COMMERCIAL BANKS LENDING PRACTICES AND THE INCIDENCE OF BAD DEBT IN NIGERIA
ABSTRACT
In the ordinary course of lending banks incur load debts which are charged against the income generated by the cause for bad and doubtful debts.  Besides, a cursory look at the annual statement of most commercial banks relatively provide for bad debt more than the other banks.  This fact could also be reflected in the elative performance of the banks.  Indeed many commercial banks in this country are a the verge of collapse particularly the state-owed ones.
TABLE OF CONTENTS
CHAPTER ONE
1.1         General Background Of The Study         
1.2         Statement Of The Problem                                    
1.3         Objective Of The Study                              
1.4         Development Of Commercial Banking In Nig
1.5         Principles Of Goods Lending                   
CHAPTER TWO
2.1         General Consideration On Bad And
Doubtful Debts                                                        
CHAPTER THREE
FINDINGS RECOMMENDATION AND CONCLUSION
3.1         Findings                                                       
3.2         Recommendation                                       
3.3         Conclusion                                                  
Bibliography                                                                  
CHAPTER ONE
1.1         GENERAL BACKGROUND INFORMATION OF THE SUBJECT MATTER INTRODUCTION
A banks economic purpose is to act as a financial intermediate it facilities the process of channeling savings into investments and, one of the avenues of realizing this objective is by lending effectively.
Lending is considered effective if it successfully reconciles the banks obligation of maximum liquidity to the depositor and maximum profitability to the shareholder.  It involves environmental analysis of banks objectives resources possibilities, constrains, economic environment, the resources flow and potentials in the economy as well as the economic development and policy objectives of the government.  It therefore involves a thorough appraised of the proposition including an analysis of the financial statement analysis of security to be offered and management competence.  Specifically, lending requires development of clear cut loan policy, strong department organization loan review programme, comprehensive credit files among other things.
In the light of the above, a bank being under obligation to the shareholders and realizing the fact that the interest accruable from advance constitute the largest chunk of the annual income declared by banks, considering also that banks lend to meet the legitimate needs of its customers and the economy in general.  They should constitute religious commandments rather are mere techniques and guidelines which have serious limitations.  Political interference contrary to the laid down policy guidelines.
From the fore-going, it was recommendation amongst others that state owned commercial banks should be effectiveness Banks should use the services of external consultants (professional) to manager collect the debts on account classified as doubtful and to avert the diversion of funds by some recalcuitrment borrower, the banks should try as much as possible to deal directly with contractors or supplies of the borrowers as the case my be.
Much of the occurrences of bad debts cannot be eliminated totally, it is hoped that the suggestion made in this treatise will in now small measures reduce its incidence by a wide margin.
In the ordinary course of lending however, bankers unavoidably incur “hand core” advances which inscrutably remain uncollectible and hence charge against the income generated with the obvious after mates of depleting profit and in some severe circumstance liquidates the affected banks.
All business regrettably experience bad debts, but bankers whose stock in trade is money, view debt incidences with dread.  Nevertheless, the occurrence of bad and doubtful debts can be regarded as an intractable occupational makise associated with business.  But fore bank, it has for long been contended that, this dreaded and unavoidable malignant should be kept within reasonably margin of the total lending portfolio of the bank.  Unfortunately in practice, the trend has been unimaginably the reserve.  With reference to the study undertaken in ACB which truly reflected the prevailing phenomena within the years under review.
The study revealed that between, 1993 and 1997, a total sum of N4.5 million was extended as loans to customers while incurring N973, 4 million or 21.58% as bad debts.
These figures as unveiled by certain annual statements could hardly be considered a reasonable margin based on its lending portfolios.
Besides since the ugly situation has ceaselessly maintained an upward trends, no doubt, it has the propensity to cause anxiety in the minds of interested part.
A case in point was the situation suffered by ACB where divided was last declared about. Situation has ceaselessly maintained an upward trends, no doubt, it has the propensity to cause anxiety in the minds of interested part.
