COMMERCIAL BANK LENDING POLICIES IN NIGERIA AND THEIR IMPLICATIONS (COMPARATIVE CASE STUDY OF THREE SELECTED COMMERCIAL BANKS IN ENUGU ZONE, UNION BANK PLC, AFRIBANK PLC AND UBA PLC)
Where money is kept for safe by a layman. As a result of this misconception, an understanding of what a bank is. There are as many definition as there are money authors and textbook in banking. As contained in the Dictionary of banking which defined a bonk as an establishment which deals in money, receiving it on deposit from customers, honouring cheques and lending or investing surplus deposited until they are required for payment.
Origin of commercial banking in Nigeria Banking as a kind of business is o recent origin but tracks of banking and banking institutions can be seen right from the ancient post. However, its from, scope and functions went on changing thought time. The three main sources to which commercial banking operations can be traced are the merchant, the goldsmith and the moneylenders in the days when all money was still in the form of coins made of precious metals.
The need for commercial banks cannot arise in an environment of complete trade by barter or counter trade. It was not therefore, still coins were regularly used for cash transitions that banking become feasible. From the beginning of banking in Nigeria in 1892, till 1952, there was no regulation of banks.
The failure of many banks during the banking boom is resulted in a significant loose to depositions. The collapse of one bank after another caused considerable. Concern within government circles.
Consequently, government felt there was need for a code of banking conduct. In order to control the banks in Nigeria and to protect their depositors from suffering further losses which they had hither to suffered from colonial government appointed the pat.. commission to look into the existing state of banking in the country and make recommendation on the extent as well as the form of control that was required in the country, although the commission was set up in September, 1948, it was based on the recommendations of this commission that the first banking legislation was passed in 1952. “An ordinance for the regulation of the business of banks which passed hemay, 1956.
- With the establishment of the central banking 1959, more banks the began to crime into the banking scene. In 1969 a new banking legislation the banking Act 1959 was passed.
- Nigeria banking system was undisguised in 1973when the federal government acquired 40 percent shares in the expatriate banks. This was later increased to 60percent in 1976 in 1977 another major event took place. The rural banking scheme which led to the establishment of money new bank branches in rural areas was introduced. It was execute in three phase between 1977 and 1990.
COMMERCIAL BANKS LENDING AND THEIR IMPLICATION BY THE BANKS UNDER STUDY.
The most important assets held by commercial banks are found in its loan portfolio. Lending is the pmn crewing capacity of the commercial banks. One of the cardinal principles of classical banking is to ensure effective lending. Hence a proper implementation of lending polices can be considered paramount in revitalizing or economy.
According to the chambers dictionary which defined lending as the use of something for a period of time on the understanding that it or its equivalent will be returned. It simply means obtaining something on the condition that it will be returned to the owner. While banking aspect lending could be stated as the facilities which a banker offer to his customers or non-customers on the ground that banker after a specified time period on payment of some charges by the customers.
In relation to the above definitions, it is interesting to note that when the banker is lending customer are also depositing. And that their role as lenders is as important it as that deposit taking. Considering the inter-relationships between one and the other. The two major views explain the banks role of financial institutions accept savings from house holds and lend the savings to business. Actually, this means the duty of bankers to exercise very carcable and professional judgment in receiving loanable funds and exploiting it by partially converting them into loans and advances.
2.2 BASIC PRINCIPLES OF COMMERCIAL BANK LENDING
As lending appears to be one of the most intricate services provided by the commercial banks, we shall examine the basic principle of commercial bank lending.
There are three basic principle of lending which only serve as a guide to the commercial banks in this research. They are: Safely, suitability and profitability, though they consist of some other sub elements.
- SAFETY: This is very important to a banker Hence, banks lay great emphasis on the basic lending which consist of character, capacity, capital, collateral and credibility. There must be a reasonable certainty that the amount granted can be repaid from profits and cash flow generated from the operations of the individuals or corporate customers.
In investigating about the character, the banker should know who the customer is, his or her previous relationship with the bank and his credit records.
- SUITABILITY: The banker should ensure and be satisfied about the suitability of an advance ever. Where the requirements of a borrower, it is absolutely necessary for the bankers to ensure that the purpose of the loan is not in conflict with the economic and monetary policies of the government.
In Nigeria, the commercial banks lending is highly regulated and controlled by the central bank Nigeria. This is done through the issue of annual monetary circular or credit guidelines. By this, qualitative and qualitative limits are placed on bank lending. Therefore, the purpose of the advanced and their implication on the economy are given due consideration when extending credit to customers.
iii. PROFITABILITY: The aim of any commercial is to maximize their wealth. Therefore any facility granted are expected to yield some profit to the bank what determines the amount of profit is the interest rate charged.
In Nigeria interest rate and vanes fixed by the central bank and are generally higher then the interest paid to depositors. Thus, banks are able to make profits relatively easily.
2.3 NIGERIA COMMERCIAL BANK LENDING POLICIES
In order to accomplish the objectives of lending activity, commercial banks in Nigeria evaluate policies or guide lines which will serve as a farm work for dealing with loans such lending policy is usually defined “as a specific design and controlled”. It includes loan portfolio specifications of amount available for lending to differentiate closes of borrowers, due maturity dates, credibility of the borrower, types of loan schedule for repayment.
