default in all its ramification. That is part from monitoring and supervision, there should be documented credit limits couple with inspection of borrowers financial statement to be sure that they are creditworthy.
  4. The lending personnel should as well make sure that securities or collateral are preferred in their lending pattern. This will act as an insurance against non-repayment by customers.
  5. Merchant banks in Nigeria should try and organize seminar and lectures for their prospective borrowers, to enlighten them about the implication of their failures and excesses in lending contract. This will go a long way to reduce the frequent cases of loan default.
  6. The merchant banks should adopt corporate planning strategies. A proper corporate planning will place the bank in a position to forecast and predict those businesses and behavioral elements, which causes loan defaults.

 

 

BIBLIOGRAPHY

Adekanye F. (1983)     Apracticeal Guide bank Borrowirng Graham burn Bedfordshire UK

Adewunmi W: (1984)   Loan Management and Nigeria Banks University of woles press Cardiff.

Adewunmi W. (1983) A survey of lending concept principles and practices and their impact for banking and Bankers in Nigeria

Adellanye F. (1986) Elements of Banking in Nigeria 3rd Edition F and B publishers Lagos.

Anyanwu J.C (1993) Monetary Economic Theory, policy and Institution Hybrid Publisher Limited.

Baridam D.M. (1995) Research methods in Administrative science paragraphic publisher, Port Harcourt

Baridam D.M. (1995) Research methods in Administrative sciences paragraphic publishers.

Baridam D.M. (1995) Research methods in administrative sciences

Donaldson J.H (1986) How to handle problem loans. A guide for Bankers 1st   Edition (Basing stoke) Macmillian publishers Limited

Ezirim C.B. (1998) Bank lending and credit Administration A lender perspective Marcowitz publishers Port Harcourt

Ezirim C.B. (1996): Merchant Banking in perspective marcowitz publishers.

Ezirim C.B. (1996) Merchant Banking in perspective marcowitz publisher Port Harcourt.

Ezirim C.B. (1998) Bank lending and credit Administration A lender perspective with cases of suggested solutions Marcowitz Publishers Port Harcourt

Kreps. J.R. (1972) “Credit Administration

And

Watch R.F. American institute of Banking and bankers

Malter L.C. (1979) The lending Bankers (London: Watchloo (London) LTD

Ndagi J.O (1984) Essentials of Research Methodology for Nigeria Educators University press LTD Ihoakar

Neave H.R. (1979) Statistic table for mathematics Engineers, Economists and the Behaviour and management sciences.

Okereke E.J (1998) Money and the Nigeria Financial.

Osayemeh R.K.O (1986) Practice of Banking “ Vol 2 lending and finance Collins publishers London.

Osuoki E.C. (1993) Introduction to research methodology Ouf/sha Africana Feb. publishers.

Perry F.E. (1998) Law and Practice relating to Banking Methren and Coltd (2nd edition)

Roussakis E.N(1977) Managing commercial Banks funds New York Prayer Publishers Inc

Sanni T.A and Oforma M.A. system Avan global publishers Okigwe, Imo state.

Sheldom H.P (1978): The practice and law of Banking Macdonald and Evans (10the Edition)

Urieto J.E. (1995) Business statistic a practical Approach Paragraphic publishers Port Harcourt.

Woodworth G.W (1971) Theories of Cyclical Liquidity Management of Commercial Bank. In Banking Market and Financial Institution Irwin Inc

 

 

LOAN DEFAULT IN NIGERIA BANKING INDUSTRY
(CAUSES AND EFFECT)
BY
AMALINZE RITA NKEIRUKA
U96/6005487

A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENT FOR THE AWARD OF THE BACEELOR OF SCIENCE
(B.Sc) DEGREE IN ECONOMICS.
UNIVERSITY OF PORT HARCOURT.
FEBRUARY ,2002

ABSTRACT
This project work was principally embarked upon to give an insight into the cause and effect of loan default in Nigeria Banking industry. In study, loan default is seen as a situation where borrower fails to comply with the terms of a loan specifically the date and time of repayment. The objectives of this project work were to fine out causes of loan default and possible ways of reducing or eliminating the high incidence of loan defaults. The study further aims at examining the lending policies of the central bank particularly the prudential guidelines and how it has been adhered to by the merchant banks. Various related literatures were extensively reviewed to give a better insight into the causes and effect of loan default in the banks. Primary and secondary source of information were used. The study sample population was made up of 10 selected merchant banks located in Lagos and Port Harcourt. The information and data collected were analyzed using tables and the pearson product moment correlation coefficient (r) to measure the degree of relationship or association between the dependant and independent variables. The research finding revealed that merchant banks apply the generally known Principles of the lending in their loan administration. Where the character of the borrower was the most emphasize factor. Also it was discovered that even though merchant banks have their own institution lending policies , that the bank officials and lending personnel give priority attention to government policies in their loan administration. Based on the above finding , we concluded that the adoption of the good credit is a must for the survival of any bank in maintaining high level of profitability and low level of loan default. We therefore recommend as follow: Merchant banks should establish special monitoring and supervision of loan, ensure that control mechanisms adapted are capable of checking problem loan, adopt corporate planning strategies and ensure proper forecast and prediction of business and behavioral element , which cause loan defaults.
CHAPTER ONE
INTRODUTION

0VERVIEW
Experiences have shown that lending has become a vital function in banking operations because of its direct effect on economic growth and business development . This is been pursued in most countries particularly Nigeria where banks and their lending activities have been usefully integrated into government policy formulation in the national economic development process.
For any lending decision and activity to be worthwhile, there must be enough assurance that it will lead to the banks growth in terms of addition variety of services yielding a good income to the bank. If lending carries greater risks than are considered reasonable it is likely that it could turn a problem at a future date and therefore fail to contribute to the banks resources in terms of quality and profitability.
In lending activity the bank is concerned with the safety of the loan since it represents a bulks of deposits money and a source of income to the bank. The inability of the manager and credit porsonnel to establish special monitoring and supervision of these loans is a major attribute to frequeut cases of bad debts loan defaults. Therefore if becomes important and essential that special control and correction of the causes of loan defalt in our bankks should be carried out immediately a loan proposal is improved by the manager of the bank.

STATEMENT OF THE PROBLEM
The case of loan default have been on the increase over the year, especially among Nigeria merchant banks. This has gone a long way to affect the operational efficiency and profitability of these banks. For instance past records of lending shows that loan default and doubtful debts considered as total loan outstanding, increased from 7.91% in 1977 to 9.34% in 1988 for the banks involved in lending practice.
This shows that the bank’s loan portfolio are predominantly non-performing. This ugly trend puts a big challenge before the managers and lending officers of these banks. It is true that good bank lending assures high profits in meeting its social responsibilities to the benefits of the society while in other ways lending can affect banks negativity.
Despite the fulfillment of the profit objective extent, the rate at which borrowers are defaulting in the loan repayments has reduced the activities of merchant banks. We do not know why cases of loan default in Nigeria merchant banks are still on the increase despite the control measure adopted to curb this problem .Given the phenomenon of loan default, there is therefore the need to study lending patterns of merchant banks with a view to obtaining an insight into how best to reduce the incidence of the loan default.
OBJECTIVE OF THE STUDY
The objective of this research study will cover the lending pratice carried out by selected Merchant banks in Nigeria and their problems of loan default. Additional the emphasis of
This research will also be based on the following.
To find out the effect of the deposit on lending decision of merchant banks.
To examine the lending policies of the central banks particularly the prudential guidelines and how it has been adhere to by the merchant banks.
To examine the causes of loan defaults and possible ways of reducing or eliminating the high incidence of loan defaults.
Family into the phenomenon so as to improve the knowledge of understanding the subject matter.

