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TITLE PAGE

ASSESSMENT OF LENDING CRITERIA OF DEPOSIT MONEY BANKS IN NIGERIA

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DECEMBER,2018

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The study assessed lending criteria of deposit money banks in Nigeria. The reliance on capacity, capital structure, collateral, character and condition as lending criteria of DMBs in Nigeria were examined. A descriptive survey design was employed on sampled respondents comprising credit officers of First Bank of Nigeria Plc., Guaranty Trust Bank Plc., Zenith Bank Plc. and UBA Plc. An independent-sample Kruscal Wallis test was used to present the relationships between the study variables and Cronbach Alpha Coefficient was used to test reliability (internal consistency and stability) of the instruments. The findings indicated that there is no significant difference in how DMBs rely on lending criteria. It was discovered that business plan, sales growth rate, borrowers’ business net worth, financial records, and business capitalization of borrower have significant relationship with loan performance. The study also found that capacity, capital, collateral, character and condition as lending criteria play important role in ensuring loan performance. It was recommended DMBs should make a detailed assessment of sales growth rate through use of tools like ratio analysis to judge the attractiveness and creditworthiness, liquidity levels, efficiency, profitability and leverage of a given company before financing. It is also recommended that DMBs should assess both the past and present records of borrowers to capture key issues like the capital adequacy, capacity of the applicant and repayment history.

TABLE OF CONTENT
COVER PAGE
APPROVAL PAGE
DEDICATION
ACKNOWLEDGEMENT
TABLE OF CONTENT
1.1       BACKGROUND TO THE STUDY
1.2       STATEMENT OF THE PROBLEM
1.3       RESEARCH QUESTIONS
1.4       OBJECTIVES OF THE STUDY
1.5       RESEARCH HYPOTHESES
1.6       SIGNIFICANCE OF THE STUDY
1.7       SCOPE AND LIMITATIONS OF THE STUDY
1.8       DEFINITION OF TERMS

CHAPTER TWO
2.1       INTRODUCTION
2.2       CONCEPT OF LENDING
2.2.1    ASSESSMENT OF LOAN
2.2.2    ANALYSIS OF LOANS
2.2.3    CREDIT RATING
2.2.4    CREDIT RISK MANAGEMENT STRATEGIES
2.3       LENDING PRINCIPLES AND PRACTICES OF NIGERIAN BANKS
2.3.1    CREDIT POLICY
2.3.2    NEED FOR CREDIT POLICY
2.3.3    CREDIT POLICY VARIABLES
2.3.4    OPTIMUM CREDIT POLICY
2.4       LENDING CRITERIA OF NIGERIAN BANKS
2.5       EMPIRICAL REVIEW
2.6       THEORETICAL FRAMEWORK
2.6.1    LOAN PRICING THEORY
2.6.2    FIRM CHARACTERISTICS THEORY
2.6.3    THEORY OF MULTIPLE-LENDING
2.6.4    THE SIGNALLING ARGUMENTS
2.6.6    HOLD-UP AND SOFT-BUDGET-CONSTRAINT THEORIES
2.7       SUMMARY

CHAPTER THREE

1. INTRODUCTION
2. RESEARCH DESIGN
3. POPULATION OF THE STUDY AND SAMPLING TECHNIQUES
4. METHODS OF  DATA COLLECTION
5. PROCEDURE FOR DATA ANALYSIS AND MODEL SPECIFICATION

MODEL SPECIFICATION
3.6       JUSTIFICATION FOR THE METHOD OF DATA ANALYSIS

1. SUMMARY

CHAPTER FOUR

1. INTRODUCTION

4.2       DEMOGRAPHIC DATA PRESENTATION AND ANALYSIS
4.3       ASSESSMENT OF RELIANCE ON CAPACITY AS A LENDING CRITERION
4.4       ASSESSMENT OF RELIANCE ON CAPITAL STRUCTURE AS A LENDING CRITERION
4.5       ASSESSMENT OF RELIANCE ON COLLATERAL AS A LENDING CRITERION

CHAPTER FIVE

1. SUMMARY
2. CONCLUSIONS
3. RECOMMENDATIONS 

CHAPTER ONE
INTRODUCTION

1.1       Background to the Study
Sourcing money may be done for a variety of reasons. Traditional areas of need may be for capital asset acquirement - new machinery or the construction of a new building or plant. The development of new products can be enormously costly and here again capital may be required. Normally, such developments are financed internally, whereas where internal source in not enough the firm may result to external sourcing. In this day and age of tight liquidity, many organisations have to look for short term capital in the way of overdraft or loans in order to provide a cash flow cushion.