A case in point was the situation suffered by ACB where divided was last declared about.
1.2       STATEMENT OF THE PROBLEM    
i.          African continental Bank was closed down by Central Bank of Nigeria because of the incidence of bad debts resultant from inefficiency of the Bank workers and dishonesty.
ii.         This unfortunate trend in the Nigeria banking industry had left creditors of the bank loose their more and their dividends as bad debts.
iii.           Conflict between boards and management banks or among members of the board and management.  This caused dissipation of bank resources and the entrenchment of inimical operating practices.
iv.           African continental Bank was also closed down due to doubtful debts, which gave rise to fraud and other unethical practices represent the most dominate factor responsible for its distress.  It can often traced to the very high incidence of bad debts and loan losses.  This could be called fraud and unprofessional conduct.
v.            Weak internal control, most operational problems are by and large symptomatic of poor quality management.  The qualify of management often males the difference between success and failure in banking as in most often frauds of economic endeavor.
Decade ago to the fact that all the net profit generated has been sunk into Yawning gap of bad and doubtful debt.  This deselecting its duly to the shareholders and general creating an unfavourable impression on the investing public.  As a result, a thorough investigation has been undertaken in the lending issues that led to the collapse of African continental bank while examining the popular-slogan of the Directives we are changing in relation to the leading practices it now adopt with a view to contributing meaningfully to its desires successfully operation and also proffer idea which could serve as a meaningful source of reference to other commercial banks and indeed the banking community in general.
1.3       OBJECTIVE OF STUD
Lending has become a vital function is banking operations because of its effect on economic growth and business development.  Lending is banking, a bank does not go ahead to advance money because a proposal sounds fantastic without thorough economic and financial analysis, not do they just advance funds solely on the strength of collateral presented.  Therefore in situations where these laxities negligence abound, the outcome remained unpleasant.
In the study relating to African continental Banks a conscientious investigation will be undertaken on the lending issues that led to its collapse.  An overview of the mancour-vies instituted by the present management to rectify-the statuesque so as to contributed meaningfully to the achievement of its objective while leaving behind a source of reference to other banks who are probably in similar difficulty.
The relevance of this study is underscore in its desire to assist banks confirm the multifarious causes of bad debts in their operation and help alert and knows his customers, project proposal and account operation thoroughly the unbendable nature of his proposed or the flagging position of his account could be easily spotted.
1.4 DEVELOPMENT OF COMMERCIAL BANKING IN NIGERIA
Modern commercial banking in Nigeria dates back to the late 19th century when elder Dempstor and co (a shipping form based in Liverpool and W.A) required “an institution in the form of a commercial bank for safely and transmission of funds, the important of credit to the government and the trading companies” it was for the aforementioned reason, that led to the invitations of African Banking corporation based in South African to open up a branch in Lagos in 1892 to enable it provide banking services to Elder Dempster and go.  The bank however failed in 1892 and was taken over by banks of British West African.  By 1894, later what was known as the limited and now first Bank of Nigeria limited could aptly be referred as the first conventional banking experience in Nigeria.  It remained the sole bank until 1917 when the colonial bank, later Barclays Bank (DOMINION COLONIAL AND OVERSEAS), subsequently Barclays Bank of Nigerian limited opened for services in the country
These two foreign banks maintained the monopoly of Banking services till the 1930’s when some indigenous entrepreneurs teamed up to form their own banks since the foreign banks were highly discriminatory and favoured mostly.  European traders and multinationals while on the other hand, they solicited the Nigeria trade for their deposits.  The situation as if existed then was most unhealthy for the meaningful growth of local entrenenurship.  It was in the bid to rectify this imbalance that marked that birth on the first surviving indigenous banks-National Bank of Nigeria in 1933, Agbomagbe Bank (Novo VVEMA Bank) in 1938 and African Continental Bank in 1947.  It is on record however, that before the first banking ordinance in 1952, some is indigenous banks were registered.  Unfortunately, all but the three already mentioned collapsed competition by the foreign banks, under capitalization and the parochial inclination of their operation.
