AN EXAMINATION OF DEBT DEFAULT IN COMMERCIAL BANKS IN NIGERIA

AN EXAMINATION OF DEBT DEFAULT IN COMMERCIAL BANKS IN NIGERIA
 
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
In Nigeria, as in most other developing countries, the financial system consists of number of institutions 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 centred on United Bank for Africa in relation to the examination of debt default on its banking activities.
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.
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.   
SIGNIFICANCE OF THE STUDY
This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.
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.
LIMITATIONS OF THE STUDY
The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion was very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all businesses or organizations but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted. Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.
Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
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 tyo 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 fiancé 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.