AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON PROFITABILITY BANKS
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AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON PROFITABILITY BANKS
INTRODUCTION TO CHAPTER ONE OF AN ASSESSMENT OF LOAN DEFAULTS AND THEIR IMPACT ON THE PROFITABILITY OF BANKS
1.1 Background of The Study
Attempts to explain commercial bank activity began with the establishment of the banking institution. Because of its direct impact on economic growth and business departments, lending has gained a critical function in banking operations.
Banks and their lending activities have been usefully integrated into government policy formulation in most countries. In terms of banks, their position as lenders is as significant as that of depositors, given the interdependence of the banking system.
Commercial banks all share the following characteristics: they hold deposits for their customers, allow some deposits to be moved by cheque from an individual account to other accounts in any bank in the country, offer loans, and invest in government securities.
It is these common characteristics, particularly the holding of demand deposits, that distinguish commercial banks from other financial institutions. Banks, like all other business organisations, have the commercial objective or primary goal of maximising profit,
which they achieve by granting loans and generating interest on such loans, which translates into profits for banks in their quest to maximise profit.
According to Clarke (2009), problem loans crises occur as a result of a breach in the payment agreement, resulting in an unreasonable delay in payment and/or potential loss.
In the banking business, problems are frequently inheritable consequences, which have major financial implications for banks; conservative lending by suppressing profit while supporting the chance of default.
We are Nigeria’s leading retail bank, having emerged from the largest merger and consolidation in the country’s banking industry following the landmark banking consolidation spearheaded by the Central Bank of Nigeria (CBN).
In January 2006, a group of financial institutions with expertise in investment banking, corporate banking, and retail banking came together to form ECO Bank.
The banks have 216 business officers spread across the country, and we are working to increase this number in the near future. It has seven largest banks by business locations, with the Head Office located at 785, Herbert Macauley Way, Central Business District Abuja, and the Head Office located at Annex 290A Akin Olugbade Street, Victoria Island Lagos.
Lagos Island, Lagos Mainland, Ibadan, Benin, Port Harcourt, Kano, Abuja, Kaduna, Bauchi, Minna, Maiduguri, Apapa, Enugu, Makurdi, Yola, Dutse, and Sokoto are among the seventeen (17) regional offices of the bank. This enables it to maintain one of the industry’s fastest decision-making processes.
As the Nigerian financial industry expands, we are progressively transitioning into a financial super-market with subsidiaries specialising in insurance, pension fund management, share registration, and stock broking.
In order to consolidate this strategic business strategy, we have a majority stake in Fug Pension Limited, Insurance Brokers, Caranda Management Services Ltd, Pelican Press, and Unity Registration Ltd. Eco Bank has purchased a majority stake in Unity Capital Assurance Plc, a leading insurer.
Today, the bank is one of Nigeria’s top employers of employees and contributor to the country’s gross domestic product (GDP). Approximately 5,000 employees are employed by the bank and its subsidiaries.
In the first year of operation, the bank’s other balance sheet size increased by 29%, while profitability increased by 418% to N2.57 billion, which is equivalent to USD 20.43 million. The results of the second year of operation are likewise promising.
Services Provided
In keeping with its mission statement of becoming the best in providing financial services and creating superior wealth for its shareholders,
Eco Bank has developed a number of hi-tech services and products in addition to traditional products such as savings, current, and time deposit accounts. Ecobank offers a variety of other products and services, both domestic and international, which are listed below:
a) Basic Banking Services
Deposit Accounts, Current Accounts, and Saving Accounts
ii. Accounts of Domiciliary Ownership
b) International Finance
i. Foreign currency exchange transaction
ii. Traveller’s cheque
iii. Export banking and financing
d) Business Finance
i. Leasing of equipment
ii. Cash advances and loans
iv. Money management services
iv. Import financing / letter of credit issuing
v. Consumer, retail, and online banking
d) Unique Banking Services
i. Issuance of borides, guarantees, and indemnities
Customs duties must be collected.
iv. Acceptance of m-tell bills for payment
iv. Financial consulting services
1.2 Statement of the Problem
Banks play an important role in a full financial system by providing the economy with money and credit.
There is empirical data that suggests a positive association between real economic growth and bank assets, as well as between money supply, bank assets, and economic development.
