The Role of Commercial Bank in Real Estate Finance

Real estate financing is the provision of finance or capital for housing purchase or building. Real estate finance also means the capital required for construction of housing or the resources required to acquire or access housing project by household or the credit supplied by housing finance institutions against some collateral (Dymski, 2007). Real estate finance loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formula. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years depending on the conditions of the agreement. Over this period, the principal component of the loan would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country (Tse, 2002).

 

Commercial banks play a crucial role in the economic resource allocation of countries by basically channeling funds from depositors to investors continuously (Ongore&Kusa, 2013). They offer all important services of providing deposit and loan facilities for personal and corporate customers, making credit and liquidity available in adverse market conditions, and providing access to the nation’s payments systems (Handley-Schachler et al., 2007). Commercial banks make most of their money from lending to their customers in various forms.

 

The soundness of the banks to a larger extent depends on their financial performance which indicates the strength and weakness of a particular bank (Makkar& Singh, 2013). Financial performance is evaluated by the profitability. Real estate financing is an important line of business for the banking industry, and real estate financing activities contribute significantly to the Nigerian economy. Most of the commercial banks rely on revenue from this line of business to grow and prosper (Bienert, 2006). History has shown, however, that imprudent risk taking and inadequate risk management, particularly during periods of rapid economic growth, can lead to significant losses and be a major impediment to the performance of commercial banks with risks of failure very high. One of the major ways in which this line of business influences the performance of commercial banks is through the cyclical nature of real estate markets where, as markets peak and decline, banks with large concentrations of real estate loans may suffer considerable losses leading to poor financial performance (Kibirige, 2006).

It is generally observed that commercial banks’ lending criteria are pro-cyclical in nature. This means that their lending criteria are not very strict in a real estate boom while during the bust they are very strict. As a result of this, commercial banks are more likely to underestimate the default risk of real estate loans during a real estate boom. Such a situation leads to real estate price inflation and this increases the banks’ credit risk exposure to the real estate (Macharia, 2013). When there is a sharp drop in real estate prices, commercial banks that have a high proportion of real estate loans in their portfolios or loans to other financial institutions that specialize in real estate lending suddenly find themselves faced by a high exposure to real estate risk. This therefore affects their financial performance in a significant manner. As a result, the country's financial system becomes risk and exposed (Macit, 2011).

Nigeria has a large housing gap which is growing every year and is increasingly prevalent in urban areas due to differences in income levels in the economy. Macharia (2013) indicated that low interest rate schemes in commercial banks made between 2001 to 2004 made a positive impact on the credit growth of mortgage finance loans from loan takeovers from existing lenders. While Nigeria mortgage market is growing, the industry is dominated by the big commercial banks indicating barriers to entry or high risk for medium and smaller banks.

 

The most economical source of borrowed capital available to Real estate is commercial banks (Nwoye, 2008). It is not debatable that the commercial banks form the largest source of funding for real estate. Because of the nature of funds available to them, commercial banks specialize in the short term lending and working capital funding in form of overdraft. Before a loan is granted the bank requires a well formulated business proposal to convince them as to financial needs of the business and how the loans can be serviced and repaid if granted. The purpose of borrowing determines the type of loan to be granted. If the potential borrowing is a credit risk, or if the amount of fund being applied for exceeds the amount that the bank manager considers reasonable on unsecure basis, then security is required.

 

Commercial Banks specialize in short term lending, this is because most commercial banks’ deposits are subject to withdrawal on demand by the customers and therefore should be risky to lend out for a very long term or permanent financing. Most commercial banks’ interest on loans depends upon the level of interest rate in the economy, usually determined by the central Bank. However, in 2007, the Central Bank’s controls on interest rate were removed by the Federal government in line with emphasis on deregulation of the economy (CBN Annual Report, 2007). It is clear that commercial loans, equipment financing and leasing are the most common and are for short-term seasonal needs. They mature 90-180 days and they may not be backed with collateral.

