CHAPTER ONE INTRODUCTION BACKGROUND OF THE STUDY
Lending is the main function of commercial banks through lending banks strives to satisfy the credit needs of the economy as well as enhance its profitability. One of the cardinal principles of classical banking is to ensure effective lending. Lending is the major product of every commercial banking activity, and it also provides the larger part of the bank’s profit. Banks in Nigeria have found it necessary to increase their lending ability and at the same time increase policies to establish the direction and use of fund from shareholders, depositors and creditors to control the composition and size of the loan portfolio and to determine the general circumstances under which it is appropriate to make and advance.
A banker’s decision will be influenced by many factors. Some of these factors include the character of the borrower, the risk involve the profitability of the transaction to the bank, the lending policy of the government, the best interest of the borrower and of the community generally. The perfect advance or lending will be safe liquid and profitable. “it will for a suitable purpose. Needless to say, these requirements will not always be present at the same time and banker will therefore search for an acceptable compromise”.
Lending is considered effective if it successful reconciles the banks’ objective of maximum profitability to the shareholders of the banks and maximum liquidity to meet the transaction and precautionary needs of the banks customers and investing public. But for obvious reasons, this principle cannot be regarded entirely satisfactory in a developing economy like ours (Nigeria) where we have a lot of new generation banks, which lends to a conflict (severe conflict) between, the profitability and liquidity needs of banks.
Against this background “effective lending in a developing economy may be defined as the quantum of lending which maxims the banks objectives of liquidity and profitability and the economic objectives of development. This is because highly profitable lending which also ensure liquidity may not always be effective. “for the instance lending for commerce may be effective in the profitability and liquidity sense, but may be ineffective in terms of maximum contribution to economic development”, similarly, although lending to Agriculture, Road construction or House, it may well be very effective lending in a development sense. Thus effective lending in a development economy must combine the classical view”. It is therefore important to note that lending should not be seen by the two parties involved bankers and borrowing customer as a hide and seek game, but as partners in progress. The banker should equally market his product and make adequate profits. The loan should be adequate and recoverable at maturity together with interest. The loan should be properly secured to make up for any liability in case the borrower defaults or facility goes bad.
Security is a kind of insurance. The real security is the character of the borrower unsecured borrowing in the shape of balance sheet that is, advances to big established limited companies may account for nearly half of the banks lending in any particular year. These advance, made to trusted borrows are usually for less troublesome than the secured advanced, which require a certain amount of work before the advance is taken, to see that the security is perfected, that the bank has control over it.
1.1 STATEMENT OF PROBLEM
The critical issues on the problems and prospects in extending credit facilities by commercial banks to their customers and the investing publics for investment purposes are many. Banks do not give their customers loan because they need it. Certain factors should be taken into consideration. Commercial banks as we know, by their very nature in terms deposit liabilities are traditionally short-term order. They do not participate in the provision of long-term lending, until recently when commercial banks under section 21 of the banks and other financial decree (BOFID) No. 25 of 1991 which permits commercial banks to acquire shares in small and medium scale industries and Agricultural enterprise. The commercial banks the change (as collateral security) on the most easily marketable securities of their client, e.g. stock of raw materials, finished goods and credit to customers. The collateral securities may equally include fixed assets in the form of landed property with good tithe documents and financial assets in the form of ordinary share, insurance policies.
Experiences in banking industry have shown that most bank borrowers, especially those that fall within the category of small and medium scale entrepreneurs, do not know the purpose for which they are obtaining the loan. Therefore, they are ignorant of the fact that the purpose of securing the loan must synchronize with the amount and types of the loan. This factor increases the banks exposure to risk of default. Also on the part of government, concretionary monetary policies and the stringent control through the central bank of Nigeria, make it extremely difficult for banks to lend for the purpose of investments. This results in discretionary bank lending and slow practices in the banking industry. Stressing more on the above problems, the following questions need to be resolved;
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