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BACKGROUND OF 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 directed lending. Policies to minimize on the negative effects have focused on mergers in banks, better banking practices but stringent lending, review of laws to be in line with the global standards, well capitalized banks which are expected to be profitable, liquid banks that are able to meet the demands of their depositors, and maintenance of required cash levels with the central bank which means less cash is available for lending. This has led to reduced interest income for the commercial banks and other financial institutions and by extension reduction in profits. Credit risk is the possibility that the actual return on an investment or loan extended will deviate from that, which was expected. Agu, & Ogbuagu,. (2015). defines credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time. The main sources of credit risk include, limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor credit assessment, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank. To minimize these risks, it is necessary for the financial system to have; well-capitalized banks, exposure within acceptable limit in order to provide a framework of the understanding the impact of credit risk management on banks profitability. One of the regulations is the minimum capital commercial banks must keep absorbing loss if unexpected things happen. It strengthened the framework and made some innovations, including tightened definition of capital, requirements for leverage ratio and a countercyclical buffer, the capital for liquidity risk and counterparty credit risk as the derivatives had gained their population in 20th century. Credit risk is one of significant risks of banks by the nature of their activities. Through effective management of credit risk exposure banks not only support the viability and profitability of their own business but also contribute to systemic stability and to an efficient allocation of capital in the economy (Psillaki, Tsolas, & Margaritis, 2010). The relationship between private sector lending and growth is one that can have strong consequences for the growth of a country and the viability of many private sector businesses. Lending being the primary function of commercial banks can have strong implication for private sector growth and will probably be impeded in times of crisis by the riskiness of the business environment that often accompany economic contraction. Growth and business cycles fluctuations are a norm in the global economy, economic crises such as the 2007 sub-prime mortgage crisis have the capability of affecting lots of lives that depend on earnings from production capabilities in the private business sector for 4 a living. The relationship between commercial lending and economic growth will be one in which the private sector which is the primary driver of a nation’s economy will be affected by increased cost of access to capital dueto the riskiness of the business environment leading to the high probability of loan default. This high probability to default is likely to make many private sector businesses to be averse to borrowing forcing them to downsize on their production output which will finally be accompanied by laying-off production staffs. The question if commercial bank lending incites growth in Nigeria is one that has not been previously addressed in a sufficient manner. It is well known that commercial bank lending in Nigeria is at an all time low and has not returned to the pre 1990s lending levels, (CBN 2012 statistics) making most Nigerian banks to be failing in their role of primary responsibility which is to lend to private sector businesses. While most of the blame lies at the doorstep of commercial banks the Nigerian government also has a joint responsibility since it has failed to create enabling environment for productive commercial activities that have the capability to reduce the transaction cost associated with production making the business environment to be risky. A host of macroeconomic variables are identified in the study to be responsible for driving growth in the Nigeria economy this include the cost of access to capital, institutional quality, the country’s monetary policy, aggregate savings and finally aggregate loss of capital due to default or mismanagement in the Nigerian Banking system. Due to the shortcomings in the management of the lending portfolio of commercial banks and the inability of the decision makers, in this case, the banker to make perfect and accurate predictions and forecast of loan repayment, bad and doubtful debts become inevitable. This arises based on the fact that lending involves a certain degree of risks and there is no standard measure of a customer whose loan will go bad or whether payment will be made at the agreed period with the price of the loan. The paper is therefore set to evaluate the effects of bad debts on the investment generation among Nigerian banks
1.2 STATEMENT OF THE PROBLEM
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 positions 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. 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:
How exactly does a commercial bank cope with the effect of bad debt?
What really are the impacts of bad debts on commercial banks in Nigeria economy?
What length does this bad debt go in causing inflation which leads to devaluation?
What roles do management play in ensuring that agreements stipulator is strictly followed?
The role of foreign exchange market in investment in our country.
OBJECTIVE OF THE STUDY
This study was conducted with the following objectives:
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 the 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.
The following hypotheses were formulated from the objectives which will be verified in the course of this research work and will guide us in finding the solution to the problem that is induced in this research work.
Ho: There is no significant relationship between bad loan debt and Nigerian commercial Banks profitability
Hi: There is significant relationship between bad loan debt and Nigerian commercial Banks profitability
Ho: There is no significant relationship between bad debt and performance of banks in Nigeria.
Ho: There is significant relationship between bad debt and performance of banks in Nigeria.
SIGNIFICANCE OF THE STUDY
It is hoped that the finding of this project work will not only add to the vast knowledge about the impact of social media on the students of The significance of this study is that, it will enable banks to appreciate the appraisal of their lending mechanism which will assist the management and other regulatory authorities in ensuring a safe banking system. It is therefore pertinent to investigate the effect of bad debts and recommend possible measures to address them and make banks’ balance sheet free of bad debt.
SCOPE AND LIMITATION 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. The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.
a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
1.7 DEFINITION OF TERMS
Credit/debt: Is a means of obtaining resources or fund at a certain period of time with an obligation to repay at a subsequent period in accordance with the terms and condition of the credit obtained. In other words, credit encompasses any form of deferred payment.
Credit control: Any system used by an organization to ensure that its outstanding debts are received within a reasonable period of time.. It is concerned with the efficiency in ranking customers status which has the objectives of minimizing risk inherent in credit extended to customers.
Credit Risk: Is the exposure to loss arising from the variation between the expected and actual outcomes of investment activities.
Credit Policy: Is the standard set to determine the amount and nature of lending money to customers. Interest: The charge made for borrowing a sum of money. Cost of borrowing fund.
Bank: An institution for receiving, lending, exchanging, and safeguarding money and other valuables and, in some cases, issuing notes and transacting other financial business.
Central Bank: The central Bank is the principal bank usually named by the government, with primary responsibilities of initiating, regulating and enforcing monetary policies while 6 working closely and controlling the operational perspectives of other banks and financial institution.
Default: Is a fundamental breach in transaction underlying the contractual relationship between a creditor and a debtor when the debtor fails or is unable to meet repayment obligations on either principal sum, interest element or both.
ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study
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