THE ROLES OF COMMERCIAL BANKS IN REAL ESTATE FINANCING IN NIGERIA
(A CASE STUDY OF UBA NASARAWA AND FCMB KEFFI)
ABSTRACT
Commercial banks contributed immensely to the real estate financing in Nigeria by providing medium and short term credit and loan facilities to real estate developers and helping in rendering other financial services such as rent collections, savings etc. The aim of this project is to examine the role of commercial banks is real estate finance in Nigeria with reference to United Bank for Africa (UBA) Nasarawa branch and First City Monument Bank (FCMB) Keffi. To achieve the above set aim, the following specific objectives were pursued: to assess the role of commercial banks in real estate financing, identify the credit and loan facilities provided by UBA and FCMB for real estate financing, examine the extent to which UBA and FCMB contribute to real estate financing in Nigeria and evaluate the problems of real estate financing by commercial banks in Nigeria. The survey design was adopted for this study; the researcher make use of statistical tools such as tables, percentage and descriptive method to presents and analyzed the data gathered from the field survey which was considered appropriate for the research. The findings of this study revealed that FCMB and UBA banks performed important roles in real estate financing such as assisting with funds for land acquisition, providing funds for construction cost and providing funds for all forms of property development. Finally the study recommend that the bank should widen the range of services or types of properties they provide fund for provided the project is viable and that the bank should make more effort to provide long term credit and loan facilities to the real estate developers as this greatly influence real estate financing positively that the short and medium and loan facilities granted by the bank. More so, the commercial banks should review their lending policies so as to make the condition a bit relax for real estate developers to be able to source for funds from the banks for the purpose of real estate development.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
The importance of real estate finance in any economy cannot be overstressed. It drives the provision of housing which is more than shelter, since it involves all the services and utilities that make a community a livable one. Real estate is also one of the best indicators of a person’s standard of living amid his or her status in the society. In spite of the crucial role real estate plays as a basic needs, it has remained inadequate in supply in practical all human societies’ right through history. An active and buoyant real estate sector is an indication of a strong programme of national development. It serves a foundation for and the first step to the future economic growth and social development. The housing sector plays a more critical role in a country’s welfare than is always recognized as it affects not only the wellbeing of the citizens but also the performance of the sectors in the economy.
Real estate finance by its very nature is a capital intensive venture which if it is to be financed through personal financial resources will require slow and tedious accumulation of savings. However, since housing provides benefits over many years, long-term credit financing is a more logical option as it will spread the repayment burden. But this requires the availability of long-term funding, and for which must be institutional capacity, structure and mechanism that will allow a convenient and effective linkage between the savers/investors and the consumers of such funds. Without an effective finance system, no housing policy can be effectively implemented. A financing framework which facilitates financial intermediation for real estate finance consists of institutions as well as their relationship and the processes involved. Indeed the framework must effectively reconcile the affordability limitation of real estate sector with viability requirement of financial institutions.
In Nigeria, real estate is typically financed through a number of institutional sources: Budgetary appropriations, Commercial/Merchant Banks, Insurance Companies, State Housing Corporations and the Federal Mortgage Bank of Nigeria (FMBN): and now the newly established Mortgage Institutions all these constitute the formal institutions. Informal institutions such as thrift and credit societies, and money lenders who have contributed and are still contributing substantially to the finance of housing construction also persists.
The Nigerian banking industry made up essentially of commercial and investment banks remain a veritable source of real estate financing. Although they operate at the short end of the market resulting from their sources of deposits, which are short-tenured, they still foster funds that are accessible through equity participation, venture capital activities and loans and advances.
Commercial banks through their intermediation role are meant to provide financial succor to the real estate developers. For the real estate developers to perform their role in the economy, they need adequate funds in terms of short and long term loans (Olachosim, Onwuchekwa & Ifeanyi, 2013). It is pertinent to know that financing strength is the main determinant of real estate sector growth in developing countries. There is no gainsaying that finance would boost the performance of real estate sector if adequately and optimally utilized. The financial systems in every country play a key role in the development and growth of the economy, although the ability to play this role effectively largely depends on the degree of development of the financial system. The traditional commercial banks which are key players in the financial systems of nearly every economy, have the potential to pull financial resources together to meet the credit needs of the real estate financing.
1.2 Statement of Problems
Real estate financing problem is a global phenomenon confronting developed and developing, rich and poor nations Agbola (2007). Habitat (1990) emphasizes that in all countries, regardless of the average standard of living, there is a large section of the population that cannot afford what could be regarded as an adequate standard of housing which forms the major part of real estate sector. As a result, a substantial part of the population has to live in accommodation that is severally substandard, shanty towns, and slums. This problem of inadequate housing is compounded by lack of readily available source of finance for the property developers to utilize in developing real estate sector which both commercial and residential accommodation for the teaming population. Among the many factors influencing housing provision in developing countries, finance is the most important. Adequate finance is therefore the first requirement for successful and effective real estate development in any nation. This is because at every stage of construction, money is needed to lease land, prepare plans and to hire labour as well as to purchase the various materials and infrastructure to be installed in the houses. The effort of the government in providing finance for real estate development had yielded little or undesirable results, thus the need to source real estate financing from private financial institutions such as the commercial banks. It is against this problem that this study seeks to examine the role of commercial banks in real estate financing in Nigeria.
