THE PROBLEMS OF LOAN DOCUMENTATION AND SECURITY PERFECTION AS IT AFFECT CORPORATE CUSTOMERS (A CASE STUDY OF UNION BANK OF NIGERIA PLC.,
Abstract
This project work is a study of problem inherent in loan documentation and security perfection as it affect corporate customers advances/credits proposal. The study examine why the bank insist on taking adequate and good security for its credits/advances inspire all tenets of lending put in place to prove the viability of any credit request. The study also attempts to find out the genesis of the problems in loan documentation and security perfection by corporate bodies with a view to elucidating clearly the prominence of these problems to the processes and gives recommendations on how to ameliorate the problems entirely. The study is divided into five chapters that dealt with introduction and Background Information, Literature review, Research Methodology, Presentation and Analysis of data, Summary, Recommendation and Conclusion.
TABLES OF CONTENTS
Title page ……… ……. ……… ……… ……. ………… ………. ……… i
Certification ……… ……. ……… ……… ……. ………… ………. …… ii
Approval page ……… ……. ……… ……… ……. ………… ………. … iii
Dedication …….. …….. …….. ……. ……. ………. …… ……. ………. …… iv
Acknowledgement ……… ……. ……… ……… ……. ………… ……… v
Table of content ……… ……. ……… ……… ……. ………… ………… vi
List of table ……… ……. ……… ……… ……. ………… ………. …… ix
Abstract ……… ……. ……… ……… ……. ………… ………. ………… x
CHAPTER ONE
1.0 Introduction … … … … … … … … … …………… 1
1.1 Background Information of the Bank… … … …………… 3
1.2 Significance of the Study… … … … … … …………… 9
1.3 Objective of the Study … … … … … … … … … … … 9
1.4 Scope of the Study … … … … … … … … … … … … 10
1.5 Statement of Problem … … … … … … … … … … … 11
1.6 Limitation … … … … … … … … … … … … … … 12
1.7 Methodology … … … … … … … … … … … … … 13
1.8 Statement of Hypothesis of the Study … … … … … … … 14
1.9 Definition of key terms … … … … … … … … … … … 16
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction … … … … … … … … … … … … … 19
2.1 Statutory Requirements on loan Documentation
And Security Perfection … … … … … … … … … … … 19
2.2 Customers Attitude Before and after Draw-Down of credits … … 20
2.3 Problem with Search on customers File in Companies Registry …… 20
2.4 Problem of obtaining Governor’s consent ……….. ……………. …… 21
2.5 The problem with loan documentation ……….. ……………. ……… 21
2.6 Maintaining Congruency in Customer’s financial Statement ………. 22
2.7 Decision Maker’s Attitude to Risk ……….. ……………. ……………. 22
2.8 Types of Securities Peculiar to Corporate Customers ……….. …… 23
2.9 Mortgage of Corporate Customer’s Title to Land With or
Without Factory Site ……….. ……………. …… ……… ………… …….. 25
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction to the Chapter……………. ……… ………………. …………… 28
3.1 The Concept of Methodology ……. ………. ……… ……………. ………… 29
3.2 Target Population ……………… ………………………… …………………. … 30
3.3 Administration of Questionnaires and Problems Encountered …….. 30
3.4 Tools of Analysis ………. …………….. ……………………….. ……………… 31
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Analysis and Interpretation of Responses ………… ……..……………. 32
4.2 Statistical Testing of Hypothesis ………… ……… ………… ………….. 54
4.2.1 Hypothesis One ……………………….. …………. ………….. ……………. 54
4.2.2 Hypothesis two ………… ……….. ………….. ………………….. ………. 57
4.2.3 Hypothesis three …………. …………… …………………. ………………. 59
4.2.4 Hypothesis four ……………. ……….. …………….. ……………… …….. 62
4.3 Summary …………………. …………….. ……………….. ………… ……… 64
CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS
5.0 Summary ………… ……….. ……………………. ……………. ………………. 67
5.1 Findings ……………… …………………… ………………. ………………………. 68
5.2 Recommendations ………………….. ………………….. …………………….. 71
5.3 Conclusions ………….. ……………….. …………………. ……………………… 72
5.4 Further Areas of Research …………… …………….. ……………. ……….. 72
Bibliography …………. ……………….. …………………… …………………… 73
APPENDIXES:
Questionnaire (Staff) ……………….. ………………… ………………….. ………… 75
Questionnaire (Customers) ……………….. ……………… ……………….. ……… 79
Chi- Square Table …………… ……………… ………………… ……………….. ……. 81
CHAPTER ONE
1.0 INTRODUCTION
The fact that, banks oil the wheel of economic activities in a country cannot be disputed. This is as a result of the large quantum of credit facilities they render to virtually all the facets of economic sectors that augment their business activities.
