LOAN LOSSES IN COMMERCIAL BANK LENDING A COMPARATIVE STUDY OF GOVERNMENT CONTROLLED AND PRIVATE BANKS
ABSTRACT
With the unprecedented display of interest in the banking business in the wake of structural adjustment programme, the fear of imminent bank failures as a result of anticipated down turn in the fortunes of banks has remained lightened.
This down turn in fortunes of mainly attribute able to one factor that has always assured greatest currency in discussions of problems  of banking in Nigeria, that is loan losses.
While the loan loss issue remains unassailable, the argument in most circles is that the loss profile is higher in the government owned or controlled commercial banks than in the privately owned banks.
It is against the background of these lightened developments that this study attempts in examination of the post SAP loss phenomenon and particularly make a comparative study of the private and government controlled commercial banks.
The study which used representative banks is therefore an appropriate attempts to draw some important conclusions backed up with empirical analysis.  The study mainly helied on historical approach and was partially descriptive in pinpointing the present problems or issues in lending and loan management.  Data was generated from the historical recors as well as the questionnair and analyzed using the statistical tool of t-distribution, chi-square and correlation analysis.
Interesting findings were made from the analysis.  On a general note, the problems of diversion, excessive emphasis on security.  Greater influence of internal organizational considerations (e.g) Loand policy), Lack of continuity of terme, undue pressures, lack of automated loand information system are inherent.  Comparatively, it was found out that the role of loan recovery is not higher in the private banks, the rate of provision for loan losses is higher in the government.  Controlled banks; the private banks do not emphasis more on security than their government controlled counterparts, the loan to total assets ratio of government controlled banks is not significantly different from the average of the commercial banking sector.
TABLE OF CONTENT
Chapter one
1.0              Introduction
1.1              Background of study
1.2              Statement of problem
1.3              Purpose of study
1.4              Significance of the study
1.5              Scope of the study
1.6              Limitation of the study
1.7              Definition of terms
Chapter two
2.0              Review of related literature
2.1              Definitions of bank
2.2              Functions of banks in the economy
2.3              Importance of lending
2.4              The lending function
2.4.1        Principles of lending
2.4.2        Securities for bank lending
2.4.3        Credit analysis and project evaluation
2.5              Loan losses and problems of lending
2.6              Need for effective loan management
2.7              Solution to the problem of lending
Chapter three
3.0              Research methodology and design
3.1              Research method
3.2              Data collection
3.3              Sample selection
3.4              Analytical technique
Chapter four
4.0              Data presentation and analysis
4.1              Data presentation and analysis
4.2              Test of hypothesis
Chapter five
5.0              Summary of Finding, conclusion and recommendation
5.1              Findings
5.2              Conclusion
5.3              Recommendation
Bibliography
Appendix: questionnaire
CHAPTER ONE
1.0       INTRODUCTION
“Neither a borrower nor a lender be” goes the popular saying.  Deriving from the above saying is a simplicity that in the lender – borrower relationship, the lender who gives has had to face problems, basic among which is that the borrower might not honour his or her debt obligations.
By virtue of their highly recognizable and incontestable role in the process of engineering economic growth through the lending function, commercial banks are most vulnerable to this non-repayment phenomenon.
In the process of accelerating economic growth in Nigeria, as in other countries, commercial banks have served as most important institutions of resources allocation and financial intermediation between surplus and deficit economic units.  However for obvious reasons of low level of capital formation in the country, emphasis of this purveying function is on lending, with its multiplier effect.
A second and consequent issue arises with due considerations to the primary motive of the investors in the banking business.  The commercial bank owners desire profit and it is largely through the interest on their loans and advances that is primary profit is satisfied.
Thirdly, besides all the important lending role and profitability consideration commercial banks lending activities demand concrete understanding of the depositors’ position since a good part of their abilities goes into the loan portfolio ie. the liquidity considerations.
The foregoing vividly underscorses the causative role of commercial banks in the process of engineering growth as well as indicating the nature of their relationships with depositors.  On the role of commercial banks as growth engineers. ORJI (1989) aptly stated.
“they are much more involved in the development of the economy than any other financial institution.  Indeed, they have been and are likely to remain the dominant financial intermediates in Nigeria for they presently account for over 80% of the resources of the financial system, they therefore occupy strategic position in the economy and are more than most other units, able in all events to influence the course of development”.
Roles of resources allocation and profitability the commercial banks commit sizeable audits of their asset portfolio in the form of loans and advances.
1.2       STATEMENT OF PROBLEM
Deriving from the above introductory background is that loan losses among commercial banks have assumed some canker wormic dimension and demands serious “financial diagnosis”.  Accordingly, it has therefore attracted the chagrin of keen observers of and commentators on, the financial systems who believe that it is a major problem which present day banks in Nigeria are facing.  In fact, of recent “The bad debts in the banking system was estimated at N73 billion (this day of April 24,2005).
However, while there is a general wider standing of high rates of loan losses among the banks, augments in many circles highlight a higher magnitude of the losses among banks wholly owned or substantially controlled by government.  This does not go to suggest a situation of no debts among the private banks, but that they maintain a relatively low bad debts while the government commercial banks are saddled with huge volumes of bad debts portfulio.  Arguementing this view, business concord (1990) source summarized it as follows:
“ The argument in financial circles… the realization that the bad debt crisis is limited only to banks with substantial government interest while bad debts profile in private banks is low”
Therefore against the background of the general situation of loan losses among the commercial banks and the perceived higher magnitude of its among the government banks, this study becomes prompting in an attempt to examine the trend and factors in loan losses and more specifically on comparative ground i.e. private versus government banks.