The development of banking is viewed as a critical factor in the economic development of developing countries such as Nigeria, as evidenced by the assertion that no other financial institution contributes more significantly to the successful operation of a nation’s economy than commercial banks.
Apart from promoting the payment mechanism, banks seek effective mechanisms or channels for mobilising savings and allocating them to the problem of most commercial banks, which is loan default.
Banking distress occurs when a bank loses liquidity or insolvency, causing depositors to fear the loss of their deposits and, as a result, a breakdown in contractual obligations.
1.3 Objectives of The Study
Although certain basic requirements and processes must be met before a transaction between the lender (the bank) and the borrower may be completed, none of these restrictions totally protect the lender from the risk of default if the borrower becomes irresponsible and unable to pay.
The primary goal of this research will be to uncover practical ways to reduce the incidence of loan default in our institutions.
To accomplish this, the following secondary goals have been established:
a) To identify the reasons of loan defaults in the bank’s operations.
b) To make recommendations for decreasing loan defaults.
c) Determine the impact of loan default on the bank’s profits.
d) To conduct a literature review on the issue of loan default.
1.4 Significance of the Research
The significance of this study stems from the fact that the performance of the banking industry parallels that of the economy, and an effective financial services industry is a prerequisite for the efficient operation of the economy.
A failing financial system indicates a failing economy. A study of bank default will thus go a long way towards conveying the underlying cause of the distress phenomena and contributing to the removal of barriers to growth and development in Nigeria.
This research will also strive to educate the general public, banking sector investors, bank customers, the government, and regulatory authorities in the Nigeria banking industry about the causes and implications of the loan default problem.
This research will improve commercial bank operations in the areas of loan and credit management, as well as positively impact the quality of services provided by Eco Bank to the public. The work is significant because it will serve as a foundation for future scholars who want to conduct research on a similar topic.
1.5 Research Questions
The study will attempt to answer the following research questions:
a) What are the practical methods for reducing the occurrence of loan default in the bank?
b) What are the causes of loan default on the bank’s operations?
b) Are there any measures in place to reduce loan defaults?
d) Does loan default have any effect on the bank’s profitability?
1.6 Scope of The Study
This study will concentrate on commercial banks, specifically Eco Bank Plc Kaduna. The study’s data will be limited to the efficient operation of credit and credit management, loan recovery, and the impact of loan and suggested solution default to Eco Bank from 2009 to 2011.
In order to achieve the research objectives, the scope of the study will be determined to include all essential aspects of loans and default in banking operations.
The various forms of loans, the frequency, the amount involved, the measure of loss to banks, the level of efficacy, and the preventive actions.
1.7 Limitations of The Study
The key constraint of this study’s research risk stems from the difficulty in collecting classified information about Nigeria Eco Bank in particular; hence, all relevance derived must be viewed through this lens, as the sample may not cover the entire industry.
Since rations are to be utilised in data analysis, another limiting element is the shortfall of a business concern’s performance financial rations do not give out up to date to current position of items in the bank financial statement.
1.8 Definition of Terms
The researcher defined certain key terminology utilised in the research effort to ensure correct understanding of the research job.
Loan: An agreed-upon sum moved from a loan account into a customer’s current account.
The amount of money charged by the bank for the usage of its money through a loan.
Liquidity is a bank’s ability to meet current obligations as they come due; it reflects short-term debt paying capabilities.
Distress: The process through which a bank is unable to satisfy its financial obligations, such as inter-bank indebtedness and deposit money, when they become due.
Credit Worthiness: This is an assessment of the customer’s ability to pay and ensures that the credit extended to him will not be detrimental.
Overdraft: This refers to permitting the customer’s current account to be overdrawn as a form of loan.
Credit Period: The time span over which credit is assigned or granted.
Collateral is a security commitment for loan repayment. It is made up of property that can be easily appraised and exchanged to cash.
Advances are money levels informed by the bank of an order, draught on current, or personal loan.
Statement of Account: This is a document that shows the situation or statement of the bank’s account.
Amount set aside from profit or surplus to meet any liability contingency, commitments in value of assets known to exist at the date of the balance statement.
Monetary policy: The real management of money supplied to meet national economic objectives.
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