TABLE OF CONTENT
Title Page…………………………………………………………………………….. i
Approval Page……………………………………………………………………….. ii
Certification………………………………………………………………………….. iii
Dedication……………………………………………………………………………… iv
Acknowledgement………………………………………………………………….. v
Table of Content……………………………………………………………………… vi
List of Table…………………………………………………………………………… viii
Abstract………………………………………………………………………………… ix
CHAPTER ONE: INTRODUCTION
Background of the Study…………………………………………………………… 1
Statement of Problem………………………………………………………………. 3
Objectives of the study……………………………………………………………… 5
Research Quesions……………………………………………………………………. 6
Significance of the study……………………………………………………………. 7
Scope of the Study………………………………………………………………….. 8
Hypothesis………………………………………………………………………………. 8
Plan of the study………………………………………………………………………. 9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
Introduction……………………………………………………………………………. 11
Meaning and importance of bank lending………………………………….. 11
Effectiveness of credit administration in the Nigeian banking sector 20
Effects of poor corporate governance on loan portfolio of DMBs
in Nigeria………………………………………………………………………………. 30
vii
Ethics and professionalism in the Nigeria banking industry…………. 38
Banking upervision and lending consideration in the banking sector 44
The influence of economic performamce on Bank loan
portfolio performance……………………………………………………………. 49
Effects of margin loan on loan portfolion of banks in Nigeria…… 52
Summary of Literature Review……………………………………………… 54
CHAPTER THREE: RESEARCH METHODOLOGY
Intoduction…………………………………………………………………………….. 57
Area of the Study……………………………………………………………………. 57
Research Design…………………………………………………………………….. 58
Data Sources and Collection…………………………………………………….. 58
Population of the study……………………………………………………………. 59
Sample Proceedure and sample size………………………………………….. 60
Instrument for data collection………………………………………………….. 60
Validation of instrument…………………………………………………………. 61
Reliability of Instrument…………………………………………………………. 61
Technique of data Analysis……………………………………………………… 62
Problems and Limitations of data…………………………………………….. 64
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
Introduction………………………………………………………………………….. 65
Data presentation………………………………………………………………….. 65
Testing of hypothesis……………………………………………………………. 70
Summary of findings……………………………………………………………. 73
viii
CHAPTER FIVE: DISCUSSION OF FINDINGS
Introduction………………………………………………………………………… 75
Discussion of findings………………………………………………………….. 75
Implications of findings…………………………………………………………. 81
Recommendations……………………………………………………………….. 82
Conclusion…………………………………………………………………………. 85
References…………………………………………………………………………. 86
Appendices………………………………………………………………………… 90
ix
LIST OF TABLES
Tables Pages
3.1 Distribution of staff according to banks……………………. 90
4.1 Summary of questionnaire distributed………………………… 90
4.2 Respondents according to academic qualifications………. 90
4.3 Respondents according to years of experience…………….. 90
4.4 Quality of laons and advances of DMBs………………….. 91
4.5 Quality of loans and advancded of DMBs………………….. 91
4.6 Mean responses on the extent poor credit adminisration
contributed to the problem of NPLs…………………………. 91
4.7 Mean responses on the extent supervisory/regulatory
authority contributed to the problem of NPLs in the
banking sector…………………………………………………………. 92
4.8 Mean responsesn on the extent weak corporate
governance contributed to the problem of NPLs………….. 93
4.9 Annual growth rate of GDP and NPLs………………………… 94
4.10 Distribution of responses of accountants and managers
on the extent poor credit administration contributed to the
problem of NPLs……………………………………………………… 95
4.11 Computation of mean and SD for each of the
statement items (managers)……………………………………….. 96
4.12 Computation of mean and SD for each of the
statement items (Accountants)…………………………………….. 96
4.13 Computation of mean and SD of Manager and Accountants 97
4.14 t-test summary for Ho1…………………………………………………. 97
x
4.15 Distribution of responses of managers and acountants
on the extent supervisory authority contributed to the
problem of NPLs ………………………………………………………. 98
4.16 Computation of mean and SD for each of the statement
items (Managers)………………………………………………………… 99
4.17 Computation of mean and SD for each of the
statement items (Accountants)…………………………………… 99
4.18 Computation of mean and SD for managers and accountants 100
4.19 t-test summary of H02………………………………………………….. 100
4.20 Distrbution of responses of managers and accountants on
the extent poor corporate governance contributed to the
problem of NPLs…………………………………………………………… 101
4.21 Computation of mean and SD for each of the statement
items (managers)…………………………………………………………… 102
4.22 Computation of mean and SD for each of the statement
items (accountants)…………………………………………………………. 102
4.23 Computation of mean and SD for managers and accountants 103
4.24 t-test summary for HO3……………………………………………………. 103
4.25 Annual growth rates of GDP and NPLs of DMBs………………… 103
4.26 Pearson correlation to test the relationship between
GDP and NPLs…………………………………………………………. ……. 104
xi
Abstract
The study was principally made to appraise the loan portfolio of DMBs in Nigeria
with the aim of finding the magnitude and trend of non-peforming loans (NPLs) and
the factor responsible fo that. The problem x-rayed here stems from the high
magnitude NPLs in the loan portfolio of DMBs as evidenced in recent joint
examination of banks carried out by CBN and NDIC. NPLs put bank in a position of
under capitalization which will in turn lead to crises and distress. In order to tackled
the above problem, six specific objectives and five research questions were designed
to guide the study. Four hypothesis were formulated and tested in the course of the
study. The study, which is a survey design, used six DMBs in Onitsha metropolies.