1.3       PURPOSE OF THE STUDY
In connection with the background ideas and the important issues generated in the statement of problem, the research has the following objectives, among them are:
1.                  To enquire into the trend in loan losses among the commercial banks.
2.                  To ascertain whether the loan losses are necessarily a concomitant of poor lending decisions and approaches.
3.                  To investigate the rate of loan recovery between the private and government commercial banks.
4.                  To compare the effectiveness of loan repayment between the private and government banks.
5.                  To assess the factors that cause heavily the process of granting loans and advances as well as sound loan management.
6.                  To compare the loans to total assets ratio of the government banks with that of the entire commercial banking sector as a means of drawing important conclusions.
7.                  To generally examine the lending operations of commercial banks as a focal point in any analysis of the efficiency of their loan portfolio management.
8.                  To make valid recommendation towards reducing the incidents of loan losses amongst the banks.
9.                  To satisfy one of the requirements for the award of Higher National Diploma (HND) in Accountancy.
1.4       SIGNIFICANT OF THE STUDY
Viewed from the background of the critical impact of loan losses and indeed lending, in the entire operations of the banks the relevance of this study can never be over emphasized.  The study is therefore rationalized on many grounds.
To old banks, it help to know more light on the lending practices among them and suggest need for improvement or not.  It also exposes the staggering volumes of bad debts and factors responsible.  However, the banks would gain from the recommendations as a means of improving existing practices.
To the new and on coming banks, the study will serve as a guide since the existing banks would invariably have to commit sizeable chucks of their asset portfolio in form of loans and advances.  Since banks mainly depends on interest from the loans and advance, this research work will help to increase the awareness of the operations on the inherent problem.
To the shareholders whose profitability is endangered by loan losses, it would help to understand the interactable problem of loan losses as a function of not only bank r elated problems of bad lending practices, but also other variables.
 To the government, it would help to provide a sound basis on which macro-level efforts can revolve forwards reducing the menace.
 To scholars, it would provide a basis for further research and improve the lending and loan minimization in banks.
1.5       HYPOTHESIS FORMULATION
Based on statement of problem and objective of the study, the following hypothesis were formulated and tested.
Hypothesis I
 H0:      there are not loan losses in commercial bank lending.
H1:       There are loan losses in commercial bank lending.
Hypothesis II
H0:       Loan losses have not affected money creation in commercial bank lending.
H1:       Loan losses have affected money creation in commercial bank lending.
Hypothesis III
H0:       Loan losses have not in reduced the capital of a commercial bank
H1:       Loan Losses have reduced the capital of a commercial Bank.
Hypothesis IV
H0:       Loan losses have not caused distress in commercial bank lending.
H1:       Loan losses have caused distress in commercial bank lending.
1.6       SCOPE OF THE STUDY
This work however examined the problems of loan losses in the commercial banks and compared the incidences between the government controlled and private banks.  This has Union Bank of Nigeria (UBN) and the Ogui Urban Community Bank as representative of the government and private banks respectively.  The union bank is owned 51% by the federal ministry of finance incorporated while Ogui Urban Community Bank is owned and controlled 60% by Nigeria and 40% by overseas group.
1.8       DEFINITION OF TERMS
1.                  Advances:  These could be referred to as the money issued out by a bank to a customer for a particular aim which is to be repaid at the expiration of time.
2.                  Banks:  These are financial institutions where money and valuable documents are kept for future needs.
3.                  Banking System:  This could be referred to as components which makes up the business of a bank operational.
4.                  Bad Debts:  These are unrecovered loans that were granted to customers
5.                  Borrower:  This is the person whom a bank grants loan to.
6.                  Commercial banks:  These are type of bank which is in the business of creating money in the economy by receiving  deposits from depositors and giving it out to customers that needs them.
7.                  Data:  This is unprocessed information.
8.                  Depositors:  These are customers that beings money in a bank.
9.                  Economic Units:  These are components that makes up an economy which may include the oil and gas sector, agricultural sectors etc.
10.              Engineering:  Is the process of designing the economic units as well s the economy as a whole.
11.              Finance:  Is the process of sourcing and allocation of available funds.
12.              Growth:  Is an iniversible increases in GNP and GDP of an economy.
13.              Information:  Is processed data
14.              Investigation:  Is the process of examination of an organization and its books of account towards the discovering of losses and forming of an opinion on the activities of the organization i.e. bank.
15.              Lender: Is a party in capital building who involves him/herself in granting money to the borrower who repays back at a stipulated time.
16.              Liquidity:  Is the ability of assets such as stocks, debtors and prepayments to change into cash within a given period of time.
17.              Loan: Is the money granted by a bank to its customer to be repaid within a given period of time.
18.              Loan Management: This involves the sourcing and administration of loan towards actualizing a particular aim within a specified period of time.
19.              Loan Portfolio Management:  This involves the planning, administration and control of available loan towards actualized a particular mission.
20.              Office Protocol:  The system of rules on the correct and acceptable way to behave on official occasions in a bank
21.              Repayment: Is the act of paying back money granted by banks.
22.              Research:   Is a study on a subject that is intended to discover new facts.
23.              Researcher:  Is a person who conducts a study on a subject towards discovering of new ideas.
24.              Secrecy:  Is a principle which could be found in the banking sector in which information relating to fact are not disclosed until there is a written approval from the real owner.
25.              Scope:  This refers to the area of coverage in which the project touches.