AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON PROFITABILITY IN ECO BANK PLC LEVENTIS ROUNDABOUT BY AHMADU BELLO WAY, KADUNA
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AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON
PROFITABILITY IN ECO BANK PLC LEVENTIS ROUNDABOUT BY AHMADU BELLO WAY, KADUNA
ABSTRACT
This
research work titled “An Assessment of Loan Defaults and its Impact on
Profitability” with special references to Eco Bank Nigeria Plc, Kaduna. The
study was conducted to find practical means of minimizing the incidence of
default on loans in our banks. This research work focuses on the introduction
to the study, the statement of research problem, objectives of the study, the
scope and limitation as well as historical background of the case study.
Further still, the researcher highlighted the method adopted in the collection
and gathering of both primary and secondary data. This was the questioning
method which involves the use of questionnaire and personal interview, the next
focus was on the analysis of the data collected and the presentation. All data
collected was analyzed through the use of (1) tabular method, (ii) likert
rating scale. However, the summary of the findings were shows that an assessment
of loan defaults and its impact on profitability as in case of Eco Bank Nigeria
Plc Kaduna where considerable increase has been recorded due to the competent
and effective collection strategy employed. Conclusively, it was gathered that
all credit should be for legitimate purpose and adequate processes should be
established to ensure that financial institutions are not used for fraudulent
activities that are prohibited by law.
TABLE OF CONTENTS
Title Page - - - - - - - - - - i
Declaration - - - - - - - - - ii
Approval Page - - - - - - - - - iii
Dedication - - - - - - - - - - iv
Acknowledgement - - - - - - - - v
Abstract - - - - - - - - - - vii
Table of Contents - - - - - - - - viii
CHAPTER
ONE: INTRODUCTION
1.1 Background of the Study - - - - - - 1
1.2 Statement of Problem - - - - - - - 5
1.2 Objective of the Study - - - - - - - 6
1.3 Significance of the Study - - - - - - 7
1.4 Scope of the Study - - - - - - - 7
1.5 Research Questions - - - - - - - 8
1.6 Scope of the Study - - - - - - - 9
1.7 Limitation of the Study - - - - - - 10
1.8 Definition of Terms - - - - - - - 10
CHAPTER
TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 13
2.2 Credit Classification - - - - - - - 13
2.2 Liquidity Requirement of Bank - - - - - 20
2.3 Overdraft - - - - - - - - - 25
2.4 Banking Risk - - - - - - - - 25
2.5 Credit Policy- - - - - - - - - 30
2.6 Defaults - - - - - - - - - 43
2.7 Causes / reason and Impacts of Loan Default - - 46
CHAPTER
THREE:
3.1 Introduction - - - - - - - - 52
3.2 Research Design - - - - - - - 52
3.3 Area of the Study - - - - - - - 53
3.4 Population of the Study - - - - - - 53
3.5 Population Sample are Sampling technique - - - 54
3.6 Instruments of Data Collection - - - - - 55
3.7 Instruments for Data Collection - - - - - 55
3.8 Reliability of the Instrument - - - - - 55
3.9 Methods of Data Presentation and Analysis - - - 56
3.10 Methods of Data Analysis - - - - - - 56
CHAPTER
FOUR:
4.1 Introduction - - - - - - - - 58
4.2 Characteristics of Respondents - - - - - 58
4.3 Data Presentation and Analysis - - - - - 63
4.4 Summary of Findings - - - - - - - 70
4.5 Discussion of Findings - - - - - - 71
CHAPTER
FIVE:
5.1 Summary - - - - - - - - - 73
5.2 Conclusion - - - - - - - - - 75
5.3 Recommendations - - - - - - - 75
References - - - - - - - - - 81
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.
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