AN EXAMINATION OF DEBT DEFAULT IN COMMERCIAL BANKS IN NIGERIA. (A CASE STUDY OF UNITED BANK FOR AFRICA (UBA) BENIN CITY)
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AN
EXAMINATION OF DEBT DEFAULT IN COMMERCIAL BANKS IN NIGERIA. (A CASE STUDY OF
UNITED BANK FOR AFRICA (UBA) BENIN CITY)
ABSTRACT
Bank is an organization that provides
various financial services as well as keeping or lending of money to customers.
Banks also perform their credit function by extending loans and credit to meet
the needs of the customers, as well as earn profits and returns that would
increase the wealth of shareholders. This has led to accumulation of bad debts
in the banking industry since some of these debts are not only un-collectable,
by the banks, but un-payable by the customers, most of which have had great
resultant examination on banks over along period of time. A number of factors
are responsible for these and will be discussed in details in this project.
Debt defaults constitute a loss to the bank, individuals and the society at
large. Therefore, concerted efforts must be made to ameliorate this problem to
enable the bank to perform their roles in the economy. In determining the
examination of bad debt or debt default as the project suggest, United Bank for
Africa (UBA) will be used as case study to determine to what extent debts
defaults affects bank. At the end of the research work, skills of curbing
defaults would be suggested to help the banks and the government to work
together to promote investors and shareholders confidence.
TABLE OF CONTENT
Chapter one- Introduction
1.1
Overview
1.2
Statement of the problem
1.3
Objectives of the study
1.4
Limitations
1.5
Research questions
Chapter Two – Literature
Review
2.1
Historical Background of Commercial Bank
2.2
Origin of lending
2.3
Development of commercial banks in Nigeria
2.4
Role of banks in Nigeria
2.5
Lending principles and canons of lending
2.6
Concept of credit
2.7
Credit analysis
2.8
Credit evaluation
2.9
Types of bank credit facilities
2.10
Risks in lending
2.11
Default in repayment
2.12
Causes of debt default
2.13
Cost of debt default to commercial banks
Chapter three
Research methodology
Instrument for data collection
Method employed
Chapter four
Data presentation, Analysis and
interpretation
Profile of UBA Plc
Analysis of data
Analysis of questionnaire respondents
Chapter five – summary, recommendations
and conclusion
Summary
Conclusion
Recommendation
Bibliography
Questionnaire
CHAPTER ONE
INTRODUCTION
In Nigeria, as in most other developing countries, the financial system
consists of number of institution which include the central bank, commercial
bank, federal saving, merchant and mortgage banks as well as the community
banks, the stock exchange securities commission. These commercial banks carry
out their day to day activities they mobilizes funds (savings), these savings
are a pool of funds on which the banks on the one hand pay interest to the
owners of such funds and then lend these savings or funds to investors in the
form of loan, credit, overdraft and advance for the development purposes, these
pay back with interest of every lending. The loans and advances constitutes the
most important components of a banks asset port-folio and this is why it is in
the interest of every lending institution to make sure that it does not acquire
any bad or doubtful debts, even though allowances are usually made for it. The
cash flow problem which are currently experienced by many businesses under the economic
recession have severally reduced by the ability to service bank debts.
(according to Nigeria economist 1988:24). Most clients fails to pay in interest
and as a result the interest plus the principals accrues, thus making the
possibility of repayment remote. There is no banking institution in the
country, including the United Band for Africa (UBA) as a case study that is no
threatened by the effect of debt defaults on their banking activity (Endeavor
1990.28). In the recent times, debt default has been one of the main set backs
experienced by commercial banks in Nigeria and for these reason the provision
for bad debts have been so enormous that they attract attention from both
general public and the government. Thus, debt default causes great concern to
Nigeria banks.
In the cause of their lending policies banks give loan and advances to
customers who for one reason or the other re viable to pay back in such away,
the bank are costly unwilling to go into litigations which are costly and time
wastage so they write off such monies as bad and doubtful debts. Bad debt are
simply loans, which have proven difficult or impossible to recover. The most
surprising things is the length of time it takes before the banks cry out for
action, this is an indication of how tolerant the system is to fraudulent
borrowing. If its existence were not at stake, it can be argued that this
sudden attention is the examination of bad debt default on commercial bank in
Nigerian might never have arisen. Thus, this research is therefore centred on
United Bank for Africa in relation to the examination of debt default on its
banking activities.
