THE ROLE OF DEPOSIT MONEY BANKS TO THE SMALL SCALE ENTREPRENEURIAL DEVELOPMENT IN NIGERIA

THE ROLE OF DEPOSIT MONEY BANKS TO THE SMALL SCALE ENTREPRENEURIAL DEVELOPMENT IN NIGERIA

ABSTRACT

The study examined the role of deposit money banks to the small scale entrepreneurial development in Nigeria with particular reference to kitchen 54, Nasarawa. The specific objectives of the study is to evaluate the extent to which small scale enterprises have been able  to obtain loans and advances from Nigerian deposit money banks; ascertain the problems facing deposit money banks in financing small scale enterprises in Nigeria and to identify problems encountered by small scale enterprises in obtaining funds from deposit money banks.  The study adopts the survey research design and Chi-square was used to test the research hypotheses. The findings of the study shows that that deposit Money Banks play significant role to the small scale entrepreneurial development in Nigeria. The study recommends that the deposit money banks should put more effort in financing entrepreneurs and small and medium scale business in other for their roles to be felt by the SMEs in terms of growth and development.

CHAPTER ONE

INTRODUCTION

1. Background of the Study

There is no doubt that banks and other financial institutions occupy strategic positions in the operation of Nigeria  economic system. The importance of these banks and other financial institutions are so encompassing that one may not imagine the functionability of the economic system without them (Oshiobugie & Okoh, 2015). This probably has been why government is always sensitive to the happenings in this important sector.

In an economy such as Nigeria, things have to be bought and paid for (for instance, an entrepreneur, buying raw materials from suppliers). Such transactions in modern times are usually done in many cases, through the bank credit transfer system because apart from the large amount of money that may be involved; there is also the need to consider the security of the money. It is for this reason that modern organizations (business and non-business alike) make use of banks and other financial institutions for many of their financial transactions. So, banks just act as intermediaries in many business transactions involving money (Afolabi, 2013).

Entrepreneurship development over the years has been facing problems of slow or stagnating development. This problem has continued to serve as a cog in the wheel of progress of the overall economic development in the country. This stampede of the growth of entrepreneurship in Nigeria is nowadays threatening to deprive the nation of the much needed benefits of poverty reduction, employment generation and wealth creation, which by implication should have set the country’s ball rolling for sustainable and growth and development (Lawal and Ijaiya, 2007).

One major problem, which is indisputable in all quarters, is the lack of sufficient fund to set up and run businesses (Onyeiwu, 2012). Lack of funds and access to credit facilities are significant obstacles to the development and sustainability of microenterprises that discourage those with entrepreneur skills. Small firms seeking bank loans face considerable credit constraints in that they receive credit much less frequently than larger ones. It is also known that many entrepreneurs would like to start up their businesses, but refrain from doing so due to the lack of credit to finance their initial or subsequent operations (Garba, 2013).

For any business to grow credit is essential; lack of credit is a barrier to the development and growth of the incomes of households and entrepreneurship. Access to credit enhances the adoption of new and more advanced technologies that will enable the rural household to expand their agricultural and non-agricultural enterprises, which in turn improve their income levels, and hence help in reducing their incidence of poverty (Abubakar, 2011). Despite the fact that credit has been recognized as an essential tool for promoting business, savings also plays an important role next to credit (Olaitan, 2006).

The deposit money banks which are main players in the financial systems of nearly every economy, have the potential to pull financial resources together to meet the credit needs of entrepreneurs, therefore, there is still a huge gap between supply abilities of the banks and the challenging needs of entrepreneurs. In Nigeria, the situation is even more predominant (Olutunla & Obamuyi, 2008) Also, it has been observed that entrepreneurs do not use formal means of financing as much as the large scale enterprises do.

The World Development Report indicated that small-scale business firms obtain only 19 percent of their financing needs as against 44 percent by medium and large scale enterprises from external sources in developing countries (World Bank, 2000). Entrepreneurs are often discouraged in sourcing for funds from the deposit money banks as they find accessing bank credit difficult. Abereijo and Fayomi (2005) note that the majority of deposit money banks loans who offered to entrepreneurs are often restricted to a period far too short to pay off any considerable investment. In addition, banks in many developing countries choose to lend to the government rather than private sector borrowers because the risk involved is smaller and higher returns are accessible (Levitsky, 2017). The main thrust of this study is to examine the role of deposit money banks to small scale entrepreneurial development in Nigeria.

1. Statement of the Problem

There is dearth of financial institutions which cater for long and medium term credit needs of businesses operating in the economy.