By this singular action of the banks, they serve as financial intermediator in the economy, mobilising and harnessing the surplus savings of one sector of the economy and making same available to the needing sector for productive investment.
The credits facilities rendered by banks to the sectors of the economy takes the form of one of the followings:-
Direct Cash DisbursementGuaranteesIndemnitiesBondsLetters of CreditBankers AcceptancesCommercial Papers etc.
In the context of the overall strategy of Nigeria’s economic development,
the structure of the banks lending in Nigeria calls for over riding objective of the strategies that will naturally ensure development of the economy as fast as possible and usher the country into self sustaining growth and economic take off. To this effect, the highest order of national priorities is accorded to agriculture, industry, transportation and rural development.
The harsh economic environment, in which many banks/financial institutions including Union Bank of Nigeria Plc. operates, has devastating effects on their advance attitude towards their corporate customers.
In the developed economy, the borrower’s character forms the hallmark of tenets of lending that is generally acceptable by Bankers for their lending, any other collateral that may be obtained constitute an additional cushion against risk of loss of the invested funds in case the business unexpectedly failed.
Over the years, the persistent difficulties experienced by banks/financial institutions in getting their invested funds back, cut throat competition, fuzzy economic expediencies and downturn in corporate customers status quo have force many banks/financial institution to sideline the all acceptable tenet of lending (customer’s character) for good and realisable security as the top most priority in credits/advances documentation.
Unfortunately, problems arise over the years in the process of documenting these credits/advances and perfecting securities to support them by corporate customers. These problems has been the stumbling block on the path of corporate customers’ success in their bid for credits/advances from their bankers/financial institutions.
According to Olashore, an erstwhile Managing Director of First Bank Nigeria Plc. In a public speech on corporate lending he said, banks and financial institutions are custodian of peoples money. Our stock in – trade is other people’s money. We cannot therefore lend without proper documentation supported by good and realisable security.
Dr. Paul Ogwuma, the erstwhile CBN Governor in his speech in a seminar organised by the Bankers’ Committee, on banks failure and way out, agrees with Olashore’s view that; obtaining good and realisable security enables a bank to play save and serves as cushion in the event of failure by the customer.
1.1 BACKGROUND INFORMATION OF THE BANK
Union Bank of Nigeria Plc. Was established in 1917 as a colonial bank with its first branch in Lagos. In 1925, Barclays Bank dominion Colonial and Oversees was formed to take over the activities of the bank. Between 1959 and 1970, 50 new branches were established to bring the total number to 59 in 1969, the bank was legally incorporated in Nigeria as a wholly-owned subsidiary of Barclays Bank International Ltd., and renamed Barclays Bank of Nigeria Plc. The ownership structure remained unchanged until 1971 when 8.33% of the bank’s shares were offered to Nigerians. In the same year, the bank was listed on the Nigerian Stock Exchange. As a result of the Nigerian Enterprises Promotion Decree 1972, the Federal Government of Nigeria acquired 51.67% of the bank’s shares, which left Barclays Bank Plc. London with 40%.
In 1979 Barclay sold half of its shareholding. This culminated in a change of the bank’s name to Union Bank of Nigeria Plc. Which reflected its new progressive image and ownership structure. Today, Union Bank is one of the oldest, independent and non-governmental banking institutions in the country.
In 1986, it become the first bank in Nigeria to hit the N1bn (US$8.9m) mark in savings deposits and as at 31 March 2001, its savings deposits of #37.76bn (US$336m) was also an industry record. It has won the Nigerian Stock Exchange President’s Merit Award in the Financial Sector more times than any other bank in Nigeria. In 2000, it won the Farmer of the years in 28 out of 36 states, including Abuja, and it has also won this award consecutively for over 10 years. In 2000 it was named by the UK’s Bankers Almanac as the number one Bank in Nigeria.