No doubt, the banking ordinance of 1957 brought some sanlty into the Nigerian Banking system since it introduced Bank licensing based on satisfying a minimum paid-up capital and the provision of bank supervision among others.
To British and French Bank for commerce and industry later known as British and French Bank, now united Bank for African Commercial operation in 1948 and remained the third expatiate Bank that planted its foot in Nigeria.  Next was international bank for West African which was registered in Nigeria in 1959.  It is worthy of note that the banks so far mentioned, were they only surviving bank in the country before 1960.
As a result of the indigenization process, oil born and its attendant industrialization and increased business activity, many more banks have been re-registered in this country since 1960.  In fact as at December 31, 1977 there was is commercial Banks (including the development banks) operating in Nigeria but it is interesting to point but that at April 30, 1989 there was 48 licensed commercial Banks operating in Nigeria.
1.5         PRINCIPLES OF GOOD LENDING
The economic growth, business and commercial development of any nation, can be divorced from the enviable lending role performed by it banking, financial and quasi financial institutions.  In most developing countries of the world, the lending function has become so paramount that it has persistently been integrated into government policy formulation in the national economic development process.  It is however necessary the lending objective of a bank is to provide growth, profit ability and liquidity, hence the need to highlight salient features as observed by the affected institutions.
Lending could be in the of overdraft and term loan with varying degrees of disbursement, moratorium and interest principal repayments.  But it has severally seen put forward that bankers in that dealings with customers are not charitable organizations, this they save on profit by extending credit in line with some start of economic criteria.  ADEKANYE (1984) in supporting this view contended that “it is a well known fact that books are business established to make profits and not as charitable organizations therefore any facilities granted are expected to yield some profit to the bank”.
A bank does it is sought for, it is based on certain yardstick which clashore (1985)” suggests includes the purpose of which the loan us required, the feasibility of the project, the capacity of experience of the proposal or customer to successfully prosecute the business or project, the integrity of the borrower and the security offered for the facility.
Invariably what is being advocated for is the exercise of care and prudence in banks lending activities.  In this regards, ADEKANYE (1985) “asserted that when a bank manager or lending officer is approached for a loan a overdraft facilities basic question which we have described as the cannons of lending.  This he expressed as.
1.            How much does the customer want to borrow
2.            Why does the customer want bank facilities
3.            Is the customers business financially strong enough to keep going if his plans suffer a set back.
4.            How long does he want if to?
5.            How does he intend to repay?
6.            What is you assessment of in customers?
7.            What is your assessment of in customers?
According the NWANKWO (1980) effective lending in a developing economic may be defined as “that quartium of lending which maximums the bank’s objectives of development.  “It therefore becomes necessary to business desiring loan facilities since this could determine whether or not business desiring loan faculties has a bright future.
CLASHORE (1985) “Compliments this view by saying that “when a lending officer have the competence for analytical appraisal or allows himself to be misled or carried away by consideration outside the normal cannons judgments in selecting his risks”.  He went further to assets that” a lending officer must be upright, fearless and dynamic and must not allow personal social relationship to becloud his judgment.
According to UZOAGA (1981) assessment of risk is based on the applicant’s character, that the applicant provide.
CLASHORE (1985) “supporting this view, went on the say that” looked at from this point of view, there are certain elements which lending officers consideration in determining whether to extend credit, and if so, how much.  The basic factors are called the four of credit.
CHARACTERS, CAPACITY, CAPITAL AND COLLATERALS
He concluded his opinion by adding that these factor “are in fact aimed attaining the successful performance to the lending functions”.
CHARACTER
ADIKWU (1983) “In his credit evaluation simple referred character as being associated with reputation”.