1. Lack of Startup Capital: Small scale enterprises are no exceptions to these, and they suffer a great deal for want of capital for development and expansion of the economic survival of the country. It cannot be over emphasized that they have moved from the subsistence level of pre-indigenization period to a position of importance in the country’s industrialization process.
2. Lack of Collateral: In an attempt to secure loan from Deposit Money Banks in Nigeria small scale business entrepries are required to provide collateral which in most cases are not available thereby poses as a problem to access capital from the banks.
3. Lack of Financial Education: The need in many cases is beyond the financial capability of the entrepreneurs who set up the business. They also lack basic financial education which help them easily access capital from the Deposit Money banks such basic education including records keeping, operating a business account among others.

The study therefore examines the role of deposit money banks to the small scale entrepreneurial development in Nigeria.

1. Objectives of the Study

The main objective of this study is to examine the role of deposit money banks to the small scale entrepreneurial development in Nigeria.

The specific objectives are:

• To evaluate the extent to which small scale enterprises have been able  to obtain loans and advances from Nigerian deposit money banks.
• To ascertain the problems facing deposit money banks in financing small scale enterprises in Nigeria.
• To identify problems encountered by small scale enterprises in obtaining funds from deposit money banks. 

1. Research Questions
2. To what extent does  small scale enterprises have been able  to obtain loans and advances from Nigerian deposit money banks.
3. What are the problems facing deposit money banks in financing small scale enterprises in Nigeria.
4. What are the problems encountered by small scale enterprises in obtaining funds from deposit money banks. 
   1. Statement of Hypothesis

Ho: Deposit Money Banks does not play significant role to the small scale entrepreneurial development in Nigeria

H1: Deposit Money Banks play significant role to the small scale entrepreneurial development in Nigeria

1. Significance of the Study

The importance of the study is to seek and direct government effort, stimulate and promote economic growth, develop local technology and to also generate employment. No doubt that this work would be of benefit to a host of stake holders in the small-scale enterprise scheme, especially the owners (promoters) and employees of business organization, the students, the government, investing financial institution and the general public.

This study through its findings and recommendations will be significant in the following ways.

1. Policy Makers and Regulators in the Industry:  To policy makers and regulators in the industry, it will present a scheme, through its analysis that could assist them in formulating policies that will not only positively impact on banks’ performances but also remain relevant in the economy of Nigeria.
2. Bankers: To bankers in general, it will expose the relationship existing between Deposit Money Banks and the Development of Nigeria Economy.
3. Academicians: In the academic arena, this study will prove to be significant in the following ways: v It will serve as a body of reserved work and knowledge to be referred to by researchers.  It will add value and enrich other literatures on banks’ performances in Nigeria and the world at large. It will suggest ways of enhancing the performance of the banking industry in Nigeria and the entire Nigerian economy. This will in turn, boost development positively which is usually affected by banks and their activities.

1. Scope of the Study

The scope of this study is limited to the role of deposit money banks to the small scale entrepreneurial development in Nigeria. The study is further limited to Kitchen 54 in Nasarawa Local Government of Nasarawa State.

1. Limitation of the Study

This study was carried out successfully but while in the course of gathering data, the researchers were confronted with the mention and analyzed problems,

• Time Constraint: The researchers had no enough time to carry out their research as have been planned because this project write up was coincided with other academic activities such as attending lectures, doing assignments and test
• Financial Constraint: Due to the economic situation that things are hard to come by, fund frustrated the researchers, but was able to take control of it.
• Materials: The researchers had no sufficient materials as to lay hands on books on the research topic. Also, the Bank Officials visited were reluctant initially to give useful information until a repeated visit.

1. Operational Definition of Terms

Deposit Money Banks: Deposit money banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments.

Small Scale Enterprises: As defined in the Nigerian context, following the current official definition of industrial  enterprises adopted by the 13^th meeting of the National Council on Industry (NCI)  Markudi, Benue State in July, 2001 as “an enterprise with total capital employed of over  ₦1.50m but not more than ₦50m, including working capital but excluding cost of land  and or labour size of 11-100 workers.

Short term credit: This type of credit is a credit or loan that has maturity period that is less or more than  one year. E.g. Personal loan.

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.

LOAN ADMINISTRATION AND PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA: A STUDY OF THREE BANKS

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.

Keywords: loan, credit, profitability, commercial bank

CHAPTER ONE

 INTRODUCTION

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:

1. To examine the quantum of loan granted by the banks under study in Nigeria.
2. To examine the different categories of loans and credits of the banks under study in Nigeria. 
3. To assess the performance of the loans and credits granted by the Banks under study in Nigeria.
4. 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:

1. What is the quantum of credits granted by the banks under study in Nigeria?
2. What are the different categories of loans and credits administration of the Banks under study  in Nigeria?
3. How has the loans and credits granted by the banks under study in Nigeria performed?
4. What are the impacts of loan administration on profitability of the banks under study in Nigeria?

1.5     Statement of Research Hypothesis 

H0:   There is no significant relationship between non performing credits and profitability of banks.

H0:   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.