INTRODUCTION
Background of the StudyThe relevance of banking to the Nigerian financial system andindeed the entire economy cannot be over emphasized. Without bankseconomic activities would grind to a halt. Undoubtedly banks serve ascatalysts to the growth and development of any nation, Nigeria inclusive.The primary function of banking in an economy is to providefinancial intermediation. Financial intermediation means the mobilizationof funds from the surplus units at a cost for on-lending to deficit spendingunit at a price, (Oboh, 2005). Through this process, deposits collectedfrom surplus economic units are channeled to deficit unit in the form ofloans and advances. Thus banks as financial intermediaries have twobasic traditional functions: deposit mobilization and lending. But by farthe most important function as far as banks are concerned is the lendingfunction.Lending has become a vital function in banking because of itsdirect effect on economic growth and development. This is beingpursued in most countries particularly the developing ones where banksand lending activities have been usefully integrated into governmentpolicy formulation in the national economic development process. Thusthe lending activity of banks as it affects economic growth anddevelopment has continued to gain prominence in the light of moderneconomy.2
As agents of development, banks provide loans and advancesincluding a variety of contingent facilities. The bulk of the fundsdeposited with banks constitute the bases for loans and advances topersonal and business customers to facilitate their individual economicactivities. Like any other business entity, banks are in business to makeprofit and as such they charge interest on credit extended and payinterest on funds deposited with them. The difference between theinterest received and that paid is the gross margin which constitutes theprofit of the banks (Rose, 2003).Lending is said to be the most profitable activity of banks.However, if lending decisions are not handled with care, it could turn outto be the most loss-making activity of a bank. The safety of any loan andadvance is therefore of paramount importance to bank.Banks therefore ensure that there is a reasonable certainty that theloans granted are likely to be repaid by the borrower. In order to keepthese risk factors under control, the bank lending function is closelyregulated to ensure prudent policies and practices. Banks also controlrisk in the lending function by setting up written policies and proceduresfor processing each loan request.The bulk of loans and advances made by banks follow some basicprinciples which help to minimize the adverse effects of lendingespecially the incidence of bad debt. Banks lay great emphasis on thecharacter, integrity and reliability of borrowers. There must be areasonable certainty that the amount granted can be repaid form theoperations of the firm. If the loan is granted to a personal borrower, thesource of repayment must not be doubtful. The borrower must be able to3
provide acceptable security which will serve as something to fall back onif the expected source of repayment should failAll these safeguards are built into the lending programme to helpreduce credit risk. Credit risk is the risk that the principal or the interest,or both or part thereof of the credit extended to a customer will not berepaid by him in accordance with the loan agreement, (Anyanwaokoro,1996). When this happens, the bank will end up classifying the credit asbad debt, and in due course it will be written off. The long-run effect ofthis on the bank can be very detrimental with its attendant effect on theentire economy. This is what has happened to many Nigerian banks thatwere classified in the past as distressed by the Central Bank of Nigeria.It is therefore expected that a high degree of efficiency andeffectiveness be maintained in the operations of banks especially in thearea of loan-making considering its implication on the profitability,liquidity and safety objective of banks and the well being of the economyat large.Statement of ProblemThere is consensus among banking experts that the greatestsource of bank profitability is credit delivery. However if lendingdecisions are not handled with care, it can turn out to be the most lossmaking activity of a bank. The safety of any loan and advances is ofparamount importance to banks.The expectation of every banker is that customer to whom the credit isextended will repay both the principal and the interest as agreed. But this4
expectation does not always materialize. Banks may incur risks andexperience some losses if certain borrowers fail to repay their loans.In order to keep risk factors associated with lending function undercontrol, a lot of caution is applied by both banks and regulatory/supervisory authorities. The bulk of loans and advanced given by banksfollow some basic principles so that certain adverse effects of lendingwill not occur especially the incidence of bad debt. Moreover, the banklending function is closely regulated to ensure the safety of bank and thesafety of customers’ deposit. The responsibilities of monitoring thelending activities of banks in Nigeria are vested with Central Bank ofNigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) toensure strict compliance with the laid down rules and regulations. Allthese precautions are built into the lending programme of banks to helpminimize credit risk associated with lending.With all the precautions highlighted above, one expects theproblem of credit risk to be very minimal in the Nigerian banking system.It is however disheartening to observe that the magnitude of nonperforming loans in the loan portfolio of Deposit Money Banks (DMBs) inNigeria is on the increase. This trend is generating a lot of concernamong stakeholders in the banking industry. Umeaba (2009) observedthat bank loans classified as non-performing in 2008 amounted to 40%of total bank loans. Infact the magnitude of non-performing loan in theloan portfolio of deposit money banks in Nigeria has questioned theprofessional credibility of banks management and integrity ofregulatory/supervisory authorities who are responsible for protecting thebanking system. Uzor (2009) noted that the increasing share of loans5