RESEARCH QUESTION
For the purpose of this study, a number of pertinent research question will be addressed. They include:
Why are loan default problems still on the increase in merchant banks despite the existence of professional lending personnel?
What else in addition to loan default can adversely affect merchant banks profitability?
Are the controls mechanisms capable enough to check problem of loan default in all its ramifications?
Should the aim of reducing cases of loam default rests solely on the ability and experience of lending personnel?
HYPOTHESIS
The hypothesis of this study is going to be state in the directional form after which statistical tests will be carried out. They include:
HA2: There is a positive relationship between cases of loan default and credit worthiness of the borrower.
HA3: There is a direct relationship between merchant banks lending and the level of interest rate.
SIGNIFICANCE OF THE STUDY:
The outcome of this research study will add to already available work that has been carried out in bank lending patterns loans default s most especially in merchant banks. Moreover the findings of this study will be in immense benefit to merchant banks lending personnel and other allied institution of the same objective with those of the banking industry. It will also examine the causes of loan default and possible ways of reducing its occurrence.
Subsequently it will contribute to existing knowledge and act as a source of reference to other interest researchers on related topics . This work will therefore aid our corporate financial manager and lending personnel in adopting a sound safe and profitable loan administration pattern.
SCOPE OF THE STUDY
The scope of the study covered appraisal of loan default situation and lending patterns of ten (10) merchant banks to the extent that it enhanced the accomplishment of the research purpose of this study.
LIMITATIONS OF THE STUDY:
The major limitations of this study were the difficulty that was encountered in soliciting information from the merchant banks due to the secrecy of certain aspect of their operation.
This little access to some vital information acted as a hindrance to an extensive study.
Other limitations encountered in this study were that of finance and time .This because the respondents of this work more based in Lagos port Harcourt and this required the research to shuttle between both cities. Finally the short period of time for this study was also another constraint to the research work.
ORGANISATION OF THE STUDY:
The study is made up of five chapters with particular emphasis contained in each chapter, chapter one, dealt with the introductory aspect of the study and was discussed under the following heading including over view, statement of the problem, purpose of the study research question, hypothesis, significant of the study scope of the study limitation of the study and definition of terms.
Chapter two deals with the literature review ,discussion were made under specific headings related to the research topic subsequently. chapter three embraced the research methodology, where the research design, sampling procedure, questionnaire design, data collection method and statistical tools of analysis were handled.
Additionally chapter four concentrations on the research findings. And finally, chapter five being the last chapter covered discussion, conclusion and recommendations based on the findings of the study.
1.9 DEFINITION OF TERMS
Bank lending :bank lending is the process by which a bank extend credit to borrowers (in vestors) such a manner as would guarantee repayment by unit that is accommodated.
Loan default: loan default is a situation where a borrower fail to comply with the terms of a loan specifically the data and time of payment
merchant Bank: A merchant bank is a bank that concentrate on wholesale banking and carry out specialized service including provision of medium and long –term lending; equipment leasing, project financing, loan,. Syndication, debt factoring, corporate financial services etc
Credit control mechanism: credit control mechanism are the techniques and methods adopted by managers and lending officers through loan supervision and monitoring to ensure that loans given out to bprrowers are are repai at the specified date.

CHAPTER TWO
LITERATURE REVIEW
INTRODUTION
Basically every piece of research include a review of relevant study……”The review of literature serves several important purpose. It reveals what has been done previously in the study area place the researcher in a better position to interpret the significance of the study and aids the effectiveness of data analysis Adbelleh and Leveine (1979).
Bearing then above in mind, review of the available literature in the fields of merchant bank lending the loan default was undertaken, the material on these field of study is indeed enormous and close to conformity, however it proves very useful in given the study a sound theoretical base.
The literature as reviewed is presented under the following headings;
Regulation of bank lending in Nigeria
Management of lending
Lending principle and practices
Lending concepts
Concept of loan default (cause and control)
Prudential guideline for license
Evolution and evaluation of licensed banks
Lending rates of Merchant banks
REGULATION OF BANK LENDNG IN NIGERIA
Regulation and control of lending function of banks did not gain due significant until the promulgation of the central bank Act 1958, and the banking Act 1969.
The central bank decree No.24 of 1991 and banks, and other financial institutions decree No.25 of 1991, thereof have repealed these acts with their amendments. These acts specify precise provisions on loans and advances granted banks. Other tools of control are monetary policy circulars, which the central bank issues at the beginning of every year.
In addition to these are the budget and other policy statements, which include the prudential guidelines, exchange control decree 1977, companies and allied matters decree No. i of 1990 and others.
These tools are the creation of the government and its agencies with the administrative responsibly resting on the shoulders of the central bank and where necessary, the federal ministry of fiancé, it would be worthy to state here that that regulatory tools have been able to instill sanity in the lending activities of Nigeria commercial and merchant banks.
MANAGEMENT OF LENDING
This is concerned with the disbursement of funds by lending personnel based on the safety and profitability requirement need to be considered before granting loans to prospective borrowers. It also entail the monitoring and supervision of ensure that borrowers are able to comply with their loan repayment schedules.
According to Enarkeyarhe (1993, p. 30)
“Credit have been granted merely to preserve relationships without due regards to capacity to the inability to repay these loans when they fall due”.
Proper credit management means that due attention should be paid to the terms of the credit. In the way individuals and organization are assigned credit limits and this is monitored so that further loans are not given to those that that have not repaid their previous loans. The management of lending therefore occupies a strategic position in loans administration in banks.

In appraising loans application, loans officers may be influenced by friendship, business, or family connections.
According to coms(1982.p2 257)
“A bank may be ambitious to build up the bank and be willing to exchange credit for additional deposits in the hope that loans granted will be repaid at maturity. Banking therefore requires the lenders not to sell something, but that they also get something back in return”. Thus it becomes easy to lend money but not always easy to get it back from borrower and white the bank must be prepare to take some risk when lending money, it deals not want not to incur bad debts.

From the above ideas it becomes important to state here that a successful bankers is a successful lender expressed in the same sense in the tools used manage lending are credit analysis, budgeting and supervision. Lending also has to be enlightened by a competitive but reasonable policy for interest charges on loans budgeting in management of lending involves projecting sources of funds from depositors and stockholders and the determination of the percentage in various types of loan. Where the bank can best place funds it has available for loans so that there is a combination of maximum profits and minimum losses.
Also supervision involvers the constant monitoring of loan which has been guaranteed to ensure protection for such loans.
The analysis of financial statements is another useful way for evaluating the prospectus of a banking business. Although it will not give an absolute answer to every question of doubts, but could point out the direction in which further enquiries should be made financial analysis as expressed by pandey (1981, p62)
“is the process of identifying the strength and
Weakness of a firm by properly establishing relationship
Between the items on the balance sheet and the profit and loss account”.
After, a bank has considered the pre-requisite factors for credit extension and feels satisfied, he then proceed to release the funds.
However, experience of most bank indicates that loan losses are often the result of a lack of attention to information that develops during the life of the loan, such as changes in business circumstances. Based on this therefore, we can express that lending generally does not only require credit analysis budgeting and supervision but also requires the exercise of judgment and hard thinking geared towards achieving the banks landing objectives.

2.3 LENDING, PRINCIPLES AND PRACTICES
In literature all banks landing depend directly or indirectly on the three basis factors namely safety, suitability and profitability. A banker in his lending attitude tries to make sure that the loans is safe.
The demands that a given amount of loans will be granted to a worthy borrower who can repay from reasonably sure sources within the agreed time or a relatively short period of time
Downey (1986, p68) explained this point when h stated as follow:
“First, all of these loans are on the principles of
Safety. This means that the bank manager will generally
lend to a reliable borrower who able to repay from
sources of funds, which are reasonably certain and that this
repayment will be within short time ideally
this loans should be supported by customer depositing
an approved security which the bank accepts as an
insurance against non-repayment by the customer”.

In effect the liquidity of the advance and the safety requirement will be satisfactorily unquestionable moreover, in the same vein Holden (1986, p143) identified six canon or principles of good lending which guide bank officials in determining whether or not security is offered.
These canons are:
Purpose of the advance
Amount of the advance
Duration of the advance
Sources of repayment
Profitability of the advance
Security of advance
a.Purpoes of the advance
This is a convenient point for a banker to start within making credit analysis. Here the banker asks the questions; why do you want the loan? What are you going to do with the money? What is the reason for your request?
From these questions, the banker understands the borrower’s intention. Answers on these questions may also shed some light on the management.
The advance must be consistent with the lean policy of the bank. Apart from the issue of policy, the purpose of an advance, which deviates from the traditional and practice of the bankers will only loan proposal unattractive to the bankers.
b. Amount of advance
The amount of advance is another important point to consider in credit analysis. Consideration in respect of these criteria would usually focus on the sufficiency of the required facility to complete the transaction and the reasonability of the proposed amount in relation to the customers own resources.
Duration of the advance
Under this aspect as a canon of good lending as identified by holden, it is a point to note that three kinds of facilities are usually distinguished in the light of the principle/criteria. They are short term (repayment with 1 year) medium term (repayment between 1 and 5 year)and long-term (repayment after 5 years).
In Nigeria, it is traditional for commercial bank to provide short term financing while merchant bank are expected to arrange medium term financing developmentr banks to finance long-term transactions. The duration of the advance thus determines which banks to approach.
Source of repayment
The repayment factor ask certain question such as when will the loan be repaid?
How will be repaid (whether install monthly or enable) from what source shall the loan be repaid?
Examining these question reveals that repayment is the mainstay of every lending activity. It is a question in lending. Since the aim of every credit analysis is to ensure that there are at least high prospect for repayment.
Repayment source and terms are important consideration that a prudent banker makes before agreeing to extent credit facility to a borrower. The source of repayment must be sure, certain reliable.
Profitability of advance
The profitability of the advance be easily ascertainable to a reasonable extent that the bank could accept such advance proposal. Also alternative sources of advance or other investments are considered and compared to such loan so that the profit from such other investment are below or the same with the advance in question before the loon is given out to the borrower.
Security of advance
Security could also be referred to collateral, and is required to guarantee the repayment of a given loan, unless the lending officer have a lot of confidence in the possible outcome of a given proposal security represent his safely net. The type of security available to a banker are land, stocks and shares guarantees, life polices. gain Philips quoter in Clements (1973:p211 )that:
Credit worth of a borrower which may be defend as the
Amount which he will be able to repay at maturity or to the
Reasonable satisfaction of the lender depends on three factors
-capital, capacity and character”
’’While advance adewunmi (1983, p23) when making a general comment about bank lending practice said:
Banks are uniquely multipurpose lenders satisfying the needs of commerce, industry and agriculture etc for different functional operations. This therefore necessitate some common element found among banks in the principles that give lending rather in actual practices”