The character of the borrower is perceived by HALE (1983) “must be free of any doubt as to their integrity.  He contends that is any questions as to the integrity or good intentions of the borrows raised the creditors should no approve the loan rather check on the moral standing and style of business before beginning negotiations.  This is feels is necessary since “banks who associate with people of less than acceptable character damage than own reputation for beyond the profit obtained on the transaction.”
PANY (1981) “indicated character as” the willingness of the customer to pay” the need to pay attention to this factor-was accepted by the ENCYCLOPEDIA BRITANNICA (1971).  Since it assets that an earnest intention to repay even in adverse circumstance is essential.
CAPACITY
PANDY (1981) “summarily described capacity as “the ability of the customer to pay”.
Banks are interested not only in the borrowers ability to repay but also in his legal capacity to borrow usually loans are not extended to minors since they can disaffirm at a later data unless the proceeds of the loans are used for essential purposes.  In the case of limited liability companies the memorandum and articles of association, certificate of incorporation and a resolution authority the directors to borrow a stats amount order to avoid bad loan with partnership the partnership dead is desired to assertion, the right and obligation of the parties.
CAPITAL
This measures the property risk.  Capital serves to protect the creditor against under losses especially curing the period of liquidations.
COLLATERAL
Collateral security merely act as an insurance against unforeseen circumstance which may render the proposed loan repayment plain difficult or impracticable.  Collateral security consider for bank lending has become a necessity.  The most appropriate time to obtain collateral documents from the customer is prior to drawing down the facility.
Although, some writes refuse to include condition.
As necessary facto-to be considered in the extension of credit, but then it is discernable that the extension of credit to a customer might be influenced by the consideration of the environment within which the business units and individuals operate economic condition.
LENDING
Undoubtedly, there has been in existence some concepts which has continued to influenced the lending pattern in banking industry.  Some bankers like ROY AND LEWIS (1971) affirmed that “like folk care” they have passed from one generation of bankers to the other”.
However, in a sequential historical order, the existing loan concept can be outlined as:
a.            The real bill doctrine
b.            The shift ability theory
c.            The anticipated income theory
d.            The liability management theory.
THE REAL BILL DOCTRINE
As was emphasized by MINTS (1970) “the real bill doctrine was firstly adequately enumerated by Adam smith”.  It is a known as the productive/commercial loan theory, it reiterates that it the (i.e bills supported by goods in transit).  This will.
1.            Automatically limit, in the most desirable manner the quantity of bank liabilities.
2.            “Means that bank assets will be of such as nature that they can be turned into cash or short notice and this calls for cash.
3.            “Cause them to very in accordance with the assets of business.   When this doctrine was in vogue in the banking industry, invariably the banks now source of liquidity apart from cash was then limited to their own portfolio.  There does not exist secondary reserve assets which could have served as a liquidity buffer for the banks.  The government securities then existing were not readily marketable.
THE SHIFT ABILITY THEORY
ADWUMI (1981) pointed out that “by the 1920’s the commercial bank’s attitude to lending was beginning to decorate slightly from the prescriptions of the real bill doctrine.  This was however attributed to the gradual but steady growth in government borrowing from the public, coupled with increasing change in the structure of the balances total deposit base towards a greater proportion being accounted for the less volatile savings and time deposits.  With emergence of the shift able open market financial assets, the banks believed that the doctrine of commercial credit need not continue to pay them to short term loans, since they felt they could make good their liquidity shortages by shifting assets would only be expected to general liquidity.
ANTICIPATED INCOME THEORY
After a thoroughly study of banks term loans, PROCHNOW (1949) came up with a new loan theory known as the “Anticipated income Theory”. As was expressed in WEODWORTH (1971) “Prochnow found in his study that in every instance regardless of the nature and character of the borrowers business, the banker planned liquidation of term loans for anticipated earnings of the borrower.  It (liquidation) is not by sales of assets of the borrower as I the commercial or traditional theory of loquacity nor by shifting the term load to none other lenders as in the satiability theory of liquidity but by the anticipated income of the borrowers.