Both primary and secondary data from these banks were used in achieving the set
objectives. Though the population of the study comprised 410 staff of the six banks
selected, the study however limited target population to only 111 senior bank officials
who take part in decision – making. The questionnaire was the main instrument used
to collect primary data. The 32 – item questionnaire was validated by three experts,
and was pre-tested and it yielded a reliability coefficient of 0.857. The secondary data
used included NPLs of DMBs and GDP of Nigeria (1997 – 2007). Mean, t-test, and
Pearson correlation coefficient statistical tools were used to analyse the data collected.
The result showed that NPLs of banks is in upward trend and stood at about 32% of
the entire loans granted by banks. Poor credit administration by banks, lapses in
CBN/NDIC supervisory over-sight, weak corporate governance, and poor economic
situation in Nigeria contributed to the above problems. It was recommended among
others that banks should review their lending policies; CBN should review the
existing corporate governance code, and that the supervisory bodies should apply full
weight of law on erring banks.
CHAPTER ONE
INTRODUCTION
Background of the Study
The relevance of banking to the Nigerian financial system and
indeed the entire economy cannot be over emphasized. Without banks
economic activities would grind to a halt. Undoubtedly banks serve as
catalysts to the growth and development of any nation, Nigeria inclusive.
The primary function of banking in an economy is to provide
financial intermediation. Financial intermediation means the mobilization
of funds from the surplus units at a cost for on-lending to deficit spending
unit at a price, (Oboh, 2005). Through this process, deposits collected
from surplus economic units are channeled to deficit unit in the form of
loans and advances. Thus banks as financial intermediaries have two
basic traditional functions: deposit mobilization and lending. But by far
the most important function as far as banks are concerned is the lending
function.
Lending has become a vital function in banking because of its
direct effect on economic growth and development. This is being
pursued in most countries particularly the developing ones where banks
and lending activities have been usefully integrated into government
policy formulation in the national economic development process. Thus
the lending activity of banks as it affects economic growth and
development has continued to gain prominence in the light of modern
economy.
2
As agents of development, banks provide loans and advances
including a variety of contingent facilities. The bulk of the funds
deposited with banks constitute the bases for loans and advances to
personal and business customers to facilitate their individual economic
activities. Like any other business entity, banks are in business to make
profit and as such they charge interest on credit extended and pay
interest on funds deposited with them. The difference between the
interest received and that paid is the gross margin which constitutes the
profit of the banks (Rose, 2003).
Lending is said to be the most profitable activity of banks.
However, if lending decisions are not handled with care, it could turn out
to be the most loss-making activity of a bank. The safety of any loan and
advance is therefore of paramount importance to bank.
Banks therefore ensure that there is a reasonable certainty that the
loans granted are likely to be repaid by the borrower. In order to keep
these risk factors under control, the bank lending function is closely
regulated to ensure prudent policies and practices. Banks also control
risk in the lending function by setting up written policies and procedures
for processing each loan request.