 

Term loans normally are loans which are paid within 5years and are secured. The principal amount is paid instalmentally and the business must abide by certain stipulated conditions entered in the loan agreement. With equipment financing and leasing, banks will loan on equipment as collateral and can arrange for small business to lease equipment for negotiated periods of time. Bank loans can be for short, medium and long terms.

Banks use the following criteria in evaluating requests for loans, character, capacity, capital, condition and collateral. Character is associated with the reputation which is a sum of personal attributes revealed indirectly. A borrowers’ reputation is really the opinion held by others about him. His business conduct such as prompt payment of obligations and speculative tendencies are all manifested by his character. To banks, character means the ability of a borrower to conserve the assets of his business and to ensure prompt repayment of his loans. Character is therefore very important in the evaluation of credit worthiness of business and individuals.

 

Capacity narrowly means the ability of a borrower to pay his monetary obligations when they fall due. The borrower, in addition to being capable must also be willing to upset his liabilities. The customers’ net worth in the business assures the bank that the borrower will be able to meet his obligations. Borrowers should have strong capital base. Banks prefer to collect back their loans from anticipated income or profit rather than from the proceeds of liquidities pledged collateral.

 

Some factors over which the small businessman has no control may inhibit the granting of bank loans to him. Seasonal characters of the business, long run business activities are some of the inhibiting factors. New businessmen must provide collateral for bank loans. Old timers with high credit standing do not necessarily secure loans. Property, life insurance policy and marketable securities are among the collateral provided. There is a greater risk in expanding business, hence long term loans have to be protected by directly pledging assets.

 

Lipsey (2003) observes that commercial banks in Nigeria could not significantly contribute to the development of small business because of the low rate of returns of entrepreneurial development. The cash holdings of the commercial banks are mostly made up of demand deposits. These deposits are liabilities to the banks and are payable on demand. Thus, short term loans, cash and advances are the major consumers of commercial bank funds in this country. Many projects are financed by commercial banks, which include ventures such as flour milling and bakeries, footwear’s printing and publishing, soap, oils and detergents. The banks hardly finance projects requiring medium and long term loans because current deposits constitute their main source of funds. This was confirmed in the study carried out by Manufacturers’ Association of Nigeria (MAN) in a survey aimed at determining funding requirement of the manufacturing se ctor as well as existing constraints in accessing bank credit. It revealed the nature of banks operating in Nigeria favors short term credit financing as against medium to long term financing (SMEDAN, 2007).

 

Functions of Commercial Banks

Commercial Banks not only deal in money and credit but they also perform various functions, viz., agency functions, credit creation, and other agency functions and general utility services. The various functions of commercial banks include:

A.    Primary Functions: These functions are performed by commercial banks from their very existence. They are classified into two categories, namely,

(1) Accepting Deposits and

(2) Advancing Loans

(1)    Accepting Deposits: Being advancing loans as the primary function, banks require money to fulfill this objective. Hence they accept deposits from individuals and institutions and make payment for deposits as interest. For this purpose banks operate various types of accounts in which the deposits are attracted. Generally commercial banks operate following types of accounts.

(i)                 Savings Deposits: The savings deposit promotes thrift habit among people. Small savings are collected and deposited in such accounts which are used for capital formation in the country. The rate of interest paid on savings deposits is comparatively lower. Even though there are restrictions on making withdrawal, liquidity of such accounts is higher in comparison with time deposits. Corporate business houses and firms are generally not allowed to open Savings Bank accounts. Those customers, who maintain a minimum balance as directed by the bank, can avail cheque facility with their accounts. Recently, most of the commercial banks provide ATM (Automated Teller Machine) cards to their customers with an additional feature as International Debit Card as per the terms and conditions of the bank.

(ii)               Current Account Deposits: This account is generally opened by traders, businessmen and industrialists, which offers high liquidity. No interest is paid on such deposits and there is no restriction on number of withdrawals. However, some charges are levied by the bank on such accounts. Customers are also given overdraft facility as per their credit.