However Ezrim (1999;p142) identified that ’’ Not withstand the regard for the three bare head of lending which are safety, suitability and and profitability. Certain other factors are paramount in the evaluation of any give proposal.
These factor are referred and to as the 5cs of credit analysis namely- character, capacity, capital, condition and collateral’’.
Character
The character of the borrower is a paramount factor to consider in any lending decision. It is a vital factor, which is sometimes considered to be superior to the other c3 of lending.
It is highly subjective to the extent that it rests on ethics, character is said to encompass other virtues like honesty, reliability, integrity, trust, worthiness, mortality and courage etc. the extent to which a borrower posses these good virtues would determine whether or not a loan decision would be in his favour.
Capacity
Capacity in the foregoing analysis is synonymous with the ability or capability of the customer to generate income sufficient to liquidate or meet the loan/advance repayment agreement. It tells how a business has been in the past and how it will possibly be in the future.
The management of the business that lacks the know how and determination to succeed, no matter how favourable the environment is would find himself failing before long. This is why it is necessary to establish the capacity of the borrower before making loan available to him.

Capital
Capital is an essential requirement for any business. It is important that bank customers or borrowers do not have mistakes in their own business before going to the bank for loan. This is because customer who have none of his money to lose in the business is likely t o be more careless than one whose capital (probability his life savings) is tied to the business. Capital is the measure of credit that may be granted to those who have the right to borrow.
Condition
Condition relate to the general trend of business and the the status of a particular industry.
The lending personnel (credit analyst) cannot accurately determine whether the season would be good or bad but at least he can predict.
Some authors have referred to the condition factor as the stability factor. For atypical merchant bank issues affecting its stability, relate to the banking industry and to the banks financial structure.
Collateral
Collateral means security (other than personal security such as guarantee)taken by a bank when it makes advance to a borrowing customer and which the bank is of entitled to claim in the event of default.

2.4 LENDING CONCEPT
Despite the fact that literature reveals a lack of consistency adherence as regards the theories of the banking from, attempts made in the development of lending theories have give rise to certain conceptualization as commonly but inappropriately referred to as theories such concepts have evolved from the early day of the banking industry.
Adewunmi (1983,p.27) contends that “Although time concept are not generally of great academic interest, of a preoccupation, their practical influence is enormous. Also the changing circumstance of the lending, legal institutional, monetary, and economic systems have prompted bankers to update but discard these items tested ideas some other recongnized concepts of lending so far developed have followed a loigcal historical order and are identified as follows:
i. The real bill doctrine
ii. The shiftability theory
iii. The anticipated income theory
iv. The liability management theory

1. THE REAL BILL DOCTRINE
This is also called the productive loan theory or loan theory of credit. The real bill doctrine holds that banks liquidity can be assured as long as it assets are held in the traditional duration of loans that would be liquidated in the normal course of business.

According Roussaki (1977, p.98) “Remark that the doctrine emphasizes the direct relationship between the quality of money and the of business as the banking process is held to be a firmly noted business activity.
The doctrine advocates that banks should restrict their asset (lending) to real bill of exchange, the is bill supported by good in transit

