AN EXAMINATION OF DEBT DEFAULT IN COMMERCIAL BANKS IN NIGERIA

(A CASE STUDY OF UNITED BANK FOR AFRICA (UBA) BENIN CITY)

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ABSTRACT

Bank is an organization that provides various financial services as well as keeping or lending of money to customers. Banks also perform their credit function by extending loans and credit to meet the needs of the customers, as well as earn profits and returns that would increase the wealth of shareholders. This has led to accumulation of bad debts in the banking industry since some of these debts are not only nu-collectable, by the banks, but nu-payable by the customers, most of which have had great resultant examination on banks over along period of time.

A number of factors are responsible for these and will be discussed in details in this project. Debt defaults constitute a loss to the bank, individuals and the society at large. Therefore, concerted efforts must be made to ameliorate this problem to enable the bank to perform their roles in the economy. In determining the examination of bad debt or debt default as the project suggest, United Bank for Africa (UBA) will be used as case study to determine to what extent debts defaults affects bank. At the end of the research work, skills of curbing defaults would be suggested to help the banks and the government to work together to promote investors and shareholders confidence.

TABLE OF CONTENT

Chapter one- Introduction

1.1 Overview

1.2 Statement of the problem

1.3 Objectives of the study

1.4 Limitations

1.5 Research questions

Chapter Two – Literature Review

2.1 Historical Background of Commercial Bank

2.2 Origin of lending

2.3 Development of commercial banks in Nigeria

2.4 Role of banks in Nigeria

2.5 Lending principles and canons of lending

2.6 Concept of credit

2.7 Credit analysis

2.8 Credit evaluation

2.9 Types of bank credit facilities

2.10 Risks in lending

2.11 Default in repayment

2.12 Causes of debt default

2.13 Cost of debt default to commercial banks

Chapter three

Research methodology

Instrument for data collection

Method employed

Chapter four

Data presentation, Analysis and interpretation

Profile of UBA Plc

Analysis of data

Analysis of questionnaire respondents

Chapter five – summary, recommendations and conclusion

Summary

Conclusion

Recommendation

Bibliography

Questionnaire

CHAPTER ONE

INTRODUCTION

In Nigeria, as in most other developing countries, the financial system consists of number of institution which include the central bank, commercial bank, federal saving, merchant and mortgage banks as well as the community banks, the stock exchange securities commission. These commercial banks carry out their day to day activities they mobilizes funds (savings), these savings are a pool of funds on which the banks on the one hand pay interest to the owners of such funds and then lend these savings or funds to investors in the form of loan, credit, overdraft and advance for the development purposes, these pay back with interest of every lending.

The loans and advances constitutes the most important components of a banks asset port-folio and this is why it is in the interest of every lending institution to make sure that it does not acquire any bad or doubtful debts, even though allowances are usually made for it. The cash flow problem which are currently experienced by many businesses under the economic recession have severally reduced by the ability to service bank debts. (according to Nigeria economist 1988:24). Most clients fails to pay in interest and as a result the interest plus the principals accrues, thus making the possibility of repayment remote.

There is no banking institution in the country, including the United Band for Africa (UBA) as a case study that is no threatened by the effect of debt defaults on their banking activity (Endeavor 1990.28). In the recent times, debt default has been one of the main set backs experienced by commercial banks in Nigeria and for these reason the provision for bad debts have been so enormous that they attract attention from both general public and the government. Thus, debt default causes great concern to Nigeria banks.

In the cause of their lending policies banks give loan and advances to customers who for one reason or the other re viable to pay back in such away, the bank are costly unwilling to go into litigations which are costly and time wastage so they write off such monies as bad and doubtful debts. Bad debt are simply loans, which have proven difficult or impossible to recover.

The most surprising things is the length of time it takes before the banks cry out for action, this is an indication of how tolerant the system is to fraudulent borrowing. If its existence were not at stake, it can be argued that this sudden attention is the examination of bad debt default on commercial bank in Nigerian might never have arisen. Thus, this research is therefore centered on United Bank for Africa in relation to the examination of debt default on its banking activities.