GIVE A BACKGROUND IN
NIGERIA
Default means failure to do something that must be done by law especially
paying a debt. Nigeria has said it can no longer afford to service its $33bn
foreign debt because of plunging oil revenues and the failure of some of its
privatization plans. Consequently, the country has suspended payment on some of
its debt as it tries to reschedule payment, said central bank governor Josph
Sanusi. Nigeria is one of the word’s largest oil producing nations held foreign
exchange reserves of only slightly more than $8bn, down about a fifth since
December. Mr. Sanusi said he had decided to halt all debt repayment rather than
to eat further into the reserves. But information minister Jerry Gana was quick
to try and downplay fears of along lasting default.
CAUSES OF DEBT
DEFAULT IN NIGERIA
Limited Funds
Most of Nigeria’s debt is owed to foreign government, members of the Paris club
of official creditors. Earlier this year Nigeria parted company with the
international monetary fund about how best to achieve a turn around in its
economic fortunes. Nigeria’s finance minister Adamu Ciroma told the BBC that
the country was unable to pay because parliament had only approved a limited
amount to funding for the current financial year. Nigeria has been asking
official creditors for substantial debt relief but apart from a modest amount
of debt rescheduling, has not had much success, says the BBC’s Dan Isaacs in
the commercial capital Lagos.
Over spending
This
is because is has failed to demonstrate the required track record of sound
economic management, our correspondents says. Nigeria is spending faster than
it is earning and therefore falling deeper into deficit.
Impeachment crisis
The
debt suspension was announced just as president Olusegun Obasanjo was faced
with possible impeachment by both houses of Nigeria parliament. Mr. Obasanjo
stands accused of failing to curb the country’s spending of ignoring budget, of
allowing corruption to remain and of ignoring spending laws.
BACKGROUND OF UBA
The United Bank for Africa (UBA) was established in 1961, it is the largest financial
services group in Nigeria and West Africa, with a balance sheet size in excess
of N1, 64 trillion, the first Nigerian bank ever to achieve this feat in the
history of the Nigeria and West African Banking Industry. UBA has grown from
more than just a bank to a one-stop-shop financial services institution,
providing solutions to more than 6 million core and walk-in customers through
its expansive retail network of over 630 business offices. Having presence in
all the commercial centers and major cities in Nigeria, UBA is often referred
to as the neighborhood bank, which aligns with the banks strategic intent and
brand strap “Africa’s Global Bank”. UBA’s aim is to deliver what the customer
wants and expects; closeness and proximity, choice, convenience and
customization. Today’s United Bank for Africa PLC (UBA) is the product of the
Merger of Nigeria third (3rd) and fifth (5) largest banks, namely
the old UBA and the erstwhile standard Trust Bank Plc (STB) respectively and a
subsequent acquisition of the erstwhile continental Trust Bank Limited (CTB).
Founding of the old UBA in 1961, and the erstwhile STB and CTB both in 1990.
although today UBA emerged at a time of industry consolidation induced by
regulation, the consolidated UBA was borne out of a desire to lead the domestic
sector to a new era of global relevance by championing the creation of the
Nigerian consumer finance market, leading a private/public sector partnership
at supporting the acceleration of Nigeria’s economic development, and growing the
institution from a banking to a one stop financial services institution, while
spreading its foot prints across Africa to ear the reputation as the face of
banking in the continent.
Today, the consolidated UBA is the largest financial services institution in
West Africa with a balance sheep size in excess of one trillion Naira (under
USD8b) and more than six million (6m) customer accounts, operating out of the
two most vibrant economic in the sub-region-Nigerian and Ghana it has over six
hundred and thirty (630) retail distribution centers across Nigeria, its main
operational base, and eight branches in Ghana outside Africa, it also has
presence in New York and Cayman Island. United Bank for Africa Plc, (UBA) is
the product of a merger of two of Nigeria’s top five banks, UBA and Standard
Trust Plc (STB). Today, consolidated UBA is largest financial services
institution in sub-saharan Africa (excluding south Africa) with a balance sheet
size in excess of 400 billion Naira (approx US dollar 3bn) and over two million
active customer accounts. With over 400 retail distribution outlets across
Nigeria, UBA has also a presence in New York, grand Cayman Island and Ghana.