2. SHIFTABILITY THEORY
This theory assumes that assets ned not be tried on self liquidating bill but also held in order shiftable open market assets such as government securities.
The shiftability theory gained recognition during 1920s, when bank lending behaviour, especially those of developed countries, started turning away slightly from the prescription of the real bill doctrine. In the word of Adewunmi (1983, P41) “All these changes leds to the assets shiftability”
3. ANTICIPATED INCOME THEORY
This theory opines that a bank should make long term and non business loan since even a real bill is repaid out of the future earnings of the borrower i.e. out of the anticipated income.
If anticipate of future income is the source of a bank loan repayment, they there is no reason of confine bank lending to the traditional commercial loan. Since what is critically an issue is the borrower’s ability to repay the loan out of future earnings and nothing more
Therefore, Anyawu (1993, p 218) stated that “under this theory, it became acceptable for bank to engage in a much broader range of lending including long terms to business, consumers instalment loans and amortised real estate loans. One striking thing with this theory is its future oriented approach to bank loan and advances. It is known generally as “cash flow approach to lending.
4. LIABILITY MANAGEMENT
This theory emerged following the launching in 1961 of certificate of deposits (CDs) by the new York money market made bank to introduce a new dimension into bank lending. This therefore establishes the fact that bank should not over mindful of the size and term of their loans.
Adewunmi (1981, p.42) opined that “the doctrine of liability management, thus tries to explain that a good liability management should generate enough liquid resources for the bank to eliminates the constraints of the earlier theory” it should be noted that the CDs are not the only source of acquiring liquidity by a bank though increased in liability. The specification of the CBN as to liquid as to assets is a good example.
2.5 CONCEPT OF LOAN DEFAULT
A plethora of forces operating in the financial environment act in certain ways that affect the lending activity. Such risk that arises in lending include default risk, liquidity risk, interest rate risk and financial risk.
A default risk for instance could occasion a loss of income to the bank, should the borrower fail to repay or unable to meet up with precise date of payments. The problems associated with debt recovery are not too pleasant to many bankers.
Owing to the above ideas, it becomes ideas to establish a definition of loan default. Loan default is an unpleasant situation to a banker (lending personnel) which arises from the failure of the borrower to pay back the loan at the specific date and time of repayment more technically, put loan default is the deficiency that arises when a borrower fails to provide the loan borrower from a lender at the required data he is expected to pay back Credit is usually given by the lender, to the borrower in anticipation of the borrower abiding by the agreement in the transaction, that he will satisfy his matured obligation to the lender. Due to one of quite a number of reasons (which are later discussed). The debtor might fail to meet his obligation thus creating a loan default scenario. However competent bank manager in his lending practice there is not doubt from time to time defaults will arise or the repayment of an advance will become doubtful.
Accordingly Nwachukwu (1988, p53) sated as follows “Average performance ratio measure as provision for bad and doubtful debts, shows that total loss outstanding increased from 6.91% in 1982 to 8.64% in 1983 for the banks involved in lending practice.
Furthermore, the ability of the industry at attaining the objective of safe, sound, and profitable lending decision, requires an understanding of the nature of the lending decision task under conditions of uncertainty. As well as the factors, which may influence the bank loan officer in the process of some decision aids that could enhance the degree of professionalism and thus the judgement accuracy of the bank loan officers. Most loan defaults passes through some stages prior to real loss of money occurring and there are a host of reasons for lending becomes unsatisfactory.
Thus Onyebula (1989, p47) state that: ‘Bank managers must lean the skill of preventing the worst possible situation occurring in order to do so; he must learn to recognize only signs of a potential loan default. It then becomes important for lending personnel to implement the control measures available to prevent frequent cases of loan defaults and problem loans.
2. 6 CAUSE OF LOAN DEFAULT
The resurgence of problem loan and loan defaults in Nigeria banking industry in the 1980s and 1990s has been attributed to a number of reasons:
Incipient poor analysis and bad judgement on the part of the banker (lending personnel during the time the proposals were first submitted and loans subsequently granted. The result of this has-been summarized by Osayemeh (1986) as “garbage in garbage out” what you put into a lending decision is what you get
Bad management of customers accounts and failure to identify irregular accounts operation
Custometic reporting of this analysis is bound to be predicted on falsehood and the result in most cases is lending error translated into loan defaults.
Inadequate credit monitoring. This arises when bankers fail to visit the customer or the project so financed on a regular basis to supervise and monitor the performance and progress. Thus ruining many a good project and breeds conditions of loan defaults.
Misrepresentation of facts and dishonesty on the part of the borrowers.
Excessive lending on security values that is clear evidence of anachronian and unproductive orthodoxy giving rise to loan default scenarios for the bank Ezirim (1998, p.26)
Insensitivity to economic and environmental development is another factor that lend support to the incidence of loan defaults. Such factors are granting of credit in times of economic recession or depression without thorough analysis.
Matters beyond the control of the customers. Osayemeh (1986, p.19) gave examples of such matters to include.
Occurrence of fire outbreak, burglary and holocaust
Show take off of project, cost over-run inadequate funds, technical equipment deficiencies, raw materials arises and reduced demand are some of the general risk that may give rise to problem loans and loan defaults.
2. 7 CREDIT CONTROL TOOLS AVAILABLE TO BANKERS
The mechanism of credit control and administro enation represent the methods adopted by bankers after granting a loan to ensure that repayment of the advances does not fail among the various methods as identified by zeal et al (1984, p.17) include the following:
Regular communication with the borrower
Regular visit and monitoring
Regular review of account operations
Regular analysis and re-evaluation of financial performances.
Control through drawdown’s or take downs or disbursement
These control tools highlighted above are briefly discussed turns.
REGULAR COMMUNICATION
It is prudent practice banker to periodically write letters of reminders to the customer during the life of the credit and after the term expire. These letters may not always overstress the life fact that the borrower owes the bank. They can be diplomatically co structured to give the borrower the impression that the bank identifies with his operations problems and success. Regular communication may also take the form of telephone calls and e-mails, depending on the circumstances involved.
II. REGULAR VISITS AND MONITORING
After approving an advance, loan officers are not expected to sit back in their officers expecting the customer to bring him necessary information about his operations and performance. In the real fact when certain customer notice that the bankers is not sufficiently monitoring their activities, the tendency is for them to act fast either or divert funds or to perpetrate one fraudulent act or the tQ the detriment of the banker. To stop these credit officers must make regular visit to the customers and the project to monitor performance. Such visit may reveal certain problems that requires his attention and subsequent action.
III. REGULAR REVIEW OF ACCOUNTS OPERAIONS
After approving an advance it is wise for the banker to review the accounts of the borrower and his operation. Also the lender has to source effective information on the progress of the borrower. Bankers while watching the operations of customer’s accounts usually take not of the following direction of cheques paid and of the account, nature of payment into the accounts, account turn over, in term of how soon and often larges sums paid in are withdraw, operation discipline of customers in terms of excessive request, poor debts, servicing etc.
iv. REGULAR ANALYIS AND REVIEW OF FINANCIAL PERFORMANCE
Banker need a credit analyst to analyse and review periodically the financial information affecting the borrower activities on a regular basis. Since the bank may not wait till audited accounts are produced at the end of the year. He can call for raw unaudited account of balance sheet and income statement at regular intervals. He could ask for updated cash budget and cash flow projects. These figures would allow the banker to compare the bank account s operation with working capital development in reviewing and analyzing financial statements, bankers are interested in such conditions as:
Variances in respect of production, sales, gross and net profit
Quality of balances sheet items, which will help the banker to determine the financial strength and stability of the firm.
V. CONTROL THROUGH DRAW DOWNS OR TAKE DOWS OR DISBURSEMENT
This kind of control measure are useful and effective to bankers. In this mode, the lending personnel of a bank disbursement funds to the credit customers in sums as per need and performance.
A useful document in use by banks to enable this is the draw downs documentation form. Using this methods, for instance in a housing loan case it may be established that there will be no release of funds until say, the builders agreement has been signed.
2.8 PRUDENTIAL GUIDELINES FOR LICENSED BANKS
The apex institution in the Nigeria banking system the central bank of Nigeria (CBN) is not silent on the issue of loan asset classification.ina bid to moving banks in the country towards compliance with international banking standard and practices. To this end of banking supervision Department (BSD) issued on November 7, 1990 circular letter No. BSD/DO/23/Vol. 1/11 to all licensed banks and their auditors. This circular and titled “prudential guidelines for licensed banks” introduced new but technical critical critters for recognizing debts performing faculties in the portfolio of banks.
The classifications are shown in the diagram below and explained a well

