Analysis Of Incidence Of Loan Default In Merchant Bank
(Case Of Ivory Merchant Bank)
The incidence of loan default in Bank has been a growing concern, reflecting challenges within the lending portfolio. Economic downturns, changes in market conditions, and unforeseen events have contributed to an increased number of borrowers facing financial difficulties, leading to a rise in loan defaults. In addition, inadequate risk assessment practices and lenient approval criteria may have played a role in the heightened default rates. The bank is actively working on implementing more robust risk management strategies, enhancing credit scoring models, and improving borrower education to mitigate the incidence of loan default and protect the overall financial health of the institution.
This research studied the nature, problem and prospect of the new product developed in the banking industry from 1990-2003.
In this research work, the researcher chose four of the products and measures the extent to which they have been able to satisfy the customers. The product selected are smart card, international money transfer, educational scheme and integrated banking network transaction.
Data for this research were collected through questionnaire and interviews by bank customers and the review of existing literature on the topic using simple random procedure and the descriptive method of research. The data so collected were analysed using the simple percentage and the formulated hypothesis were tested with chi-square (x2) method.
Some of the findings are the nature of the new product can measured in terms of accessibility, speed, timeliness, simplicity and reliability.
Customers who patronize the new product are majority those who want money transfer both locally and internationally customers derived high level of satisfaction from the new products.
Inadequate infrastructural level in our banking industry and high cost of installing them contributed to the problem of the new product.
Based on the findings, the following were recommended banks should come together and establish a common data communication satellite to minimize constant problems.
A parallel organization that was supplying electricity in competition with NEPA should be allowed to evolved so that an efficient supply of electricity can be ensured.
Finally, since this study alone cannot exhaustive of this vital subject, it is recommended for further studies.
ii Title page
iii Approval page
iv Dedication
v Acknowledgement
vii Abstract
viii Table of contents
CHAPTER ONE
Introduction 1
1.1 Background of the study 3
1.2 Statement of Problem 4
1.3 Objectives of the study 5
1.4 Research Question 6
1.5 Research hypothesis 6
1.6 Significance of the study 7
1.7 Scope and limitation 8
1.8 Definition of terms 9
Reference 11
CHAPTER TWO
Review of Related Literature 12
2.1 Literature Review 12
2.2 Historical Development of Bank lending 14
2.3 Development of Merchant Bank in Nigeria 16
2.4 Differentiating functions of Merchant Bank 18
2.5 Cannons of Good lending 19
2.6 Analysis of principles of good lending 25
2.7 Why are Banks failing 29
2.8 Exports view and comments 30
Reference 32
CHAPTER THREE
Research design and Methodology 34
3.1 Research Design 34
3.2 Area of Study 34
3.3 Population of study 34
3.4 Sample and Sampling techniques 35
3.5 Instrument for Data Collection 37
3.6 Method of Data Presentation 38
3.7 Method of Data Analysis 38
Reference 40
CHAPTER FOUR
Data Presentation and Analysis 41
4.1 Data Presentation 41
4.2 Test of Hypothesis 49
Reference 55
CHAPTER FIVE
Findings / Recommendations and Conclusions. 56
5.1 Findings 56
5.2 Recommendations 59
5.3 Conclusion 60
Bibliography 63
INTRODUCTION
According to Paget (1998), a renowned banker he defined banks as “a corporation or person (or persons) who accepts money on current account, pays cheques on such account in demand and collects cheques for customers.”
Banks are financial institutions that are charged with the responsibility of funds intimidation. They act as a go-between the simples funds sources and deficit fund services. They equally act as “a dealer in capital or more properly a dealer in money as we defined by Gulbert (1995) in performing this function, they engage themselves with deposit acceptance and granting of loans and advances to any needy sector of the economy or individual. Investors and industrialist. The banks are not charcterable organization, hence they render these services with the motive of profit making.
The banks in performing this very important duty they are faced with myriad of problems that grows in bounds everyday in consonance with the dynamic nature of Nigerian economy and growth. Their major problem emanated from the fact that those customers to whom the banks lend money on agreed terms and condition default to repay on maturity, thereby putting a wedge on the wheel of both profit making objectives of the banks, credit expansion within the system for economic activities and continual operations of the bank. This granted into bad debts.
In the pre-independence era when few banks dominated the industry, cases of loan default and bad debt were very minimal, of course, the banks management and loan grants were carefully studied before actual disbursement by the expatriates.
