THE IMPACT OF BAD DEBT IN COMMERCIAL BANK LENDING IN NIGERIA

CHAPTER ONE

BACKGROUND TO THE STUDY

Banks today are the largest financial institutions around the world, with branches and subsidiaries throughout the world. The services rendered by commercial banks in Nigerian cannot be over-emphasized. The banks basically in any economy are financial intermediaries that perform two main traditional functions which include deposit collection and lending. These banks offer different products and services to public, and because of their high liquidity, these intermediary operations are quite risky. Therefore the banks are faced with diverse risks in the course of carrying out their operations. In view of the risks inherent in bank lending and the need to minimize or contain the risk (since they cannot be avoided entirely), and in view of the need for liquidity and profitability consistence with safety and regulatory constraints, the central issue in managing the lending portfolio is balancing the potential risk with returns. This involves credit management and credit analysis. The borrower‟s ability to repay the loan has to be determined, the borrower capacity and capital have to be assessed (Nwankwo, 1991).

Credit creation is the main income generating activity of banks (Kargi, 2011) Due to the increasing spate of non-performing loans; the Basel II Accord emphasized credit risk management practices. Compliance with the Accord means a sound approach to tackling credit risk has been taken and this ultimately improves bank performance Deposit money banks are exposed to a variety of risks among them; interest rate risk, foreign exchange risk, political risk, market risk, liquidity risk, operational risk and credit risk; and what banks does is to manage these challenges especially the credit aspect. In some instances, deposit money banks and other financial institutions have approved decisions that are not vetted; there have been cases of loan defaults and non-performing loans, massive extension of credit and

1.2    STATEMENT OF PROBLEMS

It is a well-known fact that there has been a public concern on the impact of bad debt on commercial bank lending on Nigeria economy. The various management in position has been accessed of giving loans to applicants without a good or reasonable security as collateral. This has immensely given room to economic problems/crises 14i that some customers even when given a reasonable collateral tends not to meet up with the demand of the agreement 

This is as a result of borrower inconsistencies in responds to the demand made by the various banking institutions (commercial banks) for repayment of loans and advances made to them. This also in turn reduces the asset base of the bank as a result causing inflation in the economy, by devaluation of our naira in foreign exchange market, hence discouraging international/foreign investors from investing in the country.

However, the major issues are:

1.  How exactly does a commercial bank cope with the effect of bad debt?

2. What really are the impact of bad debts on commercial banks in Nigeria economy.

3. What length does this bad debt go in causing inflation which leads to devaluation.

4. What roles do management play in ensuring that agreements stipulator are strictly followed.

5. The role of foreign exchange market in investment in our country.

1.3   PURPOSE OF THE STUDY

The objectives of the study are aimed at the following:

To evaluate the impact of bad debts on commercial banks leading on Nigeria economy, to identify the problems aimed from bad debts. To identify its immediate remote causes, to determine its effect: on he economy in general. To make positive recommendations on how to possibly profound solutions and conclusions to it, to establish the level and impact of risk to an acceptable rate, and then suggest on how to improve the existing control method programme.

1.4   SCOPE, DELIMITATION OF THE STUDY

The scope of this study is intended to be more encompassing but was hampered by certain unavailable constraints; nevertheless, it is limited to commercial banks as well as their staff. Some of the constraints are our poor financial position which compelled us to restrict this volume due to the high cost of stationeries. The reluctance of some commercial banks to give out information concerning some factors were discussed in the literature review and the theoretical rationale. The scope tries to find out the impact of bad debts on commercial bank leading on Nigeria economy; and as such, its findings cannot be generalized to other types of banks.

1.5   RESEARCH QUESTIONS

This study seeks to answer the following questions:

1.  Are there impacts created by bad debts on commercial banks leading on Nigeria economy?

2. Does bad debts really come into place in commercial bank leading systems?

3. Are banks really aware of the positive and negative effect/impact of bad debts?

4. What are the problems posed by bad debts on the commercial banking sector and on the economy in general as regards bank leading?

5. What is the nature of relationship between bad debt provision and profit, hence the effect on individual and on investment growth in the economy?

6. Are there policies governing issues on bad debts on commercial leading on Nigeria economy?

7. These policies governing issues on bad debts do they vary fr6m one commercial bank to the other or they do not vary?

8. How often does this issues of ad debt affect the commercial banking sector of the country’s economy?