CREDIT PORTFOLIO CAHT
Performing facilities Non-performing facilities

Sub-standard Doubtful lost
Source:- CBN Credit policy guidelines 1990
The classification are explained below:
Performing facilities are those where payments of both principal and interest are on schedule.
Non-performing facilities are those where either
Principal or interest is overdue 90 days or more
Interest payment equal 90 days, interest or more have been capitalized rescheduled or rolled into a new loan.
Substandard non-performing facilities are thoe:
On which unpaid principal and/or interest remain outstanding for 91 and 179 days (i.e. more than 90 days but less than 180 days)
In respect of which the customer show
Inadequate cost flow to service debt
Under capitalization or insufficient working capital
Absence of adequate financial information or collateral documentation
Inactive account where withdrawals exceed repayment and hardly cover interest charges.
d. Doubtful Non performing facilities are those:
On which unpaid and or/and interest remain outstanding for between 180 and360 days and which are not secured by legal title to leased assets or perfect realization collateral in the process of collection or realization
In-respect of which the customer shows (a) weakness (b) that full repayment of debts is uncertain (c) that realization collateral will be insufficient to cover the banks exposure.
Lost no performing facilities are those
One which unpaid principal and interest are outstanding for 36o days or more.
Not secured by legal title to leased assets or perfected realization collateral in the coursed of collection or realization
In respect of which the customer show weakness in (d) ii and which are considered and are of such little value that continuation as a bankable asset is unrealistic.
The prudential guidelines of November 7, 1990 have been able to introduce some measure of technicality into the concepts of loan defaults in Nigeria banking industry. It is rightly predicted on the just need for accountability and efficiency in the corporate financial management of lending in commercial and merchant banks.
EVOLUTION/EVALUATION OF THE ACTIVITIES OF MERCHANT BANKS IN NIGERIA
Evolution: the history of merchant banking in Nigeria date back to 1960 when the first two financial institutions were registered for merchant business. In September 1960, Philip Hill (Nigeria) limited was registered while Nigerian Acceptance Limited (NAL) was registered 1960. The two companies performed identify functions which include:
The financing of commodity export by granting credits to the marketing boards.
The acceptance of large deposits from institution and wealthy individuals
The extension of credit in the form of loan and advances and
Acting as issuing houses.
The two companies merged in July 1969 to avoid unnecessary competition and to strength their capital base. At the end of the merger process. Philip Hill absorbed NAL. But the name of the absorbed institution NAL was retained and to the institution because it was more acceptable as a Nigeria company. Following the merger, Nigerian Acceptance limited the only merchant banking system was issued to U.D.T. Bank (Nigeria) limited. Restructured and named Nigerian merchant Bank limited in 1977. In 1974, two American Bank First City Bank of New York and First National Bank of Chicago were licensed and started operating in the same year.
The former pulled out and the later has remained on the scene as international merchant Bank (Nigeria) limited (IMB). In 1975, ICON limited merchant Bankers and chase merchant Bank limited changed its name to continental merchant Bank.
In September 1979, the Nigerian American merchant Bank an affiliate of First National Bank of Boston was licensed to operate as a merchant in Nigeria. It was the first merchant Bank to be sponsored by private Nigeria investors in collaboration with foreign banking interest. There was no other establishment until 1982, when the merchant banking corporation Nigeria limited and the Indo-Nigeria merchant banks operations.
In the same year additional licenses were issued to merchant Bank of Africa (Nigeria) limited, First City Bank limited and ABC merchant Bank limited. The first two started operations in 1983, while ABC merchant Bank was officially opened for business operations in 1984. Both First City merchant Bank and ABC merchant. Are fully owned by Nigerians. In 1986, grind lays merchant bank limited joined the merchant bank industry. By 1987, the number increased to 46 and as at 1996, the number of merchant Bank in the country was reached in a recent study (Asinobi, 1986) the upsurge of merchant banking in the mid 1970s could be accounted for by the indigenousation decree, the oil boom and the third natural development plan. These opened up opportunities which merchant banks did not hesitate to make up. The coming of the merchant banks in the 1980 was as a result of the specialized factor made services of merchant banks, particularly loan syndication, project financing, financial advisory services to accelerate the dace of industrialization.
SERVICES OFFERED BY MERCHANT BANK:
Merchant Bank traditionally concentrate on wholesale kind of banking and carry out specialized services which covers the following:
Okereke (1988, p119) identified the services of merchant banks as:
Acceptances
Treasury and deposit taking function
Short-term investments
Loans and Advances
Equipment leasing
Corporate finance services including project financing, trade financing
L.O.P. Financing, commodity brokerage issuing house services, investment and financial advisory services.
Loan syndication and
Foreign exchange services and international banking operations.
Particular emphasis is going to be given to loans and Advance because it is the basis of this research work.
2.92. MERCHANT BANKS LOANS AND ADVANCES:
Merchant banks provide financial assistance by granting short-term and credit facilities to customers.
Credit or lending function simply involves the advancement of monies to customers for profitable use by such customers. It is called financial accommodation, which the bank renders to customer. Credit is the hub of banking operations, by virtue of the structure of their deposits; merchant banks in Nigeria are known to grant short term loans and advances and term lending facilities to their various customers.
Merchant banks in their credit operations also provide the working capital needs of operate customers.
According to Okereke (1988.p.126)
“A crucial reason for the creation of merchant banks considering the gap thesis, is for the provision of medium and long term loans to all relevant sectors of the economy.”
Short-term credit facilities available in the portfolio of merchant banks include bringing finance and secured and unsecured business loans.
A typical customer who needs long term financing may approach a merchant bank for a temporary facility pending the conclusion of the formers arrangement with the same bank or another bank. For instance, if a corporate customer is in the financial stages of long term loan negotiations with a development bank or merchant bank, it can approach a merchant bank for temporary credit to meet the dictates of urgency attending its project.
Apart from bringing financing merchant banks offer short term business loans, and at times, personal loans to considered customers. In some cases these loans secured seared while at other times they are not. Security for the loans may range from the customers depositing an investment certificate with the merchant bank or other financial institutions to landed property, stock and shares and guarantee-unsecured loans are granted to well known and valued customers who are adjudged financially strong and credit worth. In Nigeria, the banking regulation presently discourages banks form unsecured loans.
TERM LENDING:
The lending is basically a tradition of merchant banks: A term loans is an industrial or commercial loan possessing incipient maturity exceeding on year. It is visual to put an upper limit to say, five or seven year to distinguish it from long term loans. It also distinguishes from short term loans that are basically repayable within one year. Banking theory has advance a number of reasons for increased term lending among merchant banks. First it is argued that increased lending capacity and higher operating expenses usually include banks to search out other outlets for loan able funds primarily to boast their income. Term loans are considered one of one of those outlets.
Second term lending is give further impetus in view of the greater confidence increasingly
Accorded to the stability of deposits coupled with assure willingness on the part of bank to relinquish excess liquidity. thirdly the charging attitude of supervisory and examining authorities (such as ABN and NDIC) toward bank lending provides another reason for growth of term loans.
2.9.3 LENDING POLICES OF MERCHANT BANK:
The lending or credit policy of a merchant bank specifics guidelines and blueprints designed to give direction to and provide focus towards the issuance of sound, safe and profitable decisions. in the words of Reed et al (1980,p.242) “it is desirable to have plicate lending to establish the direction and use of funds from stockholders, depositors, and others of control the composition and sized of the loan portfolio, and determine the general circumstances which it is appropriate to make a loan”
the loan plaices provide guideline guidance for lending offices and thereby establish a greater degree of uniformity in the lending practices of a particular merchant bank. No matter the liquidity position of a customary to have more loan request that the resources can accommodate. the officers expected to discriminate in their lending decision in a pure objective manner as specified in the policy. Thus policy guidelines provide the framework to deal loan proposal. Related factors that influenced merchant banks loan policies include the capital position, risk and profitability of various types of loans, stability and exposure experience of bank personnel and credit needs of the area or customer served.
2.10 LENDING BATES OF MERCHANT BANK
In the position of need of al (1980, p211)
“The parlaying of bank loans invoices to helloing of interest rates, the establishments of a compensation internet balance requirement5 and the imposition of loan fees.
Internet rate may either be fixed or variable. As the term implies a fixed or variable one that remains the same during the term of the loan. A variable rate is one that change during the period of loan contract. the most popular variable rate is prime rate which banks change their credit worthy borrower or customers.
merchant banks are required to link their lending rates of their average cost of funds. this requirement was aimed at fostering competition and efficiency in the allocation for resources. a spread of 4% above their average cost of funds subject to a maximum lending rate of 21% and to observe a floor of 13.5% on saving deposits. this requirement was in place until 1992, when ceiling on interest rates were removed. although a maximum spread of 5% is required between their average cost of funds and their lending rates.
generally the factors that should be considered in pricing loans as identified by Ezirim (1998) includes:
the cost funds
the degree of risk in the loans
the maturity of the loan
the cost of originating and administering the loans
rates available to the borrower form competitive sources of funds
the overall relationship between the bank and the borrower
the rates of return that can be earned or alternative investment Currently the policy on bank lending as specified by central bank of Nigeria is that of deregulation which suggests the fixing of rates by forces of demand and supply. As a result banks and credit customers can agree on any suitable for their purposes.
2.11 SUMMARY
From the literature review, we have been able to see various contributions of different scholars in this field of study and findings have enable us to know that bank lending is basically associated with defaults.
This chapter has adequately x-rayed the dynamic topic under study and this was done looking critically at the regulation of bank lending in Nigeria, management of lending principles and practices, lending concepts, concepts of loan defaults (causes and control) prudential guidelines for licensed banks, evolution and evaluation of the activities of merchant banks in Nigeria and lending rates of merchant banks.
The chapter reveals that the incidence of loan defaults.
In Nigeria merchant Banks is as a result of inadequate monitoring and supervision of loans on part of lending officers of these banks. However some control tools were highlighted in the chapter with these controls measure it is hoped that frequent occurrence of loan defaults in the lending activities of Nigeria Merchant Banks will be reduced.

CHAPTER THREE
METHOD OF STUDY
3.0 Introduction
The overall aim of any research is to provide solution to the problem at hand. In an attempt to analyze the source and nature of such problems, various techniques and strategies were employed.
The methods include the research, design, sampling procedure, Questionnaire Data collecting method, and statistical tools of analysis.
They are going to be explained further in this chapter.
3.1 RESEARCH DESIGN
From the nature of this study, it was thought appropriate to use survey research design. The data was therefore gathered from both primary and secondary sources for the purpose of achieving the objectives of this research.
Oral interviews were conducted since the research designs is aimed at bringing the study subjects or respondents into the study so as to obtain the required data. The respondents were mostly bank personnel from the credit department of the merchant banks.
3.2 SAMPLING PROCEDURE
Out of about fifty one merchant banks existing in Nigeria today, ten of them were selected and studied. The critical that was used for the selection of these banks are
Those merchant banks that commenced operations before1992. The reason for choosing 1992 as a base year was for the purpose of ensuring that banks selected have been in existence for a minimum of five years.
A total of about fifty one merchant banks is existing in the country. A simple random sampling of these banks was carried out; it is from this sample that the ten (10) merchant banks were selected. Six were located in Lagos while the remaining four in Port Harcourt.
3.3 QUESTIONNAIRE DESIGN:
The questionnaire is structure into three parts: the first parts is about the personality of the respondent while the second and third are for bank lending and loan defaults respectively.
The questions were a mixture of open-ended multiple choice and dichotomous types which include the Yes/No answer was despised by the research and was limited to those relevant to the scope of the study.
These questionnaires sought answer to questions related to the hypothesis stated in chapter one (1) and will be used.
3.4 DATA COLLECTION METHOD:
The data of this study were collected mainly from two sources namely primary and secondary sources.
The primary data that was employed were the use of relevant questionnaires and personal interviews from some of the respondents. The questionnaire were dispired, pre-tested validated and administered to the various bank that were selected for the study. Multiple choices were provided and respondents were given freedom to choose the answer they consider appropriate.
The secondary data were based little access to personal records of the merchant banks under study. However additional were gathered from journals. Annuals report of the various banks and also central Bank of Nigeria annual publications.
3.5 STATISTICAL TOOLS OF ANALYSIS:
The statistical tools of analysis involve the mathematical and statistical formula used on analyzing and testing of research questions and hypothesis respectively.
To enable conclusion to draw on the research’s findings, some hypothesis were formulated and stated in chapter one. Based on the relationship established in the hypothesis, the choice of statistical troll that was used in analyzing the data is the Pearson product moment correlation coefficient (r) which is a perimetric test. It was used measure the degree of relationship or association between the dependent and independent
Variables. The correlation coefficient varies between
-1 And + 1. it is a summary measure and not a test significance.
Its basic formula is