(iii)             Fixed Deposits: It is also called time deposit account. In such accounts money is deposited for a fixed period. After the maturity of the account the bank repays the principal plus interest for that given period. The interest on such accounts is pre-decided. The rate of interest is comparatively high and it varies as per the duration of the account. Interest rates are fixed as per the RBI rules and regulations. In times of urgent need for money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. Depositors can also avail of loans against Fixed Deposits.

(iv)             Recurring Deposits: In Recurring Deposit account, the customer opens an account and deposit a certain sum of money every month and is deposited for a given period. After the maturity the accumulated amount along with the interest rate is paid to the customer. The rate of interest generally is higher than the saving deposit account and lower than the fixed deposit account.

(v)               Cash Certificates: Cash Certificates are issued to the public for a longer period of time. It attracts the people because its maturity value is in multiples of the sum invested. It is an attractive and high yielding investment of those who can keep the funds for a long time.

(2)    Advancing Loans: The commercial banks provide loans and advances in various forms. Interest rate charged by banks on loans is higher than the interest rate paid by banks on deposits and thereby banks earn profit. Generally, commercial banks advance loans in following forms.

(i)     Overdraft: When a bank allows its customers having current account to withdraw the amount more than the deposits in the account is called Overdraft. This facility of overdrawing his account is generally pre-arranged with the bank up to a certain limit. It is short-term temporary fund facility from bank and the bank will charge interest over the amount withdrawn. This facility is generally available to business firms and companies.

(ii)   Cash Credit: Under this form of advancing credit, the customer opens an account and the sanctioned amount is credited with that account. The customer can operate that account within the sanctioned limit as and when required. It is made against security of movable and immovable properties, shares and debentures, personal security etc. On the basis of operation, the period of credit facility may be extended further. The bank charges interest only on the amount actually withdrawn from the account. Central Bank discourages this type of advances as it imposes uncertainty on money supply. Hence this form of lending is slowly phased out from banks and replaced by loan accounts. Cash Credit system is not in use in developed countries.

(iii) Discounting Bills of Exchange: Under this method of lending, bank provides credit against the dated bill of exchange before its maturity at discounted values, i.e., values a little lower than the face values. The bank can discount genuine commercial bills, i.e., those drawn against sale of goods on Credit. The banker’s discount is generally the interest on the full amount for the unexpired period of the bill.  If the buyer does not make the payment of the bill then the bank gets the payment from the seller of the bill.

(iv) Loans and Advances: Banks provide loans and advances to its customers against adequate collaterals. The loan amount is paid in cash or by credit to customer account which the customer can draw at any time. The interest is charged for the full amount whether the customer withdraws the money from the account or not. The loan is sanctioned for a given period time. As per the terms and conditions, the customer has to repay the loaned amount with the interest rate within the stipulated time. On default, the bank can attach the collaterals to recover the amount advanced by the bank.

(v)   Other Advances: Nowadays commercial banks have extended their traditional function of making loans and advances by starting many innovative schemes in giving advances to their customers. They provide housing finance facilities to their customers in order to participate in the working of achieving the goal of increase in better housing facilities in the country and thereby a better standard of living for the people. Government of India also encourages banks to provide housing finance. Borrowers of housing finance get tax exemption benefits on interest paid.

B.     Secondary Functions

The secondary functions of the banks consist of agency functions and general utility functions.

(1)   Agency Functions: Commercial banks act as agent of their customers and render services. Some charges are levied by the banks on such services. However some of the services are rendered free of charges as its commitment to maintain a better customer friendly relationship. Agency functions include the following:

(i)        Collection of cheques, dividends, interests etc: Bank collects cheques, drafts, promissory notes, interest, dividends etc., on behalf of its customers and credits the amounts to their accounts.