The bulk of loans and advances made by banks follow some basic
principles which help to minimize the adverse effects of lending
especially the incidence of bad debt. Banks lay great emphasis on the
character, integrity and reliability of borrowers. There must be a
reasonable certainty that the amount granted can be repaid form the
operations of the firm. If the loan is granted to a personal borrower, the
source of repayment must not be doubtful. The borrower must be able to
3
provide acceptable security which will serve as something to fall back on
if the expected source of repayment should fail
All these safeguards are built into the lending programme to help
reduce credit risk. Credit risk is the risk that the principal or the interest,
or both or part thereof of the credit extended to a customer will not be
repaid by him in accordance with the loan agreement, (Anyanwaokoro,
1996). When this happens, the bank will end up classifying the credit as
bad debt, and in due course it will be written off. The long-run effect of
this on the bank can be very detrimental with its attendant effect on the
entire economy. This is what has happened to many Nigerian banks that
were classified in the past as distressed by the Central Bank of Nigeria.
It is therefore expected that a high degree of efficiency and
effectiveness be maintained in the operations of banks especially in the
area of loan-making considering its implication on the profitability,
liquidity and safety objective of banks and the well being of the economy
at large.
Statement of Problem
There is consensus among banking experts that the greatest
source of bank profitability is credit delivery. However if lending
decisions are not handled with care, it can turn out to be the most lossmaking
activity of a bank. The safety of any loan and advances is of
paramount importance to banks.
The expectation of every banker is that customer to whom the credit is
extended will repay both the principal and the interest as agreed. But this
4
expectation does not always materialize. Banks may incur risks and
experience some losses if certain borrowers fail to repay their loans.
In order to keep risk factors associated with lending function under
control, a lot of caution is applied by both banks and regulatory/
supervisory authorities. The bulk of loans and advanced given by banks
follow some basic principles so that certain adverse effects of lending
will not occur especially the incidence of bad debt. Moreover, the bank
lending function is closely regulated to ensure the safety of bank and the
safety of customers’ deposit. The responsibilities of monitoring the
lending activities of banks in Nigeria are vested with Central Bank of
Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) to
ensure strict compliance with the laid down rules and regulations. All
these precautions are built into the lending programme of banks to help
minimize credit risk associated with lending.
With all the precautions highlighted above, one expects the
problem of credit risk to be very minimal in the Nigerian banking system.
It is however disheartening to observe that the magnitude of nonperforming
loans in the loan portfolio of Deposit Money Banks (DMBs) in
Nigeria is on the increase. This trend is generating a lot of concern
among stakeholders in the banking industry. Umeaba (2009) observed
that bank loans classified as non-performing in 2008 amounted to 40%
of total bank loans. Infact the magnitude of non-performing loan in the
loan portfolio of deposit money banks in Nigeria has questioned the
professional credibility of banks management and integrity of
regulatory/supervisory authorities who are responsible for protecting the
banking system. Uzor (2009) noted that the increasing share of loans
5
classified as non-performing is evidence that something was wrong with
the system of credit delivery of the banking sector.
It is obvious that a bank that has the bulk of its assets as nonperforming
debts stand very little or no chance of surviving in the
industry, especially in the face of the present global financial crises.
Classified debts put banks in a position of under capitalization which will
in turn lead to crisis and distress. Recently, the joint examination of
banks carried out by CBN and NDIC revealed that ten banks were in
grave danger of collapse because of burden of non-performing loan. The
CBN, in order to prevent systemic crises, had to extend a life-line of
620 billion to these banks in a bid to breathe life into them, (Business
Day, 2009).
Although there has been several attempts by the relevant
authorizes to check the ugly incidence of non-performing loans, all
efforts made by these authorities seem not to have yielded the desired
result as the problem has continued to persist as evidenced in the
current credit crises in the system. This means that the major factors
which have fostered the issue of classified debts among deposit money
banks in Nigeria have not been properly scanned and diagnosed. The
need therefore arises for further studies on the problem which is the
issue of the research.
Objectives of the Study
Based on the problems highlighted above, the broad objective of
this study is to examine the performance of the loan portfolio of Deposit
6
Money Banks (DMBs) in Nigeria. Specifically, the study will achieve the
following objectives:
1. To determine the extent and trend of non-performing loans among
banks in Nigeria.
2. To ascertain the extent poor credit administration is responsible for
the high incidence of non-performing loans in the banking sector.
3. To examine if poor supervision by supervisory/regulatory
authorities is responsible for high incidence of non-performing
loans in the banking system.
