LOAN ADMINISTRATION AND PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA: A STUDY OF THREE BANKS
ABSTRACT
The study examined loans administration and profitability of commercial banks in Nigeria with particular reference to three selected deposit money banks. The specific objectives include to: examine the quantum of loan granted by the banks under study in Nigeria; examine the different categories of loans and credits of the banks under study in Nigeria; assess the performance of the loans and credits granted by the Banks under study in Nigeria and investigate the impact of loan administration on profitability of the banks under study in Nigeria. The adopted econometric models in the analysis and data were presented in tabular and graphic forms, and analysed using statistical ratios, OLS simple regression and the ANOVA (f-test). From the data analyzed and validated by the tested hypothesis the findings of the study show that there is no significant relationship between non performing credits and profitability of banks and that there is a significant relationship between bank loans and profitability of the banks. Finally the study recommended that the management of the bank under study should strive to have more secured deposits for onward lending and that government should fine tune her mid-term and long-term financial planning, which will not easily be summersaulted. This will enable cooperate Nigeria to plan and project better on the projects upon which they will seek bank credit facilities, without defaulting.
CHAPTER ONE
INTRODUTION
1.1 Background to the Study
The Bank is a financial Institution established to provide financial services of accepting deposit from customers, providing credit facilities and other auxiliary functions aimed at meeting the financial service needs of the people and of facilitating the development and expansion of the real sector of the economy (Ahmad, 2007). Bank loan constitute an important source of providing finances to investors for the purpose of carrying out businesses and the creation of new investment to promote economic growth and wealth maximization both at the micro and macroeconomic sector. However the challenges of inaccessibility to loans and credit still persist in a larger dimension due to high interest rate, tight requirement for loan applications, non-conformity with the credit policies and sharp practices of some bank official (Ahmed, 2018).
Banks and other financial intermediaries play the important role of channeling funds from savers to borrowers (Gieseche, 2014). The traditional role of a bank is lending and loans make up the bulk of their assets. The various areas of financial management have been studied in relation to bank performance and growth usually depicted by profitability. Financial institutions (particularly deposit money banks) have faced difficulties over the years for a multitude of reasons and the major cause of serious banking problems continues to be directly related to loan administration, poor portfolio risk management, or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties (Gieseche, 2014).
The loan administration function of banks enhances the ability of investors to exploit desired profitable ventures. Loan administration is the main income generating activity of banks (Kargi, 2011). However, it exposes the banks to credit risk. The Basel Committee on Banking Supervision (2001) defined credit risk as the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Credit risk is an internal determinant of bank performance. The higher the exposure of a bank to credit risk, the higher the tendency of the banks to experience financial crisis and vice-versa. Among other risks faced by banks, credit risk plays an important role on banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. However, interest rate risk is directly linked to credit risk implying that high or increment in interest rate increases the chances of loan default. Credit risk and interest rate risk are intrinsically related to each other and not separable (Drehman, Sorensen, and Stringa, 2008).Increasing amount of non-performing loans in the credit portfolio is inimical to banks in achieving their objectives. Non-performing loan is the percentage of loan values that are not serviced for three months and above (Ahmad and Ariff, 2007).
The Nigerian banking industry has been strained by the deteriorating quality of its credit assets as a result of the significant dip in equity market indices, global oil prices and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks’ loan assets hindered banks to extend more credit to the domestic economy, thereby adversely affecting economic performance. This prompted the Federal Government of Nigeria through the instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of non-performing loans that bedeviled Nigerian banks.
Therefore this study is interested in studying the credit and loans administration in Nigerian banks and how it affects their profitability.
1.2 Statement of the Problem
One of the major problems confronting the banking industry today is the increasing incidence of loan defaults and consequent loan losses which manifested on the profitability of the banks. Sequel to increasing incidence of huge bad debts in the Nigerian banking industry, insider’s abuses, management’s competence have been called to question. Bad debts, it must be noted occur due to the inability of the bank’s management to recover loans granted to customers.
According to Ahmad and Ariff (2017), most banks in economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high non-performing loans and significant increase in credit risk during financial and banking crises, which resulted in the closing down of several banks in Indonesia and Thailand. Loan administration is the most difficult task of the bank and it is uninteresting, this is because the bankers now deal with unfriendly customer. The customer who appeared very friendly at the time of advancing the loan may suddenly become very hostile and a problem to the bank when paying loan. Therefore it is against this background that this project seeks to examine the loan administrations and profitability of commercial banks in Nigeria.
1.3 Objectives of the study
The objective of this project is to examine loans administration and profitability of commercial banks in Nigeria with particular reference to three selected deposit money banks.
To achieve this, the following specific objectives shall be pursued:
i. To examine the quantum of loan granted by the banks under study in Nigeria.
ii. To examine the different categories of loans and credits of the banks under study in Nigeria.
iii. To assess the performance of the loans and credits granted by the Banks under study in Nigeria.
iv. To investigate the impact of loan administration on profitability of the banks under study in Nigeria.
1.4 Research Questions
The following questions are formulated in line with the objectives of the study to guide the researcher:
i. What is the quantum of credits granted by the banks under study in Nigeria?
ii. What are the different categories of loans and credits administration of the Banks under study in Nigeria?
iii. How have the loans and credits granted by the banks under study in Nigeria performed?
iv. What are the impacts of loan administration on profitability of the banks under study in Nigeria?
1.5 Statement of Research Hypothesis
H01: There is no significant relationship between non performing credits and profitability of banks.
H02: There is no significant relationship between bank loans and profitability of banks.
1.6 Significance of the study
The findings of this study, credit and loan administrations in commercial banks: problems and prospects will be of great benefits to the banking sector which comprise the management of the banks and its customers as it will enlighten them of the importance of good credit and loan management in the banking industry.
The results of this research work will also be of use to the regulatory agencies as it will guide them in making relevant laws and policies that will enhance proper credit and loan administration that will provide enabling ground for the banks and customers to comply easily with the guiding principles of credit and loan administration and management thereby ensuring the profitability of the banks without necessarily overburden the customers high interest and arbitrary charges which may lead to high credit risk.
Finally, this study contribute to the wealth of knowledge, academia including authors, researchers and students will find this study relevant as it will serve as a resource material for literature review in future studies.
1.7 Scope of the study
The scope of the study is to examine the impact of loan administration on profitability of commercial in Nigeria. The study is further limited to UBA, First Bank and Access Bank plc between 2009 to 2019.
1.8 Limitations of the study
The limitations faced by the researcher in the course of this study include the following:
Finance: Lack of adequate funds tends to diminish the vital information that is supposed to obtain, which will thoroughly enhance the findings of this research work.
Data: The shortage of comprehensive information is another constraint of struggle by the research, since most of the banks employees especially the executives are reluctant to deliver relevant information of the bank that is useful to the research work.
Time Factor: Insufficient time to undertake the research was also identified as the constraint of the research work and the task of combining lectures and writing of assignments and presentations of term papers in the lecture hall was very cumbersome. Since most of the time, have to forfeit some of my lectures in other to meet up with my research work.
1.9 Definition of Terms
1. Loans: According to shekhark (1961) the term ‘’loan” is popularly used to denote the granting of an advance in hump sum, generally on the basic of securities acceptable by the bank. The distinguished feature of loans is that interest on it is payable on the entire amount borrowed.
2. Advance: These are credit that is payable in future time, e.g. loans, overdraft and discounting of bill e.t.c.
3. Bank: This is a financial institution set up purposely for safe keeping of money, valuable item and document like wills, gold and jewelries.