(ii)      Payment of rent, insurance premiums: The bank makes the payments such as rent, insurance premiums, subscriptions etc. on instructions by the customer. Till the order is revoked, the bank will continue to make such payments regularly by debiting the customer’s account.

(iii)    Underwriting functions: Large industrial and business units raise capital from the market. Debentures are underwritten by the banks. It helps the companies to collect the minimum capital on their guarantee. If the shares and debentures are not purchased in adequate quantum, the bank itself purchases all these shares and debentures. It increases the trust of the public in the company concerned.

(iv)    Purchase and sale of securities: Commercial banks undertake the purchase and sale of different securities such as shares, debentures, bonds etc., on behalf of their customers.

(v)      Act as trustee, executor, attorney, etc.: The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trustee than to appoint an individual.

(vi)    Preparation of Income-Tax returns: Banks prepare income-tax returns and provide advices on tax matters for their customers. For this purpose they employ tax experts and make their services available to their customers.

(vii)  Act as correspondent: Banks also do correspondence on behalf of customers relating to booking vehicles, travel tickets, passport etc.

(viii)          Dealing in foreign exchange: As an agent, commercial bank purchase and sell foreign exchange as per CBN guidelines.

(2) General Utility Services:

                                            i.            Safety locker facility: Safekeeping of important documents, valuables like jewels is one of the important service other than banking provided by commercial banks. These lockers are available on half-yearly or annual rental basis.

                                          ii.            Money transfer: Transfer of funds is another service provided by banks. Apart from traditional instruments/mechanisms such as cheques, Demand Draft (DD), Mail Transfer (MT), Telegraphic Transfer (MT), banks nowadays make use of credit cards, debit cards, internet banking, ATM facility etc. to transfer funds from one place to another. By taking advantage of the communication development, money can be transferred from one place to another even without bank charges/commission.

                                        iii.            Travellers cheque and Letters of credit: Banks issue travellers cheques and letters of credit to help carry money safely while travelling within the country or abroad. Traveller’s cheque is a medium of exchange that can be used in place of hard currency. Travellers' cheques are often used by individuals who are travelling on vacation to foreign countries. The cheques were first introduced by American Express back in 1891. The cheque can then be used virtually anywhere in the world once it has been countersigned with the same signature. The advantage to the traveller is that the traveller’s cheque cannot be used by someone else if it is lost or stolen, and can be replaced usually anywhere in the world.

Letter of credit is a letter by which one banker requests another, to whom the said letter is addressed, to hold a certain sum at the disposal of the third person who is the holder of that letter, and to pay him such amount as he requires against either cheques on the banker giving the letter or on the banker to whom the letter is addressed, but not exceeding in total the whole amount covered by the said letter.

                                        iv.            Acts as referees: The banks act as referees and supply information about the business transactions and financial standing of their customers on enquiries made by third parties. This is done on the acceptance of the customers and help to increase the business activities in general.

                                          v.            Information relating to trade and economic position: Large commercial banks collect information relating to economic and business activities and provide in published form in annual reports or in new letters to help its customers to take business decisions easily and quickly.

                                        vi.            Credit/Debit cards: Banks have introduced credit/debit card system. These plastic cards enable a customer to purchase goods and services from certain specified retail and service establishments up to a limit without making direct payment. In the case of credit card, the amount is paid to these establishments by the bank. The bank subsequently collects the dues from the customers by means of cheque or by transferring money from the customer’s bank account though internet banking. In the case of debit card, the amount is paid to the merchant establishments by debiting funds to the customer’s bank account and credits it to the account of the concerned establishment.

                                      vii.            ATM facility: Under this system the customers can do banking transactions like withdrawal of money, cash deposit, money transfer, submit request for stop payment of cheques, submit request for new cheque book etc. at any time from any ATM centres provided/directed by the bank.

                                    viii.            Management of public debt: Commercial banks manage public debts on behalf of central bank when central and state governments raise loans through debentures of bonds.