Since its establishment in 1917., the bank has stood out strongly as a resilient institution, which has served as a veritable hub of the financial intermediation process in Nigeria’s financial system. Under its current chairman, Mr. Kalu U. Kalu, a Chartered Accountant, and the current Group Managing Director/Chief Executive, Mr. Godwin Ahabue Thompson Oboh, an astute professional banker of repute, the bank remains a colossus not only in Nigeria but also in Africa. Its new head office building – a 23 – storey edifice – is the tallest and arguably the most beautiful concrete structure along the West coast of Africa. In preparation for the challenge of this millenium, the bank is currently reengineering and re-aligning its system and processes, an exercise which will, when completed, not only reposition the institution but will also make it fitter and swifter.
LENDING POLICY OF THE BANK
In order to minimize the risk of loss of their investment, section IIA (b) of the banking Act 1969 particularly provides that, “No manager or other officer of a licensed bank shall grant any advance, loan or credit facility to any person, unless it is authorised in accordance with rules and regulations of the bank, and where adequate security is required by such rules and regulations, such security shall be obtained for the advance, loan or credit facility and shall be deposited with the bank.
Based on this legislative provision, Union Bank Nigeria Plc have made internal rules and regulations setting the limits of credit facilities which a branch manager, Area or Regional Manager, Head Office Advances Department and the Board Advances Committee, could grant either clean of security or with security obtained.
Unless credit facilities or advances are granted clean within the limits authorised by the regulations, it is the responsibility of a branch manager, rather than the bank legal officer, to ensure that the necessary items of documentation are obtained before the authorisation of credit payment vouchers are duly signed, and draw down allowed.
LENDING STATUS THE BANK
More often than not, approval for Union Bank Samaru Branch loans and advances to it corporate customers has always been sought from the controlling office as the amounts involve exceed the authorisation limit granted the branch under the general lending policy of the bank.
It is however, interesting to state here that the bank loans and advances to it corporate customers increased phenomenally by 14,712 million or 88.07% from 16,704 million to 31,416 million in the year 1996 to 2000 respectively.
The branch also recorded an impressive upsurge in its loans and advances to it corporate customers. The increase recorded is 3,491.45 million or 77.34% from 1,023.2 million in 1996 to 4,512.65 million in the year 2000.
Of this increase, agriculture and construction sector shares the highest consistent percentage of 30.6 and 30.76 percent respectively, while the balance is shared by others sectors, construction, general commerce, personal and professional and so on.
It is therefore, not surprising that the bank’s customers (farmers) won the National award of the best farmers of the year consecutively in the year 1997 and 1998.
BRANCH NETWORK
Union bank has a large network of 294 branches, including a full-fledged offshore branch in the city of London and a representative office in Johannesburg, South Africa. The group as a whole has built up an extensive presence throughout Nigeria with a total of 313 branches. These, in addition to our network of international correspondents, have put the world in our easy reach.
PRODUCTS AND SERVICES
Union Bank’s services can be placed into two main categories: generalized services such as current, savings and deposit account, funds transfer, foreign currency domiciliation, loans and overdraft: and the tailor-made services such as equipment leasing, commercial papers, bankers’ acceptance, credits, information, service/trade enquiries, import/export documentation and finance, all of which are designed to meet the particular requirements of our clients. Union Bank is currently one of the prime movers and one of the three core shareholders in a consortium of 38 banks promoting discount houses (Consolidated Discounts Limited) in Nigeria. We are also actively involved in the provision and marketing of non-bank financial services and products to customers nationwide.
INFORMATION TECHNOLOGY
With the competition and the need to ensure the implementation of best practice in the industry, Union Bank selected a robust banking, application of software-flexcube. It is gratifying that not only the bank but some of their peers in the country have now also acquired the system. Although the bank is still a long way from their ultimate objective, 25 strategic branches and eight clearing centres nationwide are currently operating on-line, real-time banking.
Also in readiness for implementing the selected flexcube branches, 50 other locations have all been put on the VSAT enabled wide area network (WAN). With the sophistication of their communication network and using the flexcube softward as the backbone, new electronic products such as Union e-link, telephone banking, Union value Card and automated teller machines (ATM) are currently riding on flexcube and being enjoyed by their customers. Union bank is indeed in the driver’s seat differentiating its products and services to add Value and convenience to its customers.
THE FUTURE
The bank has put in place the structures, strategies and strong management team to enable it to stay ahead of competition. The bank poised to exploit these limitless opportunities offered by the emerging train of globalization in the market place. And with the pace of growth in their business supermarket and strategic focus of their information technology, the bank has truly become a colossus in the domestic scene, a attribute their hope to transfer into the international arena. By so doing, the bank shall be living up to their Mission: ‘To be the foremost financial institution with the most satisfied customer.