THE LIABILITY MANAGEMENT THEORY
This theory emanated is a result of certificates of deposits (CDs) launched in 1961 by large New York money market banks the emergence of this theory introduced another source of liquidity for the banks because of the possibility of raising substantial resources by the issue of certificates of deposits.
LENDING ANALYSIS
Lending analysis is the process of inquiring prior to making the decision to lend.  In this inquiring as PROGER HALL contends”, the banker today does his best to replace emotional feelings, such as hopes and fears, with reasoned arguments based upon a careful study of borrower’s strengths ad weakness.
The fundamental of modern analysis are two fold:
a.            The examination of the nature of the borrowers business in the context of its industry.
b.            The analysis of cash flows.
However, according to PANDEY, he contends that the applicant should be asked to provide the financial statement which will form a basis to analysis the performance and trend of the applicant’s business activities.
Lending analysis therefore intended to keep the number of bad loans to minimum and to highlight a potential problem early enough to enable the lender to seek early withdrawal or repayment from the credit.
OUTLINED FOR LEADING ANALYSIS SECTION 1
DESCRIPTION, PURPOSE AND SOURCE OF REPAYMENT OF PROPOSED FACILITY
Each analysis is usually required to being with a clear description of the proposed facilities under consideration with sufficient detail to identifying.
a.            The borrower
b.            The type or credit facility
c.   The contemplated usage of the credit’s facility
d.   The anticipated source of repayment of should be stated.
SECTION II
RISK ANALYSIS SUMMARY AND RECOMMENDATION
The analysis should state the prose and cons of extending credit and evaluate the credit risks sufficient to justify or impede the lending decision.
SECTION III
SOURCE OF INFORMATION
A detailed background knowledge on the sources of information is required.  It should also indicate the of financial statement as audited or unedited.  If the analysis relies on owns the firm’s equity.
Sufficient cases of bad debts in Nigerian Banks riske as a result of pro-documentation and perfection process of the securities taken out, this rendering realization ineffective.  This unhealthy trend informed the need to briefly examine the role of securities and the problem of in perfection.
Besides, according to Nwankwo (1982)”. The essence of the financial statement analysis to establish that, all things been equal the loan will be safe, property used, and repaid on scheduled.  But this is a garnble in the future.  All thing may not be equal and things may go wrong such that the basis and optimum established and expected do not materialize.  This is why the banker the instincts he has extend to provide the following guide’s audited financial statement.
a.            Under delay in sending to the bank the business audited financial statements.
b.            Reduction in turnover as a result of doctrine in business and/or mismanagement of funds.
c.            Unusual issue of post-dated cheques
d.            Evidence of delay in payment of trade accounts
e.            Heavy borrowing from other sources
f.             Poor quality of current assets
g.            Inability to meet learn installments to come for discussion, especially where the customer previously used in make routine calls at the bank.
SECTION IV
INTERPRETATION AND ANALYSIS OF FINANCIAL INFORMATION
The interpretation of information is geaed towards the lending risks involved in the extension of the facility.  The written interpretation and resourcefulness of the written.  To reinforce this statement (HALE 1983) asserts that “if is your decision and you must feel comfortable with it according to your own judgment.
 1.6       SECURITIES FOR BANK ADVANCES
            it is honesty difficult to talk about lending and the relationship directly or indirectly, with bad debt incidence without a mention of the securities taken out in the proposition, this view is not intended to portray security as the most important criteria without which a lender or bank could feel back in the if the borrower defaulters or if the expected source of repayment should fail.  There is often an erroneous belief that if can individual own house walk straight to any bank to demand a loan worth N200,000 or less.  This is false.  As has been stated earlier the analyst thoroughly examine the proposal makes an assessment of the risks the bank runs in extending the type of security demands its value and made of documentation and perfection required.  It is however the contention of the writer that.
            Lastly negligence on that part of some credit officers create lapses which might impede the realization of outstanding debts which due for instance there may be unapproved overdraft excessive, unformulated facilities (i.e draw down allowed before duly perfecting documentation and expired facilities not renewed on time.  In each of these cases, the customer may easily deny ever owing the bank all or part of the amount.
