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The word “bad and doubtful debt” is used in the banking to refer to the portion of loans, advances and over drafts granted by bank which has proved difficult and seemingly impossible to recover in full from the respective committed customer. Such debt do not emerge instantaneously but rather are a gradual result of “lending errors” by lending officers and subsequent improper administrative handling of the facilities among other factors.

The commercial banks are in the services industry. They are aimed at providing financial assistance to individuals and corporate bodies without underplaying the importance of profitability to the shareholders and deposits alike. A bank is therefore expected to ensure that sufficient liquidity of funds meet cash demand by its customer at short notices. This in addition to maintaining sufficient profitability hold through proper and efficient management.

A business has two  basic source of capital:

a)             Owner’s Capital: That is equity contributed by shareholders (including retained earnings) which is essentially used for he purchase of the initial assets of the business and its initial working capital.

b)             Borrowed Funds: Which refers to external fund required and injected into the business by management subject to the articles and memoranda of Association. It is here that the commercial bank play an important role by granting long and short term loans and advances. It is in the process of granting those loans facilities that error occurs. Losses resulting from such errors will be the focus of this research.

Through the proper use of interest rate banks are able to attract depositors of various terms. Such depositors include, short term deposits ranging from 7 days to 6 months, long term, deposits current account. This is regarded as special borrowing by the bank since the bank of any purpose(s) could use any deposits without recourse to the depositors, and such depositors are only payable on demand or at any agreed date. It is these depositors, which provide the basis for banks lending to various customers. This is subject of the reserve ratio set by the central bank of Nigeria (CBN). The interest rates charged on loans by banks are usually higher than the rates they pay on deposit and are determined by the federal government. It was the interest rates chargeable and payable on  loans facilities and deposits respectively.

The numbers of volume of good loan and advance seriously determine the degree of profitable commercial banks. Consequently, profitable commercial banks have to limit or eliminate the number of bad account in their lending portfolio. It is necessary to note that all funds tied up in bad and doubtful account are not accountable for further onward lending.

Also, with the advent of CBN prudential guidelines, non performing loans and advances who interest have been outstanding on these account are not reflected in the earnings of commercial bank, but charged to interest suspense and charged income when realized. Bad debt regarded as negative contributors to the profitability of commercial banks.

So banks should be expected to be the most relevant to provide for bad debts unless it is unavoidable.

Another dimension however is that critics are quick in pointing out that the high bad or doubtful debts figures in final accounts of commercial banks could be realistic. It is also alleged that banks could use such provision to evade tax. It also demonstrate the incompetence of the lending bankers in the management of loan able funds on the other hand, it is held that this provisions shows the level of convenience by the bank officer system. This views was expressed by the president of Association of Shareholders of Wema Bank, Mr. Akintunde Asaw. He alleged that some of the official of Wema Bank acted outside the specified authority and scheduled by irregularly approving loans. He therefore gave the bank up to 1990 to recover all irregular loans while assuring that those involved “regular disbursement” of shareholders would be punished.

The final accounts is of most commercial banks in Nigeria have provisions for bad and doubtful debts of various figures while the funds of the level of such provisions id decreasing in the case of some commercial banks for other, it is increasing.

This reflected in the comments made by the Chairman of the Board Directors of such commercial banks. In the case of the Bank of the North provision for bad and doubtful debts were N6.8 million (1993), N6.7 million (1994) and N213.5 million (1995). This shows an increasing trend from 1992 to 1995, which may not be connected with the allegation of the President of shareholders of Wema Bank.

The view of the provisions for bad and doubtful debts by banks in the country has necessitated on in-depth study into the fundamental factors for such losses by the bank. Consequently, the fundamental objective of this study is to identify the causes of bad and doubtful debts and controls been employed by banks to minimize or eliminate such debts. In so doing, we will be able to establish the efficiency of the control otherwise in the banks lending system. Consequently, appropriate recommendations could be made for improvement.


The bank was incorporated on 17th September, 1957 with initial share capital of 12500 dividends into 1200 ordinary shares of N1 each. It started business in January, 1960 at two branches located in Kano and Kaduna which operated to customers on 7th and 5th January 1960 respectively.

The bank is wholly owned by the Northern States of Government and Northern Nigeria Investment Corporation, a subsidiary of New Nigeria Development Company )NNDC). By 1989, arrangements have been completed to increase the N30 million share capital of the bank with N22.35 million fully paid up to N100 million. The growth of the bank from 1960 – 1970 was steady with a loss of 36,925 which was said to have veen reversed after four (4) year of operations during which period they there in position to declare dividends.

In 1970, the issued share capital was N 2.7 million, with 12 branches and staff compliment of little over 360 employees. Also the total asset of the bank is increased to N30 million, deposits stood at N26 million loans and advance was N17 million.

