AN ASSESSMENT OF LOAN DEFAULTS AND
ITS IMPACTS ON PROFITABILITY IN ECO BANK PLC LEVENTIS ROUNDABOUT BY AHMADU
BELLO WAY, KADUNA
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study
Attempts to explain the operation of commercial
banks began with the inception of banking institution. Lending has become a
vital role in banking operations because of its direct effect on economic
growth and business department. In most countries, banks and their lending
activities have useful integrated into government policy formulation. As far as
banks are concerned, their role as lenders is important as that of deposit
taking into consideration; the interrelationship in banking system. All
commercial banks have common attributes, they keep deposits for their
customers, permit certain deposits to be transferred by cheques from an
individual account to other accounts in any bank in the country, make loans and
invest in government securities.
It is these common features particularly the
holding of demand deposits that distinguished commercial banks from other
financial institutions, banks like all other business organization have the
commercial objective or primary to objective maximize profit, they do this
through granting of loans and generate interest from such loans, this translate
into profits to banks in their bid to maximize profit.
According to Clarke (2009) problem loans crises
as a result of default in the payment agreement caving undue delay in payment
and or possible loss. In the banking industry, problem are often inheritable
consequence, which have serious cost implication for banks, conservative
lending through suppresses profit while supportive leading the possibility of
default.
We are Nigeria’s leading retail bank, we emerge
from the largest merger and consolidation in Nigeria’s banking industry
following the landmark banking consolidation spearheaded by the Central Bank of
Nigeria (CBN) mire financial institutions with competences in investment
banking corporate and retail banking came together in January 2006 to form ECO
Bank.
The banks have 216 business officers spread
across the country and we are working to increase this number in the nearest
future it has 7 largest bank by business locations with Head Office at 785,
Herbert Macauley Way, Central Business District Abuja, while the Head Office is
at Annex 290A Akin Olugbade Street, Victoria Island Lagos.
The Bank have seventeen (17) regional offices in
Lagos Island, Lagos Mainland Ibadan, Benin, Port Harcourt, Kano, Abuja, Kaduna,
Bauchi, Minna, Maiduguri, Apapa, Enugu, Makurdi, Yola, Dutse, and Sokoto. This
helps it to maintain one of the fastest decision making processes in the
industry today.
As the Nigerian financial sector grows we are
gradually transforming into a financial super-market with subsidiaries covering
insurance, pensions fund management, share registration and stock broking. In
this regard, we have majority shareholding in Fug Pension Limited, Insurance
Brokers, Caranda Management Services Ltd, Pelican Press and Unity Registration
Ltd in consolidating this strategic business direction. Eco Bank has equally
acquired majority shares in Unity Capital Assurance Plc a leading Insurance
Company.
Today the bank is one of the largest employers of
labour in Nigeria and contributor in Nigeria and contributor to its gross
domestic product (GDP). The bank and its subsidiaries employ about 5,000
people. In the first year of operation the bank grew other balance sheet size
29% profitability also grew by 418% to N2.57 billion which is equivalent to USD
20.43m. The result of the second year of operation also holds great promise.
Services
Offered
Eco Bank in line with its mission statement to
remain the best in providing financial services and create superior wealth to
their shareholders has developed numerous in tech. services and product apart
from the traditional product such as saving, current and time deposit accounts.
Eco bank provides a lot of other products and services both locally and foreign
grouped as follows:
a)
Core
Banking Services
i.
Deposit Accounts,
Current Account, Saving Account
ii.
Domiciliary Accounts
b)
International
Banking
i.
Foreign exchange
transaction
ii.
Travelers cheque
iii.
Export banking and
finance
c)
Corporate
Finance
i.
Equipment leasing
ii.
Loans and advances
iii.
Cash management
services
iv.
Import financing /
issuance of letter of credit
v.
Consumer, retail and
e-banking
d)
Special
Banking Services
i.
Issuance of borides,
guarantee and indemnities
ii.
Collection of custom
duties
iii.
Acceptance of
payment of m-tell bills
iv.
Financial advisory
services
1.2 Statement
of Problem
Banks occupy a critical position in a complete
financial system that supply the money and credit need of the economy.
Empirical evidence exist which suggest a positive
correlation between real economic growth and bank; asset and between money
supply, banks asset and economic development are both financial liberalization
and repression school of thought see the development of banking as a critical
factor in economic development of developing countries like Nigeria, this fact
is evident in the assertion that no other financial institution contributes
more significantly to the successful functioning of a nation economy than that
of commercial banks.