Today, management of many Merchant Banks are worried by the trend of incidence of loan defaulters and bad debt been recorded. Still decisive and obvious action have not been taken by them to at least its impact on their operations and the effect on the economy at large which is the purpose of this study to proffer effective suggestions on how to bring under control rate of bad in merchant banks and particularly Ivory Merchant Bank.
Financial analysts all over the world agree that bad debt and loan default cannot be completely eliminated in banking industry but a constant check can be kept over every factor capable of generating this ugly experience to most financial and non-financial institutions that engaged in funds intermediation directly or indirectly.
It is note worthy to state here that some merchant banks in Nigeria apparently faced by an increasingly hostile business environment are applying to the Central Bank of Nigeria to convert to commercial banks had applied to C.B.N. as at end of October, 1993.
Incidence of loan default in merchant banking, a very important sub-sector leaves nobody any comfort, hence the researcher’s interest in searching the immediate and remote causes of bad debts and how to remedy the ugly experience so that the public confidence could be restored to the financial sector.
1.1 BACKGROUND OF THE STUDY
While reading through journals, weekly financial and business papers, on the rate of increase in number of distress and liquidating banks, the researcher was pulled into imaging that would become of the financial system in the future if dotting is deliberately done to rescue the situation. We are ignorant of the abysmal value of currency” Naria” in the past few years up to date, would you reason out that we cannot build the Nigeria of our dream if this is coupled with constant bank liquidation and failure.
Bank lending by way of loans, over draft, financing capital intensive projects by way of loan syndication, trade credit finance all over the world. The process of financial intermediation is assuming complex dimension. As they try the live up to expectation in this regard they (banks) are confronted with unacceptable pill of loan defaults. When granted loans are dues for payment and without it been actually paid, such loans are regarded as being defaulted, hence analysis of the incidence of loan default in Merchant banking.
1.2 STATEMENT OF THE PROBLEM
There is no doubt the difficulties confronting the banking industry today in Nigeria. Every bank is striking to at least keep pace with others. In their daily dealings as conduct pipe for money, whereby they aggregated funds and disaggregate them it the investing public, they are met with hitches of defaults on the part of loans and advances beneficiaries to meet their obligations have serious consequence on the lending banker.
Therefore the banks are expected to do something very urgently to address the problems so as to forestall it lending them to distress. The failure to refund money borrowed by customers have big adverse effect on banking operations. Such call for study and investigation, so that the solution could be proffered.
1.3 OBJECTIVE OF THE STUDY
(1) To identity the causes of loan default
(2) To identify the level of incidence of loan default and bad debt.
(3) To determine the extent of monitoring by merchant banks of projects for which they extended loans.
(4) To identify the effects of loan of default in merchant banks.
(5) To make recommendations can how loan default and bad debt will be minimized or eliminated.
1.4 RESEARCH QUESTIONS
(1) What are the measures adopted by the bank in preventing loan default occurrence?
(2) What is the level of incidence of loan default to your bank?
(3) How has your been able to monitor its advances granted to customers?
(4) What do think are the causes of loan default?
1.5 RESEARCH HYPOTHESIS
After thoroughly research, it lies on the research to make the following hypothesis.
Ho: Incidence of loan default in merchant banks is not high.
Hi: Incidence of loan default in merchant banks is high.
Ho: Loan supervision and monitoring are not major solution to loan default in merchant bank.
Hi: Loan supervision and monitoring are major solution to loan default in merchant bank.
Ho: Loan default does not lead to bank failure in merchant bank.
Hi: Loan default leads to bank failure in merchant bank.
1.6 SIGNIFICANCE OF THE STUDY
Based on guiding and recommendations that would be offered at the end of the study, Ivory merchant bank will use it to reassess their credit analysis, loan disbursement and recovery formular. It will also guide the treasury manager on liquidation management to eliminate the bank running into financial distress.
It is important to state here that the research findings will be immense help to other financial intermediaries in their daily dealings with both savings fund borrowing public.
Implementations of the researcher’s recommendation will restore also confidence of the public on the banking industry.
1.7 SCOPE/LIMITATION OF STUDY
The study is to be based on the contributory impact or incidence of loan default on both expansion and operation of Ivory merchant bank in Nigeria limited. The scope therefore precludes other innovations and products of the bank, such as corporate finance ceasing and investment advisory services, merchant bank loan syndication process. Investigation would be limited to the office of Ivory merchant bank alone.
It is important therefore that further researches should be extended to merchant bankers corporate and investment advisory services to determine their (merchant bankers) role in accelerating industrialization and economic development growth of Nigerian economy.