Generally, the financial system is more than just institutions that facilitate payments and extend credit. It encompasses all functions that direct real resources to their ultimate user. It is the central nervous system of a market economy and contains a number of separate, yet dependent, components all of which are essential to its effective and efficient functioning (Sanusi, 2012). According to Aruwa (2011), commercial banks remain the formal source of finance for enterprises. He states that banks have three social and economic functions: to collect and secure savings and other deposits; to finance the economy by handing out credits; and to facilitate payments and to transfer funds. Their role is to reduce the gap between supply and demand that exists between idle money and productive investment.

Bank lending is guided by credit policies which are guidelines and procedures put in place to ensure smooth lending operations. Bank lending if not properly assessed, involves the risk that the borrower will not be able or willing to honour their obligations (Feder& Just, 1980). Beyond the urge to extend credit and generate revenue, banks have to recover the principal' amount in order to ensure safety of depositors' fund and avoid capital erosion. Bank lending therefore has to consider interest income, cost of funds, statutory requirements, depositor's needs and risks associated with loan proposals. For these reasons banks have overtime developed credit policies and procedures which stipulate the lending process. This process includes among others the credit appraisals, documentations, disbursement, monitoring and recovery processes of lending.

 According to Roy and Lewis (1971), giving credit to worthy borrowers is one of the most significant functions of commercial banks that are directly related to the development of the economy. If those loans or credit where not grow, the expansion of our production facilities and operations would almost be impossible or take a longer time.

Lending criteria are basic principles of lending which are Character, Capacity, Capital, Collateral and Conditions. Adeyemi (1994) describes using lending criteria as credit analysis as the 'heart' of a high quality portfolio. This involves gathering, processing and analyzing of quality information as way of discerning the client's creditworthiness and reducing the incentive problems between the lenders as principals and the borrowers as agents. The bank's credit policy, procedures and directives guide the credit assessment process.

Matovu and Okumu (1996) state that, banks should base their credit analysis on the basic principles of lending which are Character, Capacity, Capital, Collateral and Conditions, this Matovu and Okumu (1996) aver that, it is designed to ensure lenders take actions which facilitate repayment or reduce repayment likely problems. This information about the riskiness of the borrower has necessitated banks to beam their search lights on thorough scrutiny through measurement of debtor’s capacity and capital structure as lending criteria; they also take remedial actions like asking for collateral, shorter duration of payment, high interest rates and other forms of payments (Stiglitz& Karla, 1990). When these steps are not adhered to, loan performance is highly affected. Edminster (1980) stresses the importance of credit analysis, when he observed that its abandonment often resulted into several banks witnessing non-performing loans and bad debts. The variable we have, according to Hunte (1996) includes the scrutiny of debtors’ Capacity and Capital structure, credit experience, proportion of collateral security to the loan approved. It was found out that capital structure reflected in inability to repay larger credit facilities accessed, while Capacity reflected on shortage of credible performance information required to make informed credit decisions.

Non-performing loan is a non income earning loan, full payment of principal and interest is no longer anticipated, principal or interest is 90 days or more delinquent, the maturity date has passed and payment in full has not been made. The issue of non-performing loans (NPLs) has gained increasing attentions in the last few decades. The multiple consequence of large amount of NPLs in the banking system is liquidity problems and eventual distress. However, many researches on the causes of bank distress find that asset quality is a statistically significant predictor of insolvencyand that failing banking institutions always have high level of non-performing loans prior to failure (Barr &Siems, 1994). There is no global standard to define non-performing loans at the practical level. Variations exist in terms of the classification system, the scope, and contents. Such problem potentially adds to disorder and uncertainty in the NPL issues.