R = n(?xY)-(??X) (?Y)

Where:
r = Pearson duct moment correlation coefficient
n = Number of observations (sample size)
?x = The sum of the squared scores on variable X
?x2 = The sum of the squared scores on variable X
?Y = The sum of the scores on dependent variable Y
?Y2 = The sum of the squared scores on variable X
?XY = The sum of the scores on variable X
? = Greek letter for summation.
Additionally to test for the existence of significance between the dependent and independent variable i.e. the significance of ‘r’, the t-test was used since the number of observation was less than 50
The formula for the t-test is symbolized mathematically by
T = r n-2

r2

With n-2 degree of freedom
Where,
t = t-test
r = correlation coefficient calculated
n = sample size
SUMMARY.
This chapter has specified the procedure and tools with which the study was carried out it focused on the research design.
Sampling procedure, questionnaire design data collection method and statistical tools of analysis.
All these are fundamental to the conduct of the research and interpretation of results.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS:
4.0 Introduction:
The purpose of this chapter is to analyze the data collected through primary and secondary sources of data collection. This is to enable the researcher to provide answer to the research questions, as well as to test the hypothesis stated in chapter one. The need for this analysis is to enable us establish and explain perfectly, bank lending and loan of faults in the banking industry particularly among Nigeria method merchant banks. The chapter therefore gives framework upon discussion, conclusion and recommendations are based.
The analysis made is going to be given under the following headings:
Presentation of data.
Questionnaire analysis and interpretation
Testing of hypothesis using statistical tools.
4.1 PRESENTATION OF DATA
In order to find out whether the annual deposits of merchant banks have any effect on the lending patter or decision of these banks, we examined a five years record of the total deposits and total loans and advances of the ten merchant banks taken as a study for this research work.
4.2 QUESTIONNAIRE ANALYSIS AND INTERPRETATION
In this study, ten merchant banks are selected and visited in Lagos and Port Harcourt. A total of 40 sets of questionnaire were administered to the ten merchant banks. Four questionnaires were distributed to each of the banks.
The questionnaires were administered to the managers and lending officers of the merchant banks that was studied and the exact numbers of questionnaires distributed were returned back to the researcher. The analyses of questionnaire distributed and received are given in the table below.
As earlier stated the questionnaire was designed only for the bank officials with three sections in duding personality profile, bank lending, and loan defaults respectively.
To address the fundamental point’s races in research questions, the questions were in duded in the questionnaire. The analysis of the reactions and answer form the respondents are presented in the following tables.
Question No. 18 simply asked, why are loan default problem still on the increase deposit the existence of professional lending personnel? The answers from respondents are show in the table below.
TABLE 4.2.1
LOAN DEFAULT AND EXISTENCE OF PROFESSIONAL LENDING PERSONNEL
INDICATEION NO OF RESPONDENTS PERCENTAGE
(a). Improper supervision and monitoring of loans. 14 35
Excessive lending to friends and relatives without and consideration on collateral 9 22.5
. Insensitivity to economic
trends 11 27.5
(d) Poor analysis of financial statement
6
15
Total 40 100

SOURCE; Research question No. 1
Out of the 40 respondents asked 14 representing about 35% were of the opinion that the reason for increased problems of loan defaults is improper supervision and monitoring of loans. While 9 representing 22.5% say it is because of excessive lending to friends and relative ness without any consideration on collateral security to economic trends. Finally 6 respondents representing 15% agreed that it is as a result of poor analysis of financial statements.
We can conclude based on the respondents response that the reason why there is loan default problems even with the presence of professional lending personnel is because of improper supervision and monitoring of loans.
This has addressed our question No. 1
Question No. 20 was directed at the respondents with the view of knowing what else in addition to loan default can adversely affect their bank’s profitability?
The responds to this question are show in the table below:

TABLE 4.2.2
LOAN DEFAULT AND OTHER FACTORS THAT AFFECTS
BANKS PROFITABILITY:
NO OF RESPONDENTS PERCENTAGE%
Bad debt 20 50
Illiquidity 8 20
Problem loans 12 30
TOTAL 40 100
SOURCE: Research question No. 2
In fact 20 out of 40 respondents representing 50% opined that bad debt is another factor that can adversely affect their banks profitability. While 8 respondents representing 20% believed it is illiquidity (inability to convert assets to cash) that can also affect their bank is profitability. The remaining 12 respondent representing 30% agreed that problem loans could also adversely affect their bank is profitability.
From the above analysis we can deduce that it is debts that can adversely affect the merchant banks profitability in addition to loan default; thus our research question No.2 has been answer. Question No. 21 simply asked the respondent whether the control mechanisms adopted by their bank is capable enough to check problems of loan default in all its ramifications the responses to this question are given in the following table below:
TABLE 4.2.3
CONTROL MECHANISM AND CAPABILITY TO CHECH PROBLEMS OF LOAN DEFAULT
INDICATION NO.
RESPONDENTS PERCENTAGE
Yes 22 55
No 18 45
Total 40 100
SOURCE: Research question No.3
The above table shows that shows that out of the 40 respondents, the questionnaires were administered to, 22 presenting 55 percentage agree that the control mechanism adopted by their bank is capable of checking problems of loan default in all its ramification while 18 representing 45 percent did not agree to the question asked. From the response we could confirm that the control mechanism adopted by the banks are capable enough to check problems of loan default in all its complexities. But these control mechanism are subjected to failure in most cases. This is why thee difference in percentage between those that agreed and those that do not is just 5percent.
This response has addressed our research question N0o. 3 question no 23 was tailored towards knowing whether the aim of reducing case of loan default should rest solely on the ability and experience of lending personnel?

The responses given by the respondent are shown in the table below:
TABLE 4.2.4
AIM OF REDUCING CASES OF LOAN DEFAULT AND EXPERIENCE OF LENDING PERSONNEL
INDICATION NO. OF RESPONDENTS PERCENTAGE
Yes 26 65
No 14 35
TOTAL 40 100

SOURCE: Research question No. 4
From the table above, 26 respondents representing 65percentage of the entire sample agree that the aim of reducing case of loan default should rest solely on the ability and experience of lending personnel, while 14 respondents representing 35 percent did not agree. The analysis has thus show that the experience of the lending personnel could determined the effective control mechanism to be adopted to reduce case of loan default this has addressed our research question N. 4. The questionnaires provided data for the testing of the second and third hypothesis respectively. Question 19 and 22 were designed to provide data for testing the second hypothesis in this question the respondents were asked to what extend does loan defa ult problem arise from a creditworthy be borrows.
They extent were classified into three groups, such as large extent, moderate extent, and height extent. These groups were further, assigned some ratings. Large extent was assigned 75 percent, moderate extent was assigned 50 percent and sight extent was assigned 25 percent. It should be noted that these ratings were at interval, those who chose large extent were percent to chose between 57-75 percent, moderate extent between 26-50 percent and slight extent between 1-25percent.
TABLE 4.2.5 and 4.2.6 provides the data obtained from respondents, while table 4.2.7 provided the same date based on their ratings. It is from this table of ratings that the computation of the Pearson product moment correlation coefficient (r) for the scond hypothesis was obtained.
These tables are presented below:
TABLE 4.2.5
EXTENT TO WHICH CREDIT WORTHY BORROWER COULD HAVE CASE OF LOAN DEFAULT.
S/NO

1
2
3

4
5
6
7
8
9
10 Name of bank

NAL merchant bank
International merchant bank
Nigeria-American merchant bank
First city merchant bank
ABC merchant bank
Peak merchant bank
Nigeria merchant bank
Triumph merchant bank
Fidelity merchant bank
Continental merchant bank Large extent

2
1
1

2 Moderate extent
2
3
4

3
3
3
2
2
2
2 Slight extent
1
1
1
2
1
2
– Total

4
4
4

4
4
4
4
4
4
4
T OTAL RESPONDENTS PERCETAGE (%) 65% 65% 20% 100%

SOURCE: Research from N.22 of questionnaires distribution.
TABLE 4.2.6
EXTENTS TO WHICH LOAN DEFAULT PROBLEM ARISE FROM CREDIT WOETHY BORROWERS:
S/NO.