                                        ix.            Others: Apart from the above said services provided by the banks, there are whole lot of services are rendered by commercial banks, which differ from banks to bank. They provided services with regard to share market function, merchant banking, factoring services etc.

ANALYSIS ON QUEUING PROBLEMS AT UNITED BANK FOR AFRICA (UBA) ATM SYSTEM IN NASARAWA LOCAL GOVERNMENT AREA, NASARAWA STATE

 

ANALYSIS ON QUEUING PROBLEMS AT UNITED BANK FOR AFRICA (UBA) ATM SYSTEM IN NASARAWA LOCAL GOVERNMENT AREA, NASARAWA STATE

ABSTRACT

This research work “Analysis on Queuing Problems at United Bank for Africa (UBA) ATM System in Nasarawa Local Government Area, Nasarawa State” was carried out to determine the expected time a particular customer is to spend in the bank for transaction. The data for the research was collected using observatory method, and was analyzed using; Multi-Channel queuing model. It was found that44 customers arrives the bank every 1 hour and the time interval between each arrival is 1 minute; on arrival the customer is expected to spend 54 minutes in line waiting for service and use 4 minutes to receive service, in total, the customer is to spend 58 minutes in the bank to complete his/her transaction. To address the problem of waiting time,the management should make provision for banking facilities and bank administrators to address gaps in human resources, logistics and other internal procedures aimed at reducing waiting times and thus ensuring an effective banking delivery system which often lead to increase performance.The management should adopt a five ATM model to reduce waiting time at the ATMS during peak periods in other to increase customer satisfaction. The efficiency of the present ATMs should also be increased.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Time is a major determinant of individual or organizational success and/or failure. An effective usage of time will most likely lead to success, while time abuse or mismanagement will inevitably lead to delay in service, loss of income and consequently, business failure. Man has evolved into a time conscious being, bearing in mind that he has limited period to accomplished goals that are incremental in nature. In this modern era our daily life is encompassed by routines such as driving the kids to school, keeping the garden, shopping, fixing of furniture, banking, cooking and regular exercise, which demand effective usage of time. An attempt to over stay or spend much time in one of such activities will lead to a delay or failure to accomplish the other. Inherently, customers have developed the sense of getting results and replies on demand, such that they can move to the next scheduled activity without delay.

Unavoidably, all the sectors; agriculture, media, transport, oil and gas and mining among others in the country, depend directly or indirectly on the banking sector. For instance, an agriculturist who wants to import fertilizer from India will have to use the bank for financial transaction. If there is delay in the transaction, the delivery of fertilizer may also be delayed.

Customers arrive banking halls and ATMs in a random pattern, which frequently requires joining a queue, when the arrival rate is more than the service rate, they will have to wait till it is their turn for service; although, there are exceptions where high priority customers are attended to, irrespective of their time of arrival. Queuing is pleasant or endurable when the waiting time is small, but when queues become crowded and stagnant; agitation, discomfort and quarrels, even robbery, often breakout.

According to Cowling and Newman (1995), service quality has been widely used to evaluate the performance ofbanking services. Nowadays, with the development of information technology, customers increasingly expect higher services. At the same time, most of them are becoming more time conscious and wanting more convenience. In a country where customers queue in filling stations, restaurants, saloons, bus stops and banks, they are always on the look for a better alternative where they can spend less time to get the service they desire. However, queuing becomes an unavoidable bottleneck, when customers are faced with service alternatives that are synonymous with choosing between the deep blue sea and the devil.A queuing process consists of customers arriving at service facilities, then waiting in a line (queue) if all servers are busy, eventually receiving service, and finally departing from the facility. Thus, a queuing system is a set of customers, a set of servers, and an order whereby customers arrive and are served.

A common slogan in the U.S Army is “Hurry up and wait”. In many occasions in life, we had had to queue up, because of congestion i.e. the demand of customers on a particular facility is beyond what it could cope with. Many practical applications of queuing problems are encountered in Traffic flow, scheduling and facility design, employee allocation  and telephone.