GIVE A BACKGROUND IN NIGERIA

Default means failure to do something that must be done by law especially paying a debt. Nigeria has said it can no longer afford to service its $33bn foreign debt because of plunging oil revenues and the failure of some of its privatization plans. Consequently, the country has suspended payment on some of its debt as it tries to reschedule payment, said central bank governor Joseph Sanusi. Nigeria is one of the word’s largest oil producing nations held foreign exchange reserves of only slightly more than $8bn, down about a fifth since December. Mr. Sanusi said he had decided to halt all debt repayment rather than to eat further into the reserves. But information minister Jerry Gana was quick to try and downplay fears of along lasting default.

CAUSES OF DEBT DEFAULT IN NIGERIA

Limited Funds

Most of Nigeria’s debt is owed to foreign government, members of the Paris club of official creditors. Earlier this year Nigeria parted company with the international monetary fund about how best to achieve a turn around in its economic fortunes. Nigeria’s finance minister Adamu Ciroma told the BBC that the country was unable to pay because parliament had only approved a limited amount to funding for the current financial year. Nigeria has been asking official creditors for substantial debt relief but apart from a modest amount of debt rescheduling, has not had much success, says the BBC’s Dan Isaacs in the commercial capital Lagos.

Over spending

This is because is has failed to demonstrate the required track record of sound economic management, our correspondents says. Nigeria is spending faster than it is earning and therefore falling deeper into deficit.

Impeachment crisis

The debt suspension was announced just as president Olusegun Obasanjo was faced with possible impeachment by both houses of Nigeria parliament. Mr. Obasanjo stands accused of failing to curb the country’s spending of ignoring budget, of allowing corruption to remain and of ignoring spending laws.

BACKGROUND OF UBA

The United Bank for Africa (UBA) was established in 1961, it is the largest financial services group in Nigeria and West Africa, with a balance sheet size in excess of N1, 64 trillion, the first Nigerian bank ever to achieve this feat in the history of the Nigeria and West African Banking Industry. UBA has grown from more than just a bank to a one-stop-shop financial services institution, providing solutions to more than 6 million core and walk-in customers through its expansive retail network of over 630 business offices.

Having presence in all the commercial centers and major cities in Nigeria, UBA is often referred to as the neighborhood bank, which aligns with the banks strategic intent and brand strap “Africa’s Global Bank”. UBA’s aim is to deliver what the customer wants and expects; closeness and proximity, choice, convenience and customization. Today’s United Bank for Africa PLC (UBA) is the product of the Merger of Nigeria third (3rd) and fifth (5) largest banks, namely the old UBA and the erstwhile standard Trust Bank Plc (STB) respectively and a subsequent acquisition of the erstwhile continental Trust Bank Limited (CTB). Founding of the old UBA in 1961, and the erstwhile STB and CTB both in 1990.

although today UBA emerged at a time of industry consolidation induced by regulation, the consolidated UBA was borne out of a desire to lead the domestic sector to a new era of global relevance by championing the creation of the Nigerian consumer finance market, leading a private/public sector partnership at supporting the acceleration of Nigeria’s economic development, and growing the institution from a banking to a one stop financial services institution, while spreading its foot prints across Africa to ear the reputation as the face of banking in the continent.

Today, the consolidated UBA is the largest financial services institution in West Africa with a balance sheep size in excess of one trillion Naira (under USD8b) and more than six million (6m) customer accounts, operating out of the two most vibrant economic in the sub-region-Nigerian and Ghana it has over six hundred and thirty (630) retail distribution centers across Nigeria, its main operational base, and eight branches in Ghana outside Africa, it also has presence in New York and Cayman Island.