1.3 Aim and Objectives of the Study
Aim
The aim of this project will be to examine the role of commercial banks in real estate finance in Nigeria with reference to United Bank for Africa (UBA) Nasarawa branch and First City Monument Bank (FCMB) Keffi.
Objectives
To achieve the above set aim the following specific objectives will be pursued:
- To assess the role of commercial banks in real estate financing.
- To identify the credit and loan facilities provided by UBA and FCMB for real estate financing.
- To examine the extent to which UBA and FCMB contribute to real estate financing in Nigeria
- To evaluate the problems of real estate financing by commercial banks in Nigeria.
1.4 Research Questions
The following research questions shall guide the researcher in order to achieve the set objectives:
- What are the roles of commercial banks in real estate financing?
- What are the credit and loan facilities provided by UBA and FCMB for real estate financing?
- To what the extent does UBA and FCMB contribute to real estate financing in Nigeria
- What are the problems of real estate financing by commercial banks in Nigeria.
1.5 Significance of the study
This study will examine the role of commercial banks in real estate financing in Nigeria. It appraises the credit and loan facilities offered by commercial banks to the real estate sector in Nigeria. Therefore the result of this study will relevant to property developers, investors and government authority as it will enlighten them on the contribution of commercial banks in financing the real estate sector in Nigeria.
The result of this research will also contribute to the body of knowledge in real estate financings and property development thus, will serve as research material for interested researchers who will like to further research into the role of commercial banks in real estate financing in Nigeria.
1.6 Scope and Limitation of the study
This project work will cover entirely the role of commercial banks in real estate financing. The scope of this study is limited to the United Bank for African, Nasarawa Branch and FCMB Keffi.
Limitations
Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.7 Definition of Key Terms
Commercial Bank: A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.
Real Estate: Is a legal concept encompassing all the interests, right and benefit related to ownership. Properties consist of the right of ownership which entitle the owner to a specific interest or interest in what is a physical entity and its ownership Olusegun (2003).
Short term credit: This type of credit is a credit or loan that has maturity period that is less or more than one year.
Medium term credit: This is a type of credit or loan that has a maturity period of more than one year but not exceeding two years to be repaid back. E.g. loan required for temporary business requirement.
Long term credit: This type of credit matures in more than three years and above. It has a very long maturity period as agreed by the lender and the borrower. E.g. are business development loans and Bridging loans.
Finance: Merriam Webster define finance as money or other liquid resources of a government, business, group, or individual.
Housing: Housing refers to houses or buildings collectively; accommodation of people; planning or provision of accommodation by an authority; and related meanings. The social issue is of ensuring that members of society have a home in which to live, whether this is a house, or some other kind of dwelling, lodging, or shelter.
Property: In common law, real property (immovable property) is the combination of interests in land and improvements thereto, and personal property is interest in movable property. Real property rights are rights relating to the land.
1.8 The Study Area
Nasarawa Emirate in Nasarawa State is located in the Central region of Nigeria. It is flanked by Keffi and the Federal Capital to the North. To the South, it is bounded by Benue River and to the west; it bordered the present Gadabuka and Toto Local government area which are of course, part of the Emirate. To the East, it is bordered by Doma, Lafia and Keana Local Government Areas all of Nasarawa State.
Physical Characteristics
The major things considered under physical characteristics of Nasarawa are, geographical location, temperature, rainfall, geology, wind, vegetation, humidity, soil.
Temperature
The temperatures are generally high during the day, particularly between the months of March and April. The main monthly temperatures in the state range between 200C and 340C with the hottest months being March/April and the coolest months being December/January.
Rainfall
The study area experience dry season without or little’s rainfall from November to March of about 95mm, which is wet season is from April to October of about 1.30mm,
Geology
From the Jos Plateau, this comprises of basement complex metamorphic rocks, granite and basalt of two or more ages. The basement complex is covered by shadow soil.
Wind
Nasarawa local government is determined by the seasonal movement on inter-tropical convergence zone [ITCZ], which represents the moving frontier between the moist Atlantic air from the south and the dry air from the north. In the dry season from November till March the north east wind are dominant. For the remaining of the year, the south-western winds are prevailing. Generally, the wind velocity is relatively low.
Vegetation
Nasarawa is situated in the Benue valley between the Benue river and Jos Plateau. This area lies within the part of southern guinea savannah. The vegetation of Nasarawa has, to a large extent resulted from extensive agricultural use of the land, the predominant vegetation type is partly savannah which is characterized by a discontinuous canopy, shrubs and grasses many areas are affected by man through bush burning during the dry season. Among the common trees are oil bean trees, locust bean free and isoberline trees.
Relative Humidity
The relative humidity is the measurement of deepness of the atmosphere which varies from place to place and different time of the day. The level of humidity in Nasarawa state in January is quite less that 40% which rises as from February to July to about 88%. By April when the steady rain commences it will be about 75% by August when the inter-tropical discontinuity is at it northern part, must position of the entire state will experience tropical marine wind and continues till December.
Soil
The major soil units of Nasarawa belong to the category of oxisols or tropical ferruginous soils. The soils are derived mainly from the basement complex and old sedimentary rocks. Lateritic crust occurs in extensive areas on the plains while hydro orphic soils (limbic incept sols) occur along the flood plains of major rivers (Nyangba, 1995).
Socio-Economic Characteristics
Nasarawa main economic activity is agriculture; cash crop, such as yam, cassava and egusi (melon). Production of minerals such as salt is also another main economic activity of people in the state; Nasarawa produces a large proportion of the salt consumed in the country.
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