1
2

3

4
5
6
7
8
9
10 Name of banks

NAL merchant bank
International merchant bank
Nigeria American merchant bank
First city merchant bank
ABC merchant bank
Peak merchant bank
Nigeria merchant bank
Triumph merchant bank
Fidelity merchant bank
Continental merchant bank
TOTAL
RESPONDENTS
PERCENTAGE (%)
Large extent

1
2

2

3
1
2
1

1
1

14

35% Moderate extent
3
1

2

1
2
2

2
2
2

16

40% Slight extent
1
1

3
2
2
1

10

25%
Total

4
4

4

4
4
4
4
4
4
4

40

100%
SOURCE: Responses from No. of questionnaires distribute
TABLE 4.2.7
CREDIT WORTHINESS OF BORROWERS AND CASE OF LOAN DEFAULT:

RESPONDENTS CREDITWORTHINESS OF BORROWERS CASES OF LOAN DEFAULT
X Y X2 Y2 XY
1 75 75 5265 5625 5625
2 75 50 5652 2500 3750
3 50 50 2500 2500 2500
4 50 50 2500 2500 2500
5 75 75 565 5625 5625
6 50 75 2500 5625 3750
7 50 50 2500 2500 2500
8 50 25 2500 625 1250
9 50 75 2500 5625 3750
10 50 75 2500 5625 3750
11 50 50 2500 2500 2500
12 50 75 2500 2500 2500
13 50 75 2500 5625 3750
14 50 75 2500 5625 3750
15 50 75 2500 5625 3750
16 50 50 625 2500 3750
17 50 75 2500 5625 3750
18 50 50 2500 2500 2500
19 50 50 2500 2500 2500
20 50 25 625 625 625
21 50 75 2500 2500 3750
22 50 50 2500 2500 3750
23 50 50 2500 2500 2500
24 50 75 625 625 1250
25 50 25 2500 2500 3750
26 50 25 2500 2500 1250
27 25 25 625 625 625
28 25 25 625 625 625
29 75 50 5625 5625 3750
30 50 50 2500 2500 2500
31 50 25 2500 625 1250
32 25 25 625 625 625
33 50 75 2500 2500 3750
34 50 50 2500 2500 2500
35 25 25 625 625 625
36 25 25 625 625 625
37 75 75 5625 5625 5625
38 75 50 5625 5625 3750
39 50 50 2500 2500 2500
40 50 25 2500 2500 1250
TOTAL 1,950 2,100 103,750 125,00 108,125
SOURCE: derived from table 4.2.5 and table 4.2.6
For the third hypothesis question No.8 and were designed to providing support data for testing it. The respondents were simply asked. To what extent does the level of interest rate determines the leading pattern of their bank? They were also asked; to what extent does the lending pattern of their bank depends on prevailing interest rate. The extents were classified into large, moderate and slight extents, these groups were also assigned 75-percent, 50 percent and 25percent for large extent, moderate and slight extent respectively.
In this way, the analysis is a replica of the method used for establishing data for the second hypothesis
Table 4.2.8 and 4.2.9 provides the data obtained from respondents, while table 4.3.10 supplied data obtained from respondents based on their ratings. It is from this table of ratings that the computation of the peak moment correlation coefficient for the third hypothesis was established.
The response from the respondents are given in the following tables:
Table 4.2.8
EXTENT TO WHICH LEVEL OF INTEREST RATE DETERMINES LENDING
PATTERN OF MERCHANT BANK
S/NO Name of bank Large extent Moderate extent Slight extent Total
1 NAL merchant bank 3 1 – 4
2 International merchant bank (IMB) 3 1 – 4
3 Nigeriac American merchant bank 2 1 1 4
4 First city merchant bank 2 2 – 4
5 ABC merchant bank 1 2 1 4
6 Peak merchant bank 3 1 – 4
7 Nigerian merchant bank – 2 2 4
8 Triumph merchant bank 1 2 1 4
9 Fidelity merchant bank – 1 3 4
10 Continental merchant bank 1 3 – 4
TOTAL RESPONDENT 16 16 8 40
PERCENTAGE % 40% 40% 20% 100%

SOURCE: Response from No. 8 questionnaire distributed
TABLE 4.2.9
EXTENT TO WHICH LENDING PATTERN OF MERCHANT BANKS DEPENDS ON PREVAILING RATE:
N/SO Name of banks Large extent Moderate extent SLIGHT EXTENT TOTAL
1 NAL merchant bank 2 2 – 4
2 International merchant bank 3 1 – 4
3 Nigeria American merchant bank – 2 2 4
4 First city merchant Bank 1 2 1 4
5 ABC merchant Bank 1 2 1 4
6 Peak Merchant Bank 3 1 – 4
7 Nigeria Merchant Bank – 2 2 4
8 Triumph Merchant Bank 1 2 1 4
9 Fidelity Merchant Bank – 1 3 4
10 Continental Merchant Bank 1 3 – 4
TOTAL RESPONDENT 16 16 8 40
PERCENTAGE (%) 40% 40% 20% 100%

SOURCE: Response from No. 8 of Questionnaire distrusted.
TABLE 4.2.10
LEVEL OF INTEREST RATE AND LENDING PATTERN OF MERCHANT BANK
RESPONDENTS LEVELS OF INTEREST RATE LENDING PATTERN OF MERCHANT BANK
X Y X2 Y2 XY
1 75 75 5625 5625 5625
2 75 75 5625 5625 5625
3 75 50 2500 2500 3750
4 50 50 2500 2500 2500
5 75 75 5625 5625 5625
6 75 75 5625 5625 5625
7 75 75 5625 5625 5625
8 50 50 2500 2500 2500
9 75 50 5625 2500 3750
10 75 50 5625 2500 3750
11 50 25 2500 625 1250
12 25 25 625 625 625
13 75 75 5625 5625 5625
14 75 50 5625 2500 3750
15 50 50 2500 2500 2500
16 50 25 2500 625 1250
17 75 75 5625 5625 5625
18 50 75 2500 5625 3750
19 50 50 2500 2500 2500
20 25 25 625 625 625
21 75 75 5625 5625 5625
22 75 75 5625 5625 5625
23 75 70 5625 2500 2500
24 50 50 2500 2500 2500
25 50 75 2500 5625 3750
26 50 75 625 2500 3750
27 25 75 625 5625 1857
28 25 50 625 2500 1250
29 75 50 5625 2500 3750
30 50 50 2500 2500 2500
31 50 25 2500 625 1250
32 25 625 625 625 625
33 50 75 2500 5625 3750
34 25 25 625 5625 1875
35 25 25 625 625 625
36 25 75 625 625 625
37 75 75 5625 5625 5625
38 50 75 2500 5625 3750
39 50 75 2500 5625 3750
40 50 25 2500 625 1250
TOTAL 2,200 2,225 135,000 139,375 129,375
SOURCE: Derived from table 4.2.8 and table 4.2.9
4.3 STATEMENT OF HYPOTHESIS ONE
HO2: Null Hypothesis
HA2: Alternative Hypothesis
HO2: There is no positive relationship between cases of loan default and the creditworthiness of the borrower.
HA2: there is a positive relationship between cases of loan default and the creditworthiness of the borrower we tested this hypothesis by the use of Pearson product moment correlation coefficient ® which is symbolized mathematically by:

R=n (EXY)- (EX) (EY)
(nEX2) – (EX)2 ][n (EY2) – (EY)2]

Where:
r= Pearson product moment correlation coefficient.
N. = Total number of Respondents
?x. = Respondent scores on independent variable X
?X2 = Respondent squared scores on variable X
?Y = Respondent scores on dependent variable Y
?Y2 = Respondent squared scores on variable Y
?XY = Respondent squared scored on variable X and Y
? = Greek letter for summation.
We use the figures in table 4.2.7 and substitute in the above statistical formula as follows:
N = 40
?x = 1,950
?X2 = 103,750
?Y = 2,100
?XY = 108,125
?Y2 = 125 000
we therefore inset the figures in the formula:

R=40 (108125) – (1950)(2100)
[ 4 (103750) – (1950)2 ] [40 (125,000) –(2100)2

=40 (4, 325, 00-4, 095, 00)
[ (4,150,000-3,802,500) ][ (5,000,000-4410,000) ] = 230,000
[ (347, 000) (590,000) ] = 230,000
2.05025×10
r= 230,000
452,796.864

r = 0.508. Since Pearson, product moment correlation coefficient varies between- 1 and +1, and the calculated “r” of 0.508 falls within this rage. It shows that thee exist a positive relationship between cases of loan default and the creditworthiness of the borrower.