1.2 SIGNIFICANCE OF THE STUDY
The day to day running of a business requires finance over and above that which is necessary for purchase of fixed assets and the volume of work or trading which can safely be undertaken depends not only upon the finance which is available. Debtors, stock and work-in-progress have to be carried all the times, and whilst the amount of each of these may fluctuate very considerably, there must always be a matching aggregate total of finance upon which they can ride. The ability of the corporate customers to adequately tackle the problems in formulating loan request and security perfection that would bring about prospect in their credits/advances request is important towards achieving the aforementioned objective.
The research contains in it, some salient suggestions and it also unfold some requirements that will make the business public succeed in their loan request not only from the bank, but from other financial institutions to enhance the obtaining of their financial needs at all time.
1.3 OBJECTIVE OF STUDY
Ensuring that corporate customers succeed in their credits/advances bid is a key result area, that banks/financial institutions including Union Bank of Nigeria Plc. should strive to attain. The reason been that this area of their operation provides much to their profitability profile that ensure their corporate existence.
The primary aims and objectives of this study are to identify and analyse critically the genesis of problems inherent in loan documentation and security perfection as it affects corporate customers in their quest for credit/advances request.
Consequently, this study has the following objectives:
To attempt to gauge the genesis o the problems inherent in loan documentation and security perfection.Examine the prominency of these problems and it effects as a stumbling block for corporate customers towards achieving success in their credits/advances request.Examine critically why banks/financial institutions particularly Union Bank of Nigeria Plc. Could not adopt a liberal attitudes towards granting credits/advances to her corporate customers.
1.4 SCOPE OF THE STUDY
In this research work, every efforts was made to get the cooperation of the management staff of Union Bank of Nig. Plc. Samaru and the valued corporate customers.
Consequently, the research work is focused on two sectors Manufacturing and Merchandise. One corporate customer, private limited liability is selected from each of the industry and the companies are appraised for advances request.
The study will take a critical look of the two companies for the general tenets of lending. It will also consider the companies for problems in loan documentation as required by statutes and discuss the type of securities peculiar to corporate customers and the general processes of perfection having regard to the companies.
Finally, the research work also examines how the problems of loan documentation and security perfection as stated in the statement of general problem and objectives of the study affects the corporate customer.
1.5 STATEMENT OF GENERAL PROBLEMS
The problems encountered in perfection of securities and loan documentation are in two folds:-
The problem of risk of losing the invested funds by the bank which necessitate it insisting to obtain a good and realizable security which could be fallen back on as source of repayment on realization. This leads to the problems of perfecting the security offered by the borrower to secure the bank’s advances and the loan documentation.
There is the problem of conducting a search in the company’s registry. With the company’s registry yet to be decentralized, it is becoming increasingly difficult and expensive considering the number of existing corporate companies and the number springing up day in day out in the economy to carry out a search on a company and get reports as expeditiously as commercial practice demand.
PROBLEM OF OBTAINING GOVERNOR’S CONSENT: The problem of obtaining Governor’s consent to charge the borrower’s property is becoming more difficult than contemplated by the land use Act of 1978. Infact it is more easier for the head of camel to pass through the eye of a needle than for a person to obtain the consent of the Governor to mortgage his property for an advances.
The other side of the problem relates to what the corporate customer is expected to produce, how do they attend to the banker’s interview to justify their loan request.
Would their explanation be accepted when compared with reference to the balance sheet figures on a looming trend in their business.
For these problems, loans that require quick disbursements in order to finance productive investment have been held up because the bank wants to play safe in its lending to it corporate customers. Thus slowing down the pace of commercial transactions and the development of the economy.
1.6 LIMITATION OF THE STUDY
This research is intended to cover all the major points of the study contained in the statement of objectives. It would however restrict itself to one company each form manufacturing and merchandise sector.
Preliminary investigation reveals that, a project like this would be met by stiff resistance from staff of the bank/companies under the pretext of protective confidentiality of information on the research work. However, due to genuine explanations, the researcher did his best to assure and reassure both parties of absolute confidentiality of information received.
Other limitation the researcher has is that, not all officials of the bank and customers interviewed are able to give adequate answers as a result of their dearth of knowledge on the research work.
Also, data collected through secondary method are subjective without no opportunity of making inquiry on items that appears not very clear to the researcher.
1.7 METHODOLOGY
The nature of this study, lent itself to two methods of primary data collection, namely interview and questionnaires. The data are obtained from two main sources. Primary and Secondary data.