The common experience in Nigeria is that most banks do not have the facilities and capacities to service the number of customers without much delay on the part of the customers. The problem in this regard had been that though bank customers for instance, have always been desirous of spending the least possible time in banking transactions, this age-long desire is yet to be met by the banks. Banks on the other hand, want to attract, retain customers and at the same time optimize profit. Profit making in banks is a function of management ability to provide efficient services to customers at little or no time wastage (Agbadudu, 1995).

To curb the menace and epidemic of queuing that has plagued its banking system, in the recent past, the Central Bank of Nigeria (CBN) had initiated and implemented initiatives and policies varying from the liquidation of banks to the cashless policy which includes e-banking, mobile banking and the use of automated teller machines (ATMs). Punch Newspaper (2012) reported that 60,000 Nigerians depend on   one ATM, whereas the ideal number is 15,000 people to one ATM.

In Nasarawa local government area of Nasarawa state, the situation is not different. Its population which includes; farmers, teachers and lecturers, traders, business men and women, and a large proportion of polytechnic students also face the menace of poor service delivery at ATMs as a result of queuing. At UBA Plc. customers are seen sweating profusely from heat and long hours of standing in the queue to use the ATM. Poor network, insufficient and inefficient ATMs are some of the perceived causes of these queues. Furthermore, the queues in UBA Plc. can also be attributed to unavailability of banks to meet the demand of the increasingly Nasarawa population. The problem of queuing in the banking system of Nasarawa, has however not been clearly understand.

1.2     STATEMENT OF THE PROBLEM

The obvious cost implications of customers waiting, ranges from idle time spent when queue builds up, which results in man-hour loss, to loss of goodwill, which may occur when customers are dissatisfied with a system. However, a number of customers go to bank hoping to complete a transaction within a particular period of time and return to some other activity but eventually spend unimaginable long time waiting to be served; however, what is the expected time a particular customer is to spend in the bank? The focus of this research work therefore is to carry out an analysis of queuing problems with interest to answer the above question using UBA ATM services in Nasarawa LGA.

1.3     AIM AND OBJECTIVES

1.3.1  AIM

The aim of this research project is to examine queuing problems at United Bank for Africa (UBA) ATM system in Nasarawa, Nasarawa state.

 

1.3.2  OBJECTIVES

The specific objectives of this research work are to estimate:

1. Traffic intensity.
2. The possibility that a customer will have to wait for service.
3. The mean time a customer is to spend in the ATM system.

1.4     SIGNIFICANCE OF THE STUDY

At the end of this research work, the researcher intends that it provides valuable information on queuing system and customer satisfaction to banks, bank customers, financial policy makers and the society at large; thereby prompting actions toward a better customer service experience.

• This research can help bank ATM to increase its QoS (Quality of Service), by anticipating, if there are many customers in the queue.
• The result of this paper work may become the reference to analyse the current system and improve the next system.
• Banks can now estimate the number of customers waiting in the queue and the number of customers going away each day.

1.5     DELIMITATION OF THE STUDY

The scope of this study is limited to only one commercial bank in Nasarawa local government area; United Bank for Africa (UBA) plc. Makama road, Nasarawa, Nasarawa state.

1.6     LIMITATION OF THE STUDY

Some of the challenges faced at the cause of this work are;

• The research was conducted within limited time
• Unavailability of finance
• Gathering of data through observation was time consuming and labour intensive.
• There is a room for systematic bias on the part of the researcher as he collects the data.

1.7     DEFINITION OF TERMS

Queue: a collection of items in which only the earliest added item may be accessed. It is line feeding a number of servers.

Server:  an operation fed by a queue

Utilization: a measure of how busy the system is.

ATM: Automated Teller Machine

KPMG: Klynveld Peat Marwick Goerdeler

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