DECISION RULE:
The decision rule state that if the computed coefficient of correlation (r) falls within the region of 1- and +1, the Alternative hypothesis must be accepted, otherwise reject and accept the Null Hypothesis.
Based on this test, it was seen that the calculated “r” of 0508 falls within the region of -1 and +1 being the extent to which the Pearson product moment correlation coefficient varies. Thus, we can safely reject the Null Hypothesis and accept the Alternative Hypothesis, which that. There is a positive relationship between cases of loan default and the creditworthiness of the borrower.
4.4 STATEEMNT OF HYPOTHESIS TWO
HO3: Null Hypothesis
HA3: Alternative Hypothesis
HO3: There is no direct relation between merchant banks lending and the level of interest rate.
HA3: There is a direct relationship between merchant banks lending and the level of interest rate.
This hypothesis was tested by using Pearson product correlation coefficient (r) it is represented by the mathematical formula below:

R =n (EXY) – (EX) (EY)
[n (EX) – (EX)2 ][n (EY2) –(EY)2] Where
R = Pearson product moment correlation coefficient
N = Total Number of Respondents
?x = Respondent score on independent variable X
?y2 = Respondents squared scores on variable X
?Y = Respondent score on dependent variable Y
?Y2 = Respondent squared scores on variable Y
?XY = The sum of the scores on variable X and Y
? = Greek letter for summation
We use the figure in table 4.2.10 and substitute in the above formula as follows:
N = 40
?X = 2200
?X2 = 135,000
?Y2 = 139,375
?xY = 129,375
We therefore inset the number in the position of their corresponding variables
R = 40(129375) – (2200) (2225)
40(135000) – (2200)2][40(139,375) – (2225)
= (5175, 000 – 4,895,000)
(5,400,000 -4,840,000)][ (5,575,500 – 4, 950, 625)
= 280,000
[ (560,000) (624,875)]

= 280,000
3.4993X10”
= 280,000
591,548,815
r = 0.473
The correlation coefficient ‘’r ‘’ shows that there exist a positive or direct relationship between merchant bank lending and the level of interest rate.
DECISION RULE:
The decision rule states that if the calculation coefficient (r) falls within the region of – 1 and +1.
Therefore, we can then reject the Null hypothesis and accept the alternative hypothesis which states that ‘’ there is a direct relationship between merchant banks and level of interest rate’’

CHAPTER FIVE
DISCUSSION, CONCLUSION AND RECOMMENDATION
5.0 INTRODUCTION:
In the preceding chapter, the data obtained from the select merchants banks and those from the questionnaire were analyzed using both explanatory and statistical tools. The major emphasis of this chapter therefore is discussion conclusion and recommendation, based on the finding.
5.1 DISCUSSION:
This study was aimed at investigating bank lending and load default in the banking industry particularly among Nigerian merchant banks. Chapter one of the study embraced issue relating to the introductory aspect of the study. Here, the overview statement of the problem and purpose of the study was highlighted while some research questions and hypothesis were stated. The significance, scope and limitations of the study were also being discussed in the chapter. Definitions of terms related to the study were not also left out. The review of relevant literature related to the research topic were treated in chapter three handled the methodology of the study and the tools to be used in testing the hypothesis were provided in this chapter. In chapter four the data obtained from the questionnaire were used to address the research question. The hypothesis were also tested with the correlation coefficient(r) and the t-test by employing the data obtained from the questionnaires and those from the secondary source i.e the annual reports of the selected merchant banks and CBN statistical bulletin.
The findings from this study indicate that merchant bank apply the generally known principles of lending in their loan administration. The character of the borrow was the most emphasized factor. The implication of this finding is that when loans and advances were granted to clients whose character, integrity, and management ability of high, there is the possibilities that such customers would try to meet up the repayment schedules. Such customer therefore constitutes a relatively less prone customer to the lenders but clients with low character and unreliable credit standing are regarded as high credit risk borrowers. Collateral was accorded the least importance-from the study, which shows that merchants banks uphold the view that the essence of obtaining collateral security from borrows is to provide a hedge against loss arising from failure to pay back loans. Therefore collateral should never be look upon as a source of repayment but only as a protection of fund in the event of default.
Subsequently, it was also discovered that amongst other factors considered by merchant banks in granting loads and advances that profitability and viability of a prospective project was considered of paramount importance.
This establishes the fact that banks generally make use of depositors money. In order to be able to refund such monies together with interest, they must make profit. It becomes more imperative when it is considered against the background that loan and advances constitutes the most important revenue yielding assets of a bank (merchant banks includes.) bank also make use of owner’s fund and the owner of these funds expect to earn dividends. In addition to deposit liabilities and owners fund, merchant banks also borrow from the money market at a coast. Thus, they have to sufficient, profit to remain in business. Also the visibility of projects consideration in lending decision shows that viable projects have a better potential of generating enough funds to liquidate loans obtained to finance such project.
Findings from this study also revealed that even though merchant banks have their own institutional lending policies, that the bank officials and lending personnel give priority attention to governor policies in their loan administration pattern. In this way, it follows that even where a loan request of a potential borrower may satisfy all safety and profitability requirements, a merchant bank could deem it necessary to ensure that the purpose for which the loan is given out is in consonance with the economic and monetary policy guidelines of the safety and profitability criteria of merchant banks carry out proper credit analysis before loan are granted to customers. They also inspect and evaluate business premises of their clients. Introduce special I monitoring and a borrowed finds, so that repayment of loans can be made accordingly.
5.2 CONCLUSION:
The adoption of good credit administration policy is a must for the survival of bank especially in maintaining a higher level of loan defaults. In the previous chapters. We examined what bank lending is all about and how merchant banks are practicing it. We also treated issues relating to the causes of loan default and possible ways reducing its occurrence especially among merchant banks.
This was achieved by collecting relating related materials and other data derived from the questionnaire administered among ten merchant banks in two large business centers in the country: Lagos and Port Harcourt.
Merchant banks act as catalyst for development by providing funds for viable projects to increase the level of investment and economic development through and efficient loans administration policy.
This study therefore analyzed the lending activities of merchant banks in Nigeria and case of loan defaults. The statistical test that was carried out in chapter four on the first hypothesis proved that there exist a positive and significant relationship between deposits hypothesis proved that there lending pattern. This is also buttressed by the fact that a bulky part of the deposits mobilized by merchant banks are channeled into the loans and advances they give out to borrowers.
Again, the test conducted on the second hypothesis indicated that there is a positive relationship between cases of loan default and the creditworthiness of the borrowers. This is centered on the fact that borrowers that are creditworthy could also have case of loan default because of lack of character. In addition the test conducted on hypothesis three, showed that there is a direct relationship between merchant banks lending and the levels of interest rate.
We also find out during the course of the study that the credit policy guideline of the central bank. That merchant banks on the basis of their risk avers tendencies and strong considerations for profits sometimes disobey the central bank’s guidelines by exceeding within one year while shortfall have always been experienced in the prescribed maximum target for loan of maturity period of 3 years and above it then means that merchant banks preferred short term loan to medium and long term loans even with the associated restriction.
It is with these facts that the researcher has decided to come up with certain recommendations for merchant banks and lending officers in particular, so as to establish a better lending environment free of frequent case of loan defaults.
5.3 RECOMMENDATIONS:
This research had deemed it necessary to recommend the following points, base on the result obtained from the research work.
Nigeria merchant banks should establish special monitoring and supervision of loan, even with the presence of professional lending personnel. The banks should endeavor to set up monitoring and supervision department that will closely monitor and supervise the credits given not to borrowers and customers.
The lending officers of merchant banks should also ensure that the character of the borrowers is of paramount important since it is superior to all other of C’s of credit analysis. This will enable the bankers to ascertain beyond reasonable extent that the terms of the loan contract will be complied with.
The banks should at the same time ensure that the control mechanisms adopted by their bank are capable enough to check problems of loan default in all its ramification. That is part from monitoring and supervision, there should be documented credit limits couple with inspection of borrowers financial statement to be sure that they are creditworthy.
The lending personnel should as well make sure that securities or collateral are preferred in their lending pattern. This will act as an insurance against non-repayment by customers.
Merchant banks in Nigeria should try and organize seminar and lectures for their prospective borrowers, to enlighten them about the implication of their failures and excesses in lending contract. This will go a long way to reduce the frequent cases of loan default.
The merchant banks should adopt corporate planning strategies. A proper corporate planning will place the bank in a position to forecast and predict those businesses and behavioral elements, which causes loan defaults.

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