Between 1971 and 1979, the bank opened a total of 31 branches, has branches in all states capital of the Northern States of the Federation including Federal Capital territory, Abuja. Consequently, with the support and patronage of northern states, marketing boards, Ahmadu Bello University Zaria, a good number of manufacturing and commercial business, the bank continued to grow since the 1980s. the staff strength increased to 200 employees, total assets increased to N900 million while net profit exceeds N10 million. Loan, advances and overdraft were also said to have witnessed tremendous growth during the period.

The bank refers the following services to its customers at both head office and branch levels varying only according to size of each branch networks:

1.           Personal loans, that is short term loans for temporary commercial needs or purchase of consumer durables;

2.           Revaluing overdraft facilities to meet working capital needs to customers;

3.           Project finance which could be for short/medium and long term loans needs for viable projects

4.           Loans syndication which is done with minimum delay;

5.           Agricultural financing

6.           Domiciliary account for customer and acceptance of deposits of the accounts as competitiveness rates.

7.           Housing/vehicle scheme.

8.           Finance advise on how best the customers can handle their financial matters, establishing new projects, acquisition, capital restructuring, mergers reorganization and equipment leasing.


Recent incessant and huge cash withdrawals by individuals and corporate customers for commercial banks rapid increase in the credit facilities extended by the banks to meet the demands created by the Structural Adjustment Programme (SAP) and recent transfer of accounts by governments parastatals and agencies of Central Bank of Nigeria (CBN) has created liquidity problem and disparity in deposit (assets) versus loans and advances (liabilities) ratio for the banks. Most of the commercial banks in the country are now faced with the adverse situation of uncalled liabilities (Loans, advances and bad and doubtful accounts) over total deposits available to them. Consequently, the banks are forced to place a temporary embargo on further expansion of credit facilities while increasing the deposits base by intensifying exploitation, recalling some of the debts and importantly, recover the huge figures in their bad and doubtful debt accounts, the fundamental problem is therefore that of identifying and effectively utilizing the most efficient and appropriate measures of recovering the bad debts and controlling further losses due to errors inherent in the lending processes and procedures.


The aims and objectives of this research study are stated below:

1.         To find out the various causes of continuously increasing bad and doubtful debts portfolio in commercial banks.

2.         To find out the control measure employed by the commercial bans to curb the emergences and growth of such accounts respectively.

3.         To establish the effectiveness of otherwise of such control measures so employed by the banks.

4.         To recommend additional control measure toward helping the banks to drastically reduce the level of losses (bad accounts).

1.4       HYPOTHESIS

1.           H1: There is adequate security given to the loan/advances.

2.           H0: There is no adequate security given to the loan/advances.

3.           H1: There is financial regulation, which guides the management of the bank.

4.           H0: There is no financial regulation, with which guides the management of the banks.


It is incontestable that the level of loanable funds to commercial banks to large extent determines total credit that could be granted to various customers. The increase in money supply in the Nigerian economy of recent which was held, as one of the major of the depreciation of the naira, and raising rate of inflation is traceable to increase in credit facilities extended by financial intermediaries (especially commercial banks) to customer. This was possible because of availability of fund to commercial banks through enhanced attractive interest rates especially the decount of government department and parastatals.

But the level of profitability of commercial banks is a function of earnings accruing from expanded good credits granted to customers. Recent withdrawals of nearly N4 billion from commercial banks to central bank of Nigeria has before credit liquidity problems for the banks and made inteisfy the search for the deposit. So any deposits available to the bank call for judicious application and adoption of central bank measures, which will ensure good lending to the preclusion of emergence of bad accounts. Such measures will certainly be of interest to the banks particularly loan officers and managers.


As earlier stated, the research is aimed at finding out causes and control of bad account by  commercial banks and recommending effective ways of minimizing or curbing the emergence of the growth of such accounts. For the purpose of the study therefore, one bank is selected (Bank of the North Ltd).


-      Bad Debt: This is called an irrevocable debt of a company or organization or debt that cannot be recovered.

-      Banker: A person in an important position in the bank. He is financial doctor that stand as intermediary between the deficit and the surplus sector of the economy.

-      Collateral: Security of customer as a guarantee for bank loan.

-      Customer: A person or corporate that have some sort of account with the bank, be it current saving or deposit.

-      Lending: This is a term used to define the avenue which an organization give out financial assistance to another organization for certain period.

-      Retained Earnings: Is an undistributed profit of an organization kept for the unforeseen contingencies.

-      Overdraft: Is a chance of drawing of cheque more than what is the current account to a certain extent. This facility is given by commercial banks to current account owners.

-      Advances: This is the money paid down by the customer for the goods he wants to purchase.

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