BANKING LENDING POLICIES AND RECOVERY PROCEDURE IN NIGERIA

CHAPTER ONE

INTRODUCTION

A bank could be described as a major financial institute; other such institutions include fiancé house, insurance companies, mortgage companies etc. The main function of those financial institutions is to provide financial support to those who are in need. Apart from this function, counseling, acceptance of deposits, provision of loans and advances and also providing safekeeping place for people valuables. Many banks play intermediary roles in the financial sector of the economy which focus primarily on the following

i.                    Moderation of the rate of inflation

ii.                  Reduction of pressures on the external sector so as to achieve a sustainable balance of payment position.

iii.                Establishing the naira exchange rate in Nigeria.

Banks could be classified into the following categories.

a.       Central Banks

b.      Commercial banks

c.       Merchant banks

d.      Development banks

e.       Community banks

Obviously with an observers first contact with a developing economy, all these categories of banks play important roles in stimulating the economy. They deal with members of the public. Firstly, they all provide first information and investment advice to willing customers to spread banking services to the grass-root  considering the fact that a greater percentage of the country’s population reside in the rural areas.

Development banks by implication tend to carry out their functions effectively because they diversify into specialized areas such as Agricultural and Industry. An example is the Nigeria Agricultural and commercial bank (NACB) and Nigeria Industry Development Bank (NIDB). Hence the development of the economy is stimulated through these agency functions.

In order to achieve their set out objectives all these banks rely on certain instruments and policies which include reserve requirements, stabilization of securities, interest rate policy (lending policy) exchange rate and foreign exchange management. Discount rate policy among others which in Nigeria a developing country are put in place and over seen by the government owed central bank.

Lending has over the years become one of the most important functions in banking operations.  It provides money for investments which in turn yields turnover and increases the liquidity in circulation, due to this direct effect, it has on the economy and business development, it is being pursed in many developing countries where banks and their lending activities have been usefully integrated into government policy formulation in the national economic development process.  In Nigeria for example, where majority of the population live in object poverty, funds are very difficult to come by either for investment purposes or otherwise.

Thus, the federal government finds it necessary and critical to interview in the formulation of bank lending policies.

Lending is giving something to someone else for use over a short period of time (in this case money with interest where being paid bank).

In the objective of lending activity, the banks in the country have come up with policy guidelines which basically provides the frame-work for dealing with loans and advances.  Some of these policies are designed to have relevance to the interval constraints of each bank for instance, sector performance, deposit base, risks existing exposure while others are derwed mainly from the guidelines issued periodically by the central banks for control reasons and known as monetary and credit policy guidelines for each fiscal year.  A lending policy if properly articulated could provide a guide for safe.  Sound and profitable banking activities.  If on the other hand, the lending policy is not properly formulated, it could lead to the banks liquidation.

Irrespective of the amount of liquidity available in a bank, it may find it practically impossible to satisfy all the requests it lies for loans since the requests may outstrip available resources.  The bank thus has to discriminate in its decision to lend.  Such actions must however be based on objectives funds available for loans must be judiciously applied strictly along the banks policy guidelines.  When the policy has been formulated, lending procedures evolves as check towards ensuring that the objectives it realized.

Lending procedures which acts as checks towards making sure that the objectives of the policy guidelines are achieved includes.

(i)                 How loan are to be processed

(ii)               What documents are required

(iii)             Necessary securities

(iv)             Where various documents should be sent

(v)               Recommendation to be forward etc

Like any other operational procedures, these should not be breached in any way otherwise it could cause doubtful debts etc.  Due to improper lending, most banks make prevision for bad debts but on the other hand, what is known as recovery procedure in savouning doubtful debts.  They include the steps by steps action by this specialized unit either legal or other wise to this effect.

In summary, this tends to take critical appraisals at these lending policies and procedures for loan recovery.  These policies and procedures for play important role in achieving a goal and effective banking system.

1.1              BANKING SERVICES IN NIGERIA

Banking services in Nigeria dates back in 1897 when the elder Dumpster company was engaged in the business of moving coins up and down the country.  In the same year, African Banking Corporation was formed to provide banking services to elder Dumpster company.  This bank failed in the same year and was over run by the bank of British west Africa.  The National Bank of Nigeria Ltd was established in 1933 as the first indigenous bank, the Agbonmagbe bank was registered in 1943 and the African continental Bank was found in 1947 by late Dr. Nnamdi Azikiwe.  This was as a result of the shoody treatment he received in one of the expatriate banks.  Co-operative banks of western and Eastern Nigeria was established between 1984 and 1951.

Indeginisation of the Nigerian Banking system started ORJI LINDA N. AC/N2002/077 essentially and banking facilities in the economy.  These credit facilities could be placed under two broad groups long term facilities and short term facilities.  The former normally covering long term investment.  Capital market investments, credit financing, self-employment, consumer credit etc.  funds obtained are usually for either commercial purposes or for industrial development.  In recent years, the major interest of loan seekers is earning of profits.  Banks in their realization of the need to develop the economy, encourage the disbursement of loan.  In aid or assistance of variable projects, such projects will either result in the expansion or development of firms and industrial corporations.

Transactions of businessman and other professionals are also not left out.  In the need for liquid cash, which are sometimes made possible through the provision of credit facilities