Apart from promoting the payment mechanism, banks
after an efficient mechanisms or channel for the mobilization of savings and
their allocation to the problem of most commercial banks is in the area of loan
default. Banking distress occurs when a bank experiences liquidity or
insolvency resulting in a situation where depositors fear the loss of their
deposits and a consequent breakdown of contractual obligation.
1.3 Objective
of the Study
Although there are certain basic condition and
procedures necessary for consummating transaction between the lender (the bank)
and the borrower, none of these conditions completely protest the lender
against the risk of default if the borrower became irresponsible and unable to
pay.
The primary objective of this research will be to
find practical means of minimizing the incidence of default on loans in our
banks.
To achieve this, the following secondary
objectives have been specified:
a)
To identify causes
of loan default on operation of the bank
b)
To recommend
measures for reducing cases of loan default
c)
To access the impact
of loan default on the profitability of the bank
d)
To review existing
literature on problem of loan default
1.4 Significance
of the Study
The importance of this study lies in the fact
that the performance of the banking industry mirrors the performance of the
economy an efficient financial service industry is a pre-requisite for the
efficient functioning of the economy.
A failed financial system is an indication of a
failed economy. A study of bank default therefore will go a long way in
expressing the underlying cause of the distress phenomenon and contribute
towards eliminating obstacles to growth and development in Nigeria.
This research work will also seek to enlighten
the general public, investors in the banking industry customers of banks, the
government and regulatory authorities of the Nigeria banking industry as to the
cause and implications of loan default problem.
This research enhance the operation of commercial
bank in area of loan and credit management as well as to positively affect the
quality of services provided by Eco Bank to the public. The study is
significant in that it would serve as a base for future researchers who will
like to carry out a research on similar topic.
1.5 Research
Questions
The research will seek to find answers to the
following research questions:
a)
What are the
practical means of minimizing the incidence of loan default in the bank
b)
What are the causes
of loan default on the operation of the bank?
c)
Are there measures
for reducing cases of loan default?
d)
Is there any impact
of loan default on the profitability of the bank
1.6 Scope
of the Study
This research will focus on commercial banks with
reference to Eco Bank Plc Kaduna. Data for the study will be within the year
2009 to 2011 it is limited to the operation efficiently as regards credit and
the management of credit, loan recovery and the impact of loan and suggested
solution default to Eco Bank.
In other to attain the objectives of this
research, the scope of the study will be defined to embody all relevant aspect
of loans and default in banking operations. The different types of loans, frequency,
amount involve, measure of loss to banks, causes level of effectiveness and
preventive measures.
1.7 Limitation
of the Study
The major limitation of this study research risk
stem from the difficulty in obtaining classified information on Nigeria Eco
Bank in particular consequently all relevance drawn must be seen from this
perspective as the sample may not cover the whole industry.
Since ration are to be used in the analysis of
data another limiting factor is the shortcoming of the performance of a
business concern financial rations do not give out up to date to current
position of things in the bank financial statement.
1.8 Definition
of Terms
For proper understanding of this research work by
the researcher, the researcher have defined some relevant terms used in the
research work.
Loan: An agreed
amount made available to a customer transferred from a loan account in the
customers current account.
Interest: The amount
of money charged by the bank for the use of its money by the way of loan.
Liquidity: It is the
ability of a bank to meet its current obligation as they fall due, if measures
short term debt paying ability.
Distress: Is the
process whereby bank is unable to meet its financial obligation that fall due,
such as inter-bank indebtedness and deposit funds
Credit Worthiness:
This is the assessment of the customer’s ability to pay and test that the
credit will be attended to him will not him bad.
Overdraft: This involve
allowing the customers current account to be overdrawing by the customer as a
type or a loan.
Credit Period: Length of
time which credit is allocated or granted.
Collateral: These are
security pledge for repayment of loan. It consists of property that can be
valued easily and converted to cash.
Advance: These are
money level by the bank inform of order, draft on current or by personal loan.
Statement of Account:
This is a document showing the position or the statement of the account owns
the bank.
Reserve: Amount set
aside out of profit other surplus that one designed to meet any liability
contingency, commitments in value of assets know to exist at the date of
balance sheet.
Monetary policy:
The actual management of the money supplied to achieve national economic goal.