United Bank for Africa Plc, (UBA) is the product of a merger of two of Nigeria’s top five banks, UBA and Standard Trust Plc (STB). Today, consolidated UBA is largest financial services institution in sub-saharan Africa (excluding south Africa) with a balance sheet size in excess of 400 billion Naira (approx US dollar 3bn) and over two million active customer accounts. With over 400 retail distribution outlets across Nigeria, UBA has also a presence in New York, grand Cayman Island and Ghana.

STATEMENT OF THE PROBLEM

The basic objectives of most banks includes the survival and growing, fulfillment of social responsibility and making of satisfactory profits. But contrary to expectation, most of the commercial banks in Nigeria over the recent past, have been making unusual high provisions for bad and doubtful debts, which eats into the profits. Making one to question the whole essence of the lending process. With the banks, clients believe that bank exists to divide the national cake, coupled with a host of problems, banks have suddenly found themselves with a catalogue of defaults in their hands. This inability of bank to recover loans granted to their client, constitute a major factors in the banking activities.

OBJECTIVES OF THE STUDY

Looking into consideration that problem stated above, the objectives of this particular study involves.

a. The determination of low debt default has impeded the lending ability of commercial banks and also affect their profit.

b. Determining the inherent risks associated with the lending activities of commercial banks.

c. To know how to require knowledge about bank lending policies on borrowing, collateral and payments.

Although this discussion is wide, the environment of this research is on commercial banks. It shall talk on their financial statement. Because of time constraint and other factors which could pose as a problem to the research of this project, only sectoral performance of commercial banks for a period of 5 or 6 years would be taken into consideration while an analysis of the financial would be used.

SCOPE OF THE STUDY

The extent of this research work will be limited to only one bank, United Bank for Africa (UBA) it will cover loans, doubtful provision, shareholders interest and this covers a general review of the whole system of commercial banks lending activities.

RESEARCH QUESTION

In cause of stating the examination of debt defaults on commercial banks in Nigeria, certain research questions need to be asked.

1. Does the commercial bank actually proper loan or credit granting procedure?

2. Does the management or board members guarantee loan or credit to certain individuals of questionable character?

3. How much information on the use of the loan or credit does the recipient of the loan actually have?

4. What is the extent of government policy in the banking activity?

5. How flexible is the interest rate on loan or credit granted to customers?

6. How much effect does debt default actually have on a banks profit?

7. How much effect does default actually have on stakeholders and shareholders dividends?

If proper attempts are made to answer these questions, a careful result and recommendation will help banks to find solutions to the problem of debt defaults.

Definition of terms

Commercial Bank: his is a financial institution, which deals in the acceptance of money deposits and making them available to investors and borrowers alike as loans and overdrafts. It is other functions, which include discounting bills of exchange, foreign exchange and providing safe custody for valuables. They lend money to private sector business traditionally, for non-fixed capital purpose usually accounts for greater pat of their profit.

Loans: This is the act of lending something such as bank lends and somebody borrows. It is also all types of advances granted by banks to customers with interest repayment programme and on which interest is charged

Maturity dates for such loans can vary from bank to bank and from loan to loan, as the case my be.

Loan can be classified into the;

i. Secured loan

ii. Un-secured loan

Secured loans: These are loans that are secured by a collateral usually assets like houses, landed property etc.

Un-secured loans: These are loans that are not secured by a collateral, but is made on the signature of the borrower, however, if the borrower is not well known, a guarantor maybe sought.

Collateral: This is defined in dictionary of banking and fiance as a specific property, which a borrower pledges as security for the payment of a loan, agreeing that the lender shall have the right to sell or dispose the collateral for the purpose of liquidating the debt if the borrower fails to repay the loan at maturity” (David 1980 pp 49.)

Maturity: This refers to the time a loan is granted to the time of repayment falls due. Maturity of loans could be classified onto three.

Short term maturity: usually a period of up to one year.

Medium term maturity: refers to maturity period ranging between one to five years.

Long term maturity: refers to maturity period ranging over five years.

Default: it means failure to do something that must be done by law especially paying a debt.

Bad debt: this is the among in open accounts that have proved unrecoverable, it includes instances where the borrower has refused to pay.

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