STATEMENT OF THE
PROBLEM
The basic objectives of most banks includes the survival and growing,
fulfillment of social responsibility and making of satisfactory profits. But
contrary to expectation, most of the commercial banks in Nigeria over the
recent past, have been making unusual high provisions for bad and doubtful
debts, which eats into the profits. Making one to question the whole essence of
the lending process. With the banks, clients believe that bank exists to divide
the national cake, coupled with a host of problems, banks have suddenly found
themselves with a catalogue of defaults in their hands. This inability of bank
to recover loans granted to their client, constitute a major factors in the
banking activities.
OBJECTIVES OF THE
STUDY
Looking into consideration that problem stated above, the objectives of this
particular study involves.
a.
The determination of low debt default has impeded the lending ability of
commercial banks and also affect their profit.
b.
Determining the inherent risks associated with the lending activities of
commercial banks.
c.
To know how to require knowledge about bank lending policies on borrowing,
collateral and payments.
Although this discussion
is wide, the environment of this research is on commercial banks. It shall talk
on their financial statement. Because of time constraint and other factors
which could pose as a problem to the research of this project, only sectoral
performance of commercial banks for a period of 5 or 6 years would be taken
into consideration while an analysis of the financial would be used.
SCOPE OF THE STUDY
The extent of this research work will be limited to only one bank, United Bank
for Africa (UBA) it will cover loans, doubtful provision, shareholders interest
and this covers a general review of the whole system of commercial banks
lending activities.
RESEARCH
QUESTION
In cause of stating the examination of debt defaults on commercial banks in
Nigeria, certain research questions need to be asked.
1.
Does the commercial bank actually proper loan or credit granting procedure?
2.
Does the management or board members guarantee loan or credit to certain
individuals of questionable character?
3.
How much information on the use of the loan or credit does the recipient of the
loan actually have?
4.
What is the extent of government policy in the banking activity?
5.
How flexible is the interest rate on loan or credit granted to customers?
6.
How much effect does debt default actually have on a banks profit?
7.
How much effect does default actually have on stakeholders and shareholders
dividends?
If proper attempts
are made to answer these questions, a careful result and recommendation will
help banks to find solutions to the problem of debt defaults.
Definition of terms
Commercial Bank: his is a financial
institution, which deals in the acceptance of money deposits and making them
available to investors and borrowers alike as loans and overdrafts. It is other
functions, which include discounting bills of exchange, foreign exchange and
providing safe custody for valuables. They lend money tyo private sector
business traditionally, for non-fixed capital purpose usually accounts for
greater pat of their profit.
Loans: This is the act of lending
something such as bank lends and somebody borrows. It is also all types of
advances granted by banks to customers with interest repayment programme and on
which interest is charged
Maturity dates for such loans can vary
from bank to bank and from loan to loan, as the case my be.
Loan can be classified into the;
i.
Secured loan
ii.
Un-secured loan
Secured loans: These
are loans that are secured by a collateral usually assets like houses, landed property
etc.
Un-secured loans:
These are loans that are not secured by a collateral, but is made on the
signature of the borrower, however, if the borrower is not well known, a
guarantor maybe sought.
Collateral: This is
defined in dictionary of banking and fiancé as a specific property, which a
borrower pledges as security for the payment of a loan, agreeing that the
lender shall have the right to sell or dispose the collateral for the purpose
of liquidating the debt if the borrower fails to repay the loan at maturity”
(David 1980 pp 49.)
Maturity: This refers to the time a
loan is granted to the time of repayment falls due. Maturity of loans could be
classified onto three.
Short term maturity: usually a period
of up to one year.
Medium term maturity: refers to
maturity period ranging between one to five years.
Long term maturity: refers to maturity
period ranging over five years.
Default: it means failure to do
something that must be done by law especially paying a debt.
Bad debt: this is the among in open
accounts that have proved unrecoverable, it includes instances where the
borrower has refused to pay.
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