Secondary data are from Union Bank Newsletters and other in-house publications and circulars.
The primary data were obtained through the use of structured questionnaires administered on thirty-three (33) corporate customers and thirty (30) staff of Union Bank Samaru- Zaria.
1.8 STATEMENT OF HYPOTHESIS OF THE STUDY
The following hypotheses have been formulated to guide the researcher based on the problems and objectives of the study.
Null Hypothesis (HO)
Unwillingness of the Manager/ Appraiser Officer to take risk as a result of customers’ characters-manner of account conduct over the years, attitude on keeping to promises will affect success of corporate customers in their credits/advances bid.
Alternative Hypothesis (HI)
Unwillingness of the Manager/ Appraiser Officer to take risk as a result of customers’ characters-manners of account conduct over the years, attitude on keeping to promises does not affect success of corporate customers in their credits/advances bid.
Null Hypothesis (HO)
Inability to provide convincing explanation by the borrowing company’s management to a looming feature in the balance sheet will affect success of corporate customers in their credits/advances request.
Alternative Hypothesis (HI)
Inability to provide convincing explanation by the borrowing company’s management to a looming feature in the balance-sheet does not affect success of corporate customers in their credits/advances request.
Material defects in supporting feasibility study will affect success of corporate customers in their credits/advance bid.
Alternative Hypothesis (HI)
Material defect in supporting feasibility study does not affect success of corporate customers in their credit/advances bid.
Null Hypothesis (HO)
Obtaining Governor’s consent will constitute a problem in the process of security perfection to support credits/advances request by corporate customers.
Alternative Hypothesis (HI)
Obtaining Governor’s consent does not constitute a problem in the process of security perfection to support credits/advances request by corporate customers.
1.8 DEFINITION OF TERMS
CREDIT:- Credit is a process of financial intermediation and is exercise within the framework of government regulation and peculiar features of specific market served.
LOAN DOCUMENTATION:- Loan documentation as used in the study means what the statute required the bank to enquire from it corporate customer before the loan agreement is sealed – Memorandum and article of association, certificate of incorporation and board resolution authorising the borrowing.
The statute also behoves the bank to do a careful study of these documents so as to avoid an unpleasant situation, whereby the borrowing cloud be declared ultra vires the customers, and the transaction becomes null and void.
SECURITY:- Security in the study is used to mean the assets of a limited liability company, both floating and fixed, consisting of goods in transit, raw materials, plants and machinery that are chargeable as security for bank lending. Legal and equitable mortgage on the company’s real property including factory site, also offers additional security for the borrowing.
DIRECT CASH DISBURSEMENT: Means credit facility that involves cash advances to the customer in form of overdraft or loan.
LOAN: Loan is an outright credit in form of lump-sum of money made available to the customer’s disposal.
OVERDRAFT: Is an arrangement where the banker allows the customer to draw his A/C up to an agree limit.
GUARANTEE AND INDEMNITY:- The banks often times issue undertaking to support the activities of their customers with their (customers) employers. GUARANTEE: Is an undertake by the bank to be responsible to the liabilities of their customers if the activity guarantees does not occur. An indemnity however imposes absolute liability on the bank as the bank principally assumes the customers liability to his (customer) employer, which is in no way conditional on the customer.
BOND: A bond can be visualized from two perspectives- financial bond and performance bond.
FINANCIAL BOND: A financial bond Is a long term financial document issued by a corporation to its banker in return for a capital advancement. PERFORMANCE BOND: Performance bond on the other hand is issued by the banks to cover a small percentage of the contract value of their customers in case performance of the contract is not consummated.
LETTERS OF CREDIT: Documentary Credits is a conditional written undertaking/guarantee given by a bank (issuing bank) at the request of a buyer (applicant) to effect settlement to a seller (beneficiary) against presentation of documents relating to the goods specified by the buyer. The undertaking or guarantee is conditional because the terms and conditions stipulated in the credit must be strictly complied with before payment is effected.
Although, guarantee, indemnity, performance bond and letters of credit do not involve outright disbursement of cash by the bank, it however, imposes legal implication on the bank in case the customer fails in performance of the contract for which the instrument is issued.
CLEAN OF SECURITY: This is an advances term which donate credit given without security as a result of good track record/character of the customer concerned.
THE PROBLEMS OF LOAN DOCUMENTATION AND SECURITY PERFECTION AS IT AFFECT CORPORATE CUSTOMERS (A CASE STUDY OF UNION BANK OF NIGERIA PLC.,
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