THE EFFECT OF BAD AND DOUBTFUL DEBT ON THE LIQUIDITY OF UNITY BANK PLC, KADUNA STATE
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ABSTRACT
The major energizer of economic and development in Nigeria since independence is the financial industry. The government has been formulating various monetary and fiscal policies commercial banks under the strict supervision of the Central Bank of Nigeria. To be able to pursue these policies towards ensuring methodical, economic, industrial and socio-political development, the need enough fund to support lending to various individual and corporate customers, so when any of the loan facilities granted become bad or doubtful debts for commercial banks are not able to fulfill perfectly this responsibility and this has been the effect of mounting bad debt in book of commercial bank especially with the recent withdrawal of deposits by government department and parastatals. Deposits now are expensive, and the banks need money to back up their lending.
This research study is on “effect of bad and doubtful in commercial bank”. The study was carried out through administration of questionnaire on both employees and customers of Unity bank. The aim was to find out the effect and control of bad and doubtful debt in commercial bank. And interview was also conducted the only cheapest source of loanable fund for commercial bank is the amount on their bad and doubtful account, this is shown by the findings effects towards recovering substantial portion of such debt becomes imperative and compelling on the bank. It also shows the slip shot manner with each loan facilities granted, and treated by bank employees and customers alike, additional control of new debts have been identified and recommended for adoption by banks.
CHAPTER ONE
- Introduction – – – – – – – – 1
- Historical background of unity bank – – – – 6
- Statement of problem – – – – – – – 9
- Aims and objectives of the study – – – – – 10
- Hypothesis – – – – – – – – 11
- Significance of the study – – – – – – 11
- Scope of the study – – – – – – – 12
- Definition of terms – – – – – – – 13
CHAPTER TWO
2.0 Literature Review
2.1 Introduction – – – – – – – – 15
2.1.1 Concept of Bad and Doubtful Debts – – – – 16
2.1.2 Lending In Commercial Banks – – – – – 26
2.2 Causes of Bad Debts – – – – – – – 37
CHAPTER THREE
3.0 Research Methodology
3.1 Introduction – – – – – – – – 40
3.2 Sources and Methods of Data Collection – – -41
3.3 Method of data analysis – – – – – 46
3.4 Data analysis techniques – – – – – 48
CHAPTER FOUR
- Data Presentation, Analysis and Finding
4.1 Sample Size – – – – – – – 50
- Data presentation – – – – – – 50
- Analysis of bank employees responses – – – 51
4.2.2 Analysis of bank customer (respondents) – – 64
4.3 Findings – – – – – – – – 71
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendation
5.1 Summary – – – – – – – – 76
5.2 Conclusion – – – – – – – 8
5.3 Recommendations – – – – – – 79
Bibliography – – – – – – – – 82
Appendix I – – – – – – – – – 84
Appendix II – – – – – – – – 90
CHAPTER ONE
- INTRODUCTION
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:
- 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.
- 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