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BANKING FINANCE

IMPROVING THE MANAGEMENT OF LOANABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA

IMPROVING THE MANAGEMENT OF LOANABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA

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IMPROVING THE MANAGEMENT OF LOANABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA

INTRODUCTION TO CHAPTER ONE OF IMPROVING THE MANAGEMENT OF LOANABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA

1.1 BACKGROUND OF THE STUDY

Banking institutions play an enviable position as a vital source of money for development. This stems primarily from the function that financial institutions play in mobilising diverse deposits and directing them to practical and successful money-generating projects.

Banks play a crucial role in the structure of the nation’s economy by providing loans and advances, which are the lifeblood of the business community. The size, variety, and degree of such profitable outlets, as well as other complementary elements, contribute to the enhancement of the country’s economic well-being.

As a result, financial institutions have come to be regarded as agents of economic growth and, maybe, economic progress. These loanable deposits can only be made available to banks if consumers make significant deposits, which may arise via loans and advances.

This allows the bank to keep its day-to-day administrative costs low and provide a reasonable dividend to its stockholders. Thus, banks have lending policies in place to establish the director and use of funds from shareholder deposits, to manage the composition and size of the loan portfolio, and to specify the broad circumstances under which advances are appropriate.

Borrowers put such loans and advances to good use, resulting in greater productivity and profitability. As a result of the higher earnings, these borrowers are able to repay the principal as well as the interest on such loans and advances, and the bank will extend such repayment as loans and advances to other potential borrowers.

These loans and advances are in a never-ending circle. Any failure to repay will result in a day in the circle, a reduction in loanable money, and an impact on the economy’s growth.”

Thus, banks play a critical role in the country’s economic well-being through extending loans and advances. However, maximum utilisation of such facilities is attained with efficient loan and advance management.

1.2 STATEMENT OF THE PROBLEM

Lending is the backbone of banking activity because it accounts for the majority of bankers’ profits. The banking industry must be effective in loan administration in order to ensure efficient distribution and utilisation of loanable funds and hence encourage economic development.

In this age of restricted financial resources, the economy will only be able to thrive if its loanable funds are properly deployed.

However, the Nigerian banking industry is beset by the issue of loan default. This is due to the borrowers’ inability to repay their loans when they are due, resulting in significant leakage of loanable funds, making it extremely difficult for other prospective borrowers to take advantage of such funding opportunities, among other consequences.

A review of the financial reports of most Nigerian banks reveals an increase in loan defaults. These defaults contribute to economic leakage by denying the economy the use of money that have been written off and could have been retrieved and reinvented. It also deprives the bank of the profit that would have resulted from the advances.

This also causes a hole in the economy’s investment tube since it prevents the complete recycling of loanable funds. The failure of borrowers to repay loans and advances is correctly linked to the prevalence of loan default. However, such failure may have been avoided if banks’ lending rules and practises had been more efficient.

Thus, the increasing level of loan default might be related to lending institutions’ incapacity to appropriately implement lending policies and practises that will minimise them. Government-controlled banks are the hardest afflicted by this problem, as they suffer as a result of poor lending practises.

1.3 OBJECTIVES OF THE STUDY

The study’s goal is to assess the management of loanable funds in commercial banks in order to:

a. Determining the root reasons of loan default in banks,

b. Determining the cause of the increased loan defaults in banks.

c. Investigating why the rise in loan default appears to be more common in government-controlled banks than in privately held banks.

d. Investigating the effects of loanable funds default on commercial banks in particular and the economy as a whole.

e. Making recommendations on potential and functional solutions.

1.4 SIGNIFICANCE OF THE STUDY

The significance of this study will be clearly realised in terms of the effects of loan default on banks.

The occurrence of loan default endangers the bank’s business existence. This study will thus benefit banks by minimising loan defaults and ensuring improved utilisation of the economy’s resources for the benefit of both the banks and the economy. It will also assist banks in identifying and implementing appropriate lending policies and practises.

1.5 RESEARCH QUESTIONS

i. Who is to blame for the loan default?

ii. Is loan management liable for loan default?

iii. What types of banks in Nigeria encounter loan default?

iv. Is there a link between loan venture and loan default?

v. What effect(s) does loan management have on banks and the economy in general?

1.6 HYPOTHESIS

For the purposes of this study, it is assumed that loanable funds are not well handled and that the incidence of loan defaults is increasing in banks as a result of factors derived from the foregoing assumptions, which form the main hypothesis.

The following operational hypothesis will be considered:

1i: Ho: The incidence of loan defaults owing to loan mismanagement in commercial banks is steadily increasing.

ii. Hello: the incidence of loan default owing to loan mismanagement in commercial banks is not increasing continually.

Ho: Loan default occurs more frequently in government-controlled banks than in privately owned banks.

Hi: Loan defaults are not more common in government-controlled banks than in privately owned banks.

2i Ho: Loan default rates are higher in government-controlled banks than in privately owned banks.

ii. Hello: Loan default does not occur at a higher rate in government-controlled banks than in privately owned banks.

3i. Ho: There is no strong and positive relationship between loan volume and loan defaults.

ii. Hi: There is a strong and positive relationship between loan volume and loan defaults.

4i. Ho: The degree of loan default has no negative impact on profitability.

ii. Hello: the amount of loan default has a negative impact on profitability.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

The study would be limited to two banks, one government-owned and one privately operated, for a comparative study that will represent all banks in Nigeria.

The study’s principal limitation will be the issue of time and limited financial resources, which will undoubtedly be a limiting or constraining element.

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