4. To identify if the level of non-performing loans among banks is as
a result of poor corporate governance by the operators.
5. To find out if economic performance of the country is responsible
for non-performing loans in the banking sector.
6. To suggest various ways through which the problem of nonperforming
credit in the banking system will be minimized.
Research Questions
The study is guided by the following questions:
1. What is the magnitude and growth rate of non-performing loans
in the banking sector?
2. To what extent has poor credit administration contributed to the
high incidence of non-performing loans in the banking system?
3. To what extent has poor supervision by supervisory/regulatory
authority impacted on high incidence of non-performing loans in
the banking system?
7
4. To what extent has poor corporate governance by bank
management contributed to non-performing credit in the banking
system?
5. To what extent does the economic situation in the country
contribute to credit crises in the banking system?
Significance of the Study
This study is coming up at a time when the banking industry is
passing through a serious problem of non-performing loans with its
negative consequences in the sector. The study will therefore be of
immense importance to various stakeholders in the banking sector
particularly the operators of banks, borrowers, depositors, regulatory
bodies and even the general public.
The outcome of the study will help managers of banks to identify
the causes of bad debts and its effects on the activities of banks so that
they can take the necessary steps to check the ugly trend.
The study would be of significance to the investing public who
obtains loans from banks. They would be educated on the need to make
efficient use of credit extended to them as the reverse often leads to
inability to honour their obligations. The study will show them that by
defaulting in loan repayment they make it impossible for banks to
address their function of credit provision in the economy.
Unprofessional and unethical practices among bank operators
constitute the greatest threat to banking industry. It is hoped that the
findings and recommendations of this study will help to expose some of
the unethical and unprofessional practices carried out by both bank
8
management and staff. With this exposure, it will position the supervisory
and regulatory authorities to tackle the problem in order to minimize it.
To bank management, the study will enlighten them on the
importance of efficient risk management techniques in the management
of loan portfolio.
To the academia, the research work would be significant because
salient issues in loan portfolio management will be highlighted to
enhance their knowledge of the topic, and this will increase the pool of
knowledge from which reference can be made in future.
Scope of the Study
The researcher would have liked to extend the scope of this work
to cover both development banks, specialized banks and other
categories of banking institutions in the banking system, so as to get to
the root of the problem identified in this study. However in order to carry
out more accurate and detailed study, the scope of this work is strictly
narrowed to loan portfolio of Deposit Money Banks (DMBs) in Nigeria.
The study covered a period of eleven (11) years (1997 to 2007).
Hypothesis
The following hypotheses were tested in the course of the study.
All the hypothesis are in the null.
Ho1: There is no significant difference in the mean responses of
Accountants and Managers on the extent poor credit administration
contributed to the problem of non-performing loans in DMBs.
9
Ho2: There is no significant difference in the mean responses of
Managers and Accountants on the extent the supervisory/regulatory
authorities contributed to the problems of non-performing loans in the
banking system.
H03: There is no significant difference in the mean responses of
Managers and Accountants on the extent poor corporate governance
contributed to the problem of non-performing loans in DMBs.
Ho4: There is no significant relationship between the level of banks’ nonperforming
loans and GDP of Nigeria.
Plan of the study
In order to present detailed account of what the researcher has done
and found in the course of this study, the work is presented in five
chapters.
The first chapter is introductory chapter. The chapter presents the
background of the study, the problem to be studied, objective of the work
and the significance of the study. The chapter also specifies the
research questions that guided the study, the hypothesis and the scope
of the work.
Chapter two reviews related literature. In this chapter the opinions
of eminent scholars and commentators are reviewed. The review is
divided into eight sub-topics.
Chapter three presents the methods and procedures adopted in
data collection and analysis. The presentation is made under the
following sub-headings: research design, area of study, sources of data
collection, population and sampling procedure, instrument for data
10
collection and how it is pre-tested and validated, techniques adopted in
data analysis, and problems encountered in data collection.
Chapter four is the presentation and analysis of data gathered.
Here the data collected are presented in tables and analyzed.The four
hypothesis formulated in the work are tested here. Summary of findings
are presented at the tail-end of the chapter. All the tables used in this
chapter are assembled in appendix.
The fifth chapter which is the last chapter contains the discussion
of findings, its implications, recommendations and conclusion of the
work.
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