1.2       Statement of the Problem
The banking industry has achieved great prominence in the Nigerian economic environment and its influence play predominant role in granting credit facilities. The probability of incurring losses resulting from non-payment of loans or other forms of credit by debtors known as credit risks are mostly encountered in the financial sector particularly by institutions such as banks. The biggest credit risk facing banking and financial intermediaries is the risk of customers or counter party default.

During the 1990s, as the number of players in banking sector increased substantially, Nigerian economy and banks witnessed rising non-performing credit portfolios. This significantly contributed to financial distress in the banking sector (Hamisu, 2011). Also identified were the existences of predatory debtors in the banking system whose modus operandi involves the abandonment of their debt obligations in some banks only to contract new debts in other banks.

The major cause of serious banking problems continues to be directly related to low credit standards for borrowers and counterparties, poor portfolio management, and lack of attention to changes in economic or other circumstances that can lead to deterioration in the credit standing of bank’s counter parties (Treacy& Carey, 2000). Ojo (2011) avers that, it is also clear that banks use high leverage to generate an acceptable level of profit.

The discovery of the imminent collapse of five banks by the Central Bank as a result of high non-performing loans which the banks were exposed to, necessitated subsequent auditing of other banks, which led to more discovery of high liquidity risk, poor risk management, insider dealings, by these banks (Sanusi, 2012). This can be pinned on the lending criteria used by the banks.

Somewhat surprisingly (especially given all of this activity) there has been relatively little research into whether the lending criteria has worked well in terms of its implementation and its usefulness to banks. In fact this criticism can be leveled at the field of loan granted more generally, which has seen much prescription, but relatively little empirical research (Ojo, 2003). Molondu have made some efforts to demonstrate the extent of reliance on lending criteria, but his approach has been to use largely anecdotal cases (Molondu, 2000). Others have sought to undertake studies on Credit risk management, but have tended to concentrate on non-performing loan rather than lending criteria.

However, it is interesting to know that financial providers often depend too much on credit risk management, to the detriment of lending criteria, for increasing the loan performance level which may be misleading (Owojori,Akintoye&Adidu, 2011).

Banks and other financial intermediaries are at the heart of the world’s recent financial crisis. The deterioration of their asset portfolios, largely due to reliance on lending criteria, was one of the main structural sources of the crisis (Fries, Neven&Seabright, 2002; Kashif, 2008; Sanusi, 2010). To a large extent, this problem was the result of inappropriate lending criteria. More so, realizing the need to focus on measurability of extent of reliance on Capacity, Capital structure, collateral, character and condition as lending criteria is a challenge to banks providing the funds.

This research therefore seeks to fill in the existing vacuum between assessment and non-assessment in respect of the extent of reliance on lending criteria by Deposit Money Banks Nigeria. This study therefore aims at assessing lending criteria of Deposit Money Banks in Nigeria.

1.3       Research Questions
In order to achieve the set objectives of this study, the following research questions are addressed by this study:

1. To what extent do Deposit Money Banks rely on borrower’s Capacity as a lending criterion?
2. To what extent doDeposit Money Banks rely on borrower’s Capital Structure as a lending criterion?
3. To what extent doDeposit Money Banks rely on borrower’s Collateral as a lending criterion?
4. To what extent doDeposit Money Banks rely on borrower’s Characteras a lending criterion?
5. To what extent doDeposit Money Banks rely on borrower’s Condition as a lending criterion?

1.4       Objectives of the Study
The main objective of this study is to assess the lending criteria used by Deposit Money Banks in granting loan. The specific objectives are to:

1. Examine the extent of reliance on borrower’sCapacity as a lending criterion by Deposit Money Banks.

1. Evaluate the extent of reliance on borrower’sCapital Structure as a lending criterion by Deposit Money Banks.
2. Examine the extent of reliance on borrower’s Collateral as a lending criterion by Deposit Money Banks.
3. Establish the extent of reliance on borrower’sCharacteras a lending criterion byDeposit Money Banks.
4. Evaluate the extent of reliance on borrower’sCondition as a lending criterion by Deposit Money Banks.

1.5       Research Hypotheses
In order to pursue the objectives of the study which is focused on the effect of lending criteria on corporate loan performance, the following hypotheses were formulated in there null form:

H01:     DMBs do not significantly rely on borrower’sCapacity as a lending criterion.
H02:     DMBs do not significantly rely on borrower’s Capital Structure as a lending criterion.
H03:     DMBs do not significantly rely on borrower’sCollateral as a lending criterion.
H04:     DMBs do not significantly rely on borrower’s Character as a lending criterion.
H05:     DMBs do not significantly rely on borrower’sCondition as a lending criterion.