LIMITATION OF STUDY
The research study is an academic exercise in which the researcher had to work within time frames limit. Financial handicap hindered the printing and distribution of enough questionnaire. Moreover, distributed questionnaires were not all returned, the researchers’ analysis is therefore based on returned questionnaires.
1.8 DEFINITION OF TERMS
1. Loan: A bank loan may be defined as financial faculty granted by a bank which is in tender to be applied for financing of a specific purpose an it usually has a defined duration and fixed repayment programme.
2. Loan Default: This could be seen as a situation whereby customers failed to repay the loans they borrowed from the bank.
3. Incidence of Loan Default: This is the rate at which borrowers could not pay back their money occurs in Ivory Merchant Bank.
4. Merchant Bank: A merchant bank is defined by the Banking Amendment all 1979 as “any person in Nigeria, who is engaged in wholesale banking, medium and long term financing, equipment leasing debt factoring, investment management, issue an acceptance of bills and the management of this trust.
5. Ivory merchant bank: This is a branch of merchant bank formed for the purpose of lending in banking industry.
6. Bank Lending: These are basic principle a banker should observed while granting loans and advances to customers.
7. Criterion for Bank Lending: These are basic factors, which a banker should put into consideration before granting loans.
8. Finance System: Nigeria finance system is made up of banking institution and non banking institutions.
Analysis Of Incidence Of Loan Default In Bank:
Analyzing the incidence of loan default in a merchant bank requires a comprehensive approach that takes into account various factors. Here’s a structured analysis you could consider:
1. Data Collection: Gather historical data on loans disbursed by the merchant bank, including details of the borrowers, loan amounts, interest rates, loan terms, and repayment schedules. Also, collect data on the instances of loan defaults – when borrowers fail to meet their repayment obligations.
2. Loan Portfolio Composition: Segment the loan portfolio based on different criteria such as loan types (personal, business, mortgage, etc.), borrower profiles (individuals, small businesses, corporations), industries, and loan sizes. This breakdown will help identify patterns in default rates across different segments.
3. Economic Factors: Analyze the broader economic conditions during the period of observation. Factors like GDP growth, unemployment rates, interest rate fluctuations, and industry-specific trends can significantly impact borrowers’ ability to repay loans.
4. Risk Assessment: Evaluate the merchant bank’s risk assessment and underwriting processes. Were the loans given after thorough due diligence? Assess whether the bank’s risk management practices aligned with industry best practices.
5. Credit Scoring: Examine the credit scoring models used to evaluate borrower creditworthiness. Determine if these models accurately predicted default cases or if they need recalibration.
6. Industry Analysis: For business loans, consider the specific industry conditions. Some industries might be more prone to defaults due to their cyclic nature or sensitivity to economic changes.
7. Geographical Analysis: If the merchant bank operates in multiple regions, assess whether default rates vary across different geographic areas. Regional economic disparities can impact borrowers’ ability to repay.
8. Loan Terms and Interest Rates: Analyze whether loan terms (duration) and interest rates have a correlation with default rates. Loans with longer terms might face higher default risks. Similarly, high-interest loans might burden borrowers and lead to defaults.
9. Borrower Behavior: Examine borrower behavior leading up to default. Were there any signs of financial distress? Delve into factors such as changes in income, sudden expenses, or changes in business conditions.
10. Recovery Efforts: Evaluate the bank’s efforts to recover defaulted loans. Analyze the success rate of recovery processes, such as renegotiating terms, collateral liquidation, or legal action.
11. Regulatory Factors: Consider how regulatory changes might impact loan default rates. Changes in lending regulations or consumer protection laws can affect the bank’s lending practices and borrowers’ repayment behavior.
12. Portfolio Diversification: Assess whether the loan portfolio is well-diversified across different risk segments. Overexposure to a particular sector or borrower type can amplify default risks.
13. Comparisons with Industry Benchmarks: Compare the bank’s default rates with industry benchmarks or averages. This provides a context for understanding whether the bank’s default rates are within acceptable limits.
14. Predictive Modeling: Consider building predictive models using machine learning techniques to forecast potential default cases based on historical data and relevant variables.
15. Mitigation Strategies: Based on the analysis, identify strategies to mitigate loan default risk. This could involve refining underwriting processes, improving risk assessment models, or offering financial counseling to borrowers in distress.
Remember that loan default analysis is an ongoing process. Regularly monitor and update your analysis to adapt to changing economic conditions and lending practices.