classified as non-performing is evidence that something was wrong withthe system of credit delivery of the banking sector.It is obvious that a bank that has the bulk of its assets as nonperforming debts stand very little or no chance of surviving in theindustry, especially in the face of the present global financial crises.Classified debts put banks in a position of under capitalization which willin turn lead to crisis and distress. Recently, the joint examination ofbanks carried out by CBN and NDIC revealed that ten banks were ingrave danger of collapse because of burden of non-performing loan. The CBN, in order to prevent systemic crises, had to extend a life-line of620 billion to these banks in a bid to breathe life into them, (BusinessDay, 2009).Although there has been several attempts by the relevantauthorizes to check the ugly incidence of non-performing loans, allefforts made by these authorities seem not to have yielded the desiredresult as the problem has continued to persist as evidenced in thecurrent credit crises in the system. This means that the major factorswhich have fostered the issue of classified debts among deposit moneybanks in Nigeria have not been properly scanned and diagnosed. Theneed therefore arises for further studies on the problem which is theissue of the research.Objectives of the StudyBased on the problems highlighted above, the broad objective ofthis study is to examine the performance of the loan portfolio of Deposit6
Money Banks (DMBs) in Nigeria. Specifically, the study will achieve thefollowing objectives:1. To determine the extent and trend of non-performing loans amongbanks in Nigeria.2. To ascertain the extent poor credit administration is responsible forthe high incidence of non-performing loans in the banking sector.3. To examine if poor supervision by supervisory/regulatoryauthorities is responsible for high incidence of non-performingloans in the banking system.4. To identify if the level of non-performing loans among banks is asa result of poor corporate governance by the operators.5. To find out if economic performance of the country is responsiblefor non-performing loans in the banking sector.6. To suggest various ways through which the problem of nonperforming credit in the banking system will be minimized.Research QuestionsThe study is guided by the following questions:1. What is the magnitude and growth rate of non-performing loansin the banking sector?2. To what extent has poor credit administration contributed to thehigh incidence of non-performing loans in the banking system?3. To what extent has poor supervision by supervisory/regulatoryauthority impacted on high incidence of non-performing loans inthe banking system?7
4. To what extent has poor corporate governance by bankmanagement contributed to non-performing credit in the bankingsystem?5. To what extent does the economic situation in the countrycontribute to credit crises in the banking system?Significance of the StudyThis study is coming up at a time when the banking industry ispassing through a serious problem of non-performing loans with itsnegative consequences in the sector. The study will therefore be ofimmense importance to various stakeholders in the banking sectorparticularly the operators of banks, borrowers, depositors, regulatorybodies and even the general public.The outcome of the study will help managers of banks to identifythe causes of bad debts and its effects on the activities of banks so thatthey can take the necessary steps to check the ugly trend.The study would be of significance to the investing public whoobtains loans from banks. They would be educated on the need to makeefficient use of credit extended to them as the reverse often leads toinability to honour their obligations. The study will show them that bydefaulting in loan repayment they make it impossible for banks toaddress their function of credit provision in the economy.Unprofessional and unethical practices among bank operatorsconstitute the greatest threat to banking industry. It is hoped that thefindings and recommendations of this study will help to expose some ofthe unethical and unprofessional practices carried out by both bank8
management and staff. With this exposure, it will position the supervisoryand regulatory authorities to tackle the problem in order to minimize it.To bank management, the study will enlighten them on theimportance of efficient risk management techniques in the managementof loan portfolio.To the academia, the research work would be significant becausesalient issues in loan portfolio management will be highlighted toenhance their knowledge of the topic, and this will increase the pool ofknowledge from which reference can be made in future.Scope of the StudyThe researcher would have liked to extend the scope of this workto cover both development banks, specialized banks and othercategories of banking institutions in the banking system, so as to get tothe root of the problem identified in this study. However in order to carryout more accurate and detailed study, the scope of this work is strictlynarrowed to loan portfolio of Deposit Money Banks (DMBs) in Nigeria.The study covered a period of eleven (11) years (1997 to 2007).HypothesisThe following hypotheses were tested in the course of the study.All the hypothesis are in the null.Ho1: There is no significant difference in the mean responses ofAccountants and Managers on the extent poor credit administrationcontributed to the problem of non-performing loans in DMBs.9
Ho2: There is no significant difference in the mean responses ofManagers and Accountants on the extent the supervisory/regulatoryauthorities contributed to the problems of non-performing loans in thebanking system.H03: There is no significant difference in the mean responses ofManagers and Accountants on the extent poor corporate governancecontributed to the problem of non-performing loans in DMBs.Ho4: There is no significant relationship between the level of banks’ nonperforming loans and GDP of Nigeria.Plan of the studyIn order to present detailed account of what the researcher has doneand found in the course of this study, the work is presented in fivechapters.The first chapter is introductory chapter. The chapter presents thebackground of the study, the problem to be studied, objective of the workand the significance of the study. The chapter also specifies theresearch questions that guided the study, the hypothesis and the scopeof the work.Chapter two reviews related literature. In this chapter the opinionsof eminent scholars and commentators are reviewed. The review isdivided into eight sub-topics.Chapter three presents the methods and procedures adopted indata collection and analysis. The presentation is made under thefollowing sub-headings: research design, area of study, sources of datacollection, population and sampling procedure, instrument for data10
collection and how it is pre-tested and validated, techniques adopted indata analysis, and problems encountered in data collection.Chapter four is the presentation and analysis of data gathered.Here the data collected are presented in tables and analyzed.The fourhypothesis formulated in the work are tested here. Summary of findingsare presented at the tail-end of the chapter. All the tables used in thischapter are assembled in appendix.The fifth chapter which is the last chapter contains the discussionof findings, its implications, recommendations and conclusion of thework.