1.6       Significance of the Study
The role of bank remains central in financing economic activity and its effectiveness could exert positive impact on overall economy as a sound and profitable banking sector is better able to withstand .negative shocks and contribute to the stability of the financial system (Athanasoglou, Brissimis& Delis, 2005). Therefore, lending criteria as a determinant of loan performance in banks have attracted the interest of academic research as well as of bank management.
The findings of this study will help banks and other financial institutions in formulating effective lending criteria that will reduce bad debts and non-performing loan.It will enable Nigerian government and other regulatory authorities like Central Bank of Nigeria (CBN) formulate policies and institute reforms that will enhance performing loans.By examining the reliance on lending criteria, it will assist business owners in the preparation of necessary lending criteria in other for them to have access to quick loan.Finally, academics and researchers will find this study useful as it shall increases the body of knowledge on lending criteria and lending of DMBs in Nigeria.

1.7       Scope and Limitations of the Study
The scope of this research covers the assessment of capacity, capital structure, collateral, character and condition in First Bank Plc., Guaranty Trust Bank Plc., Zenith Bank Plc. and United Bank for Africa Plc. The period under review covered 1994 to 2013; being a period that witnessed series of turbulence and subsequent reforms in the banking sector.

There is no research carried out which would not encounter difficulties in one way or the other. Just as many other research works, this study too faced the following constraints: Funding; the study needs to be properly financed so as to gather enough information.Another militating factor will be time. As it is known that the study would be combined with course work, which will make the time available too limited.

1.8       Definition of Terms
The research would attempt here to define in the process of this study some expressions and technical term used in order to eliminate some misinterpretation or misunderstanding at the research work and objectives. These terms include;

Capacity:Itrefers to the customer’s ability to fulfill his/her financial obligations.

Capital Structure:This isthe financial strength, more so in respect of net worth and working capital.

Character: It refers to the client’s willingness to or commitment to meeting loan obligations and the client’s past repayment record.

Collateral: Is the property, fixed assets or chattels, pledged as security by clients.
           
            Condition:  It relates to the general economic climate and its influence on the client’s       ability to pay.

Credit Crunch: A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available.

1.9                                                    PLAN OF THE STUDY
This project work is basically divided into five (5) chapters.
CHAPTER ONE: Takes on the introduction of the subject matter. If consists of the super significance and definition of terms of the study.
CHAPTER TWO: This is the literature review this entails the works that had been done on this particular topic which was done by other researchers.
CHAPTER THREE: Will talk about the Methodist that the researcher adopted in getting necessary materials or information that will facilitate the success of the research work.
CHAPTER FOUR: Explain how the researcher was able to analysis and present the data he got for his work while the chapter:

CHAPTER FIVE: Brings everything to conclusion the researcher does his summary and give necessary recommendation where needed.

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CHAPTER TWO: The chapter one of this work has been displayed above. The complete chapter two of "assessment of lending criteria of deposit money banks in nigeria " is also available. Order full work to download. Chapter two of "assessment of lending criteria of deposit money banks in nigeria " consists of the literature review. In this chapter all the related work on "assessment of lending criteria of deposit money banks in nigeria " was reviewed.

CHAPTER THREE: The complete chapter three of "assessment of lending criteria of deposit money banks in nigeria " is available. Order full work to download. Chapter three of "assessment of lending criteria of deposit money banks in nigeria " consists of the methodology. In this chapter all the method used in carrying out this work was discussed.

CHAPTER FOUR: The complete chapter four of "assessment of lending criteria of deposit money banks in nigeria " is available. Order full work to download. Chapter four of "assessment of lending criteria of deposit money banks in nigeria " consists of all the test conducted during the work and the result gotten after the whole work

CHAPTER FIVE: The complete chapter five of design and construction of a "assessment of lending criteria of deposit money banks in nigeria " is available. Order full work to download. Chapter five of "assessment of lending criteria of deposit money banks in nigeria " consist of conclusion, recommendation and references.

 

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