            As long as the bank’s official have failed to exercise the appropriate per leading control, as laid down in the bank’s lending policy and procedure, the bank is placed in a weak position when it comes unfavourable occurrence, the banker needs more than ever before to pay personal to his policy (usually five) should be deposited by the customer and the anns is on the credit analyst properly examine the policy and also ensure that it adequately covers the value placed on the properly as well as notify the insurance company would acknowledge the receipt of this information and in response duly note the bank’s interest on the policy.
            Another important aspect of documentation perfection is the need to obtain the governor’s consent to mortgage, failure of which mollifies the transactions.  Normally before granting such consent the governor would ensure that all rents and rates have been paid and other related legislation or bye laws have been complied with.
INSURANCE POLICIES AS A FORM OF SECURITY
In recent times, insurance policy have grown to be widely acceptable from of security taken out by banks to lending purpose especially, a life policy has become most desirable except in cases where the banker has financial plant, machinery or stock burglary policies with the bank’s interest duly noted on them.
The contract of assurance is contract “uberrimance fider” which means that the non disclosure of any materially important fact of the time of taking out a policy can vitiate the policy and hence invalidate the bank’s security position.  The most popular form of life policy acceptance to banks is the Endearment Policy where the stipulated age by the assued or at a specified future date or of death.  Under this borth certificate or birth declaration of the life assued as well as examine carefully any special/conditions which may be incorporated in the policy sometimes to example, it is a condition that the life assumed shall not engage in certain specified occupations.
The lending analyst need to in ascertain in the surrender value of the policy and related it to the facility amount.  Essentially the analyst should ensure that the customer pays permission as and when due, but where he fails to comply the bank may pay and debit the amount to the customer’s ancient as have been mandated by the mortgage contract.
SHARE/STOCK AS SECURITIES
Stocks and shares in reputable tradry & manufacturing companies are frequently accepted by bankers as security for advances.  The various typed of shares and stocks which a company may issue are “preference and “ordinary” shares.
Bank generally prefer quoted investments companies whose share are listed on the Nigerian stock exchange since they are readily marketable and it is possible to ascertain their precise value at any given time.  When a banker accepts listed stocks as secondly for a loan, he should be careful to lend a sum which is smaller than the value, of the shares.
In this way, his will be protected is the value of the shares/stocks in the market moves downwards.
The safest of debenture for a loan is “debenture stock” the while of debenture stock has a right to receive interest from the company.  Usually at a final rate, and is a secured.  Creditors of the company what the security is will depended upon what assets are charged by the depend upon what assets are charged by the debenture trust deed.  The next safety security is “unsecured loan stock” the holder of unsecured loan stock is also a creditors of the company and ahs a right to receive interest from the company.  The next safest security for a loan a “preference share is not a creditor and does not have a right to any interest or to a dividends on his share before any dividend can be paid to the holder of “ordinary shares”.  In a situation of an insolvency the holder of a preference share is usually next in line of priority often all the creditors have been paid.
The least safe security of an ordinary share.  Ordinary shares represents the company’s venture capital and they carry the greatest risks, but also of the company prospers, the greatest reward.
GUARANTEES AS SECURITY
A guarantee is a promise by a person or limited liability company, who is called the “guarantor|” or “surely” to answer for the debt, default or miscarriage of another person know as the “principal debtor”. Such promise made to the party to whom the principal debtor is or will become liable.
At the time of entering into a guarantee the guarantor may be quite able and willing to perform though on fault is his own may charge for the coose.  While the guarantee remain operative, the banker should therefore, renew periodically his original inquires.  He should make it clean to the source of his information that the enquiring is a renewal since otherwise the latter might think that the guarantor was undertaking our additional liability which he would but be in a position to meet.
A company may give a guarantee if only it is expressly permitted to do so by its memorandum.