In Nigeria today, there are two major lending policies operating in our commercial banks. These the explicit lending policies the explicit being formulated by the monetary authorities which is largely derived flow circulars issued periodically by the central bank.
The implicitly policies are formulated by the commercial banks themselves and mostly designed to relevant internet constraints like sectoral performance, deposit base, existing exposure.
Reeds and company are of the opinion that commercial banks have the lending policies to establish the direction and use of funds flows stock holder depositors and others, to control the composition and size of loan portfolio and to determine the general circumstances tender which is appropriate to make the loan “Although these policies serve a number of purpose, the most important is that they provide guidance for lending officers and there by establish a degree of informality in lending.
2.4 FACTORS THAT DETERMINE NIGERIA COMMUNICATION BANK LENDING POLICIES
Factors that determine lending polices fall into two categories, the eternal factors which are incongruous and the internal for endigenous factors since lending is important to both the banks, customers and the entire community, lending policies are worked out carefully after considering the following factors.
- External Factors: – This means the environment of the community which the banks separate. These concerns the political situation in the country, idle there is stability or not, the nature of the economy of the state, the level of economic development and the social and psychological attitude of the people in the country. It also include the legal restriction on banks. These external factors that impure on bank lending include:-
- Financial System
- Monetary and fiscal policies
- Customers and the public
- Credit needs of the community
- The economic position
- Financial System:- The financial system can be defined as the family of makes and regulations and the longerial of financial arrangement, institutions, agent and the mechanism where by they relate to each other within the financial self or and with the rest of the world.
The commercial banking system being within an outer system is bound to be influenced by activities of other actors and participants in the financial sector.
The components of the financial sector include:-
- Banking system central, commercial and co-operative banks
- Saving institutions:- Federal savings banks
- Specialized or development banking institutions
- Insurance companies and provident funds
- The money and captied markets
- Public sector federal and state government and parastatls institutions.
- Monetary policies:- The monetary authorities in Nigeria are the federal ministry of finance and the central bank of Nigeria. However, monetary authority functions are performed by the central bank of Nigeria on behalf of the federal government.
The review of statutory functions of central bank of Nigeria indicate the large armory of tools supervision the activated of the commercial banking system. These tools might be tight or easy.
- Competition: Commercial bank operate in a completive environment. They complete among themselves as well as other participants in the money and capital market.
In lending to business borrowers, they must complete with the suppliers of funds in the money and capital markets for banks to survive, they must incorporate the competitive nature of the banking system into their lending policies.
- The customer and the public: – What the public expects from the commercial bank depends on their knowledge and perception of the roles and functions of these banks. Therefore, there is need for a banking habit, to educate the customers and the public on banking operations, especially the branch banking operation.
- Credit needs of the community: – The credit needs of the community is the obvious factor that determines the lending polices of commercial banks with country. The banks cannot finance short-term business loans, what is desired or needed in the country are agriculture loans of short term or even long-terms.
- The Economic position:– The economic positional any point in time determines the commercial banks lending for instance under and inflationary period lending may not be advisable because of change of non-repayment.
- Internal factors: The internal factors are more important because they are selfish motives of the bank. The internal factors which determines the commercial bank lending policies will be considered in the follow ways.
- The capital position of the banks. The capital of a bank serves as a cushion for the protection of the depositors of funds. The size of capital in relation to deposits influences the amount risk that a bank can afford to take for commercial banks, capital is their own founds or resources. It is mainly shareholders fund or resources which consist of paid up capital, share premium accounts, statutory reserves undistributed profits general reserves and general provisions.
- Stability of deposits:- The stability of the customers deposits also helps to determine the amount of advance to be approved to them and consequently determine the lending policies. This is because a regular depositor creates no doubts of repayment then an unregular depositor.
- The risk and profitability of various types of loans. This goes a loan to determine the lending policies of commercial banks since commercial banks aims at profit maximization, any loan granted by the bank are expected to pay or yield some profit to the bank and it is the late of interest that determined the level of profits
- Liquidity and profitability:- Every commercial bank is profit. Left is itself, it loan like to creating deposits in order to lend at profit. But this entails certain risk. In the first place, the loan may not be repaid. Secondly, there could be a run on the bank for cash withdrawals. So banks should always try to meet their dual obligation of solvent and profitability.
- security or safely of the loans and advances: commercial bank are limited in their lending policies both quantitatively and qualitatively loans must be limited and adequate security must be afforded always. But limitation of loans and advance which constitute he banks most profitable assets means decreasing earnings. But the question is what must the bankers do to resolve the deline? This problem is solved by a judicious portfolio or asset mix. This is achieved by dividing the loan among different types of borrower and for different perilous of time.
2.5 IMPACTS OF LENDING POLICIES ON NIGERIA ECONOMY: The lending policies as a process designed by the management of a bank to control lending activities affects the bank itself the customers and the entire economy.
There, has been a wide speculation that the lending policies of bank is to strict. However, it is a common knowledge that getting the support from the financial institutions have been inadequate for budding Nigeria business men, especially entrepreneur who would like to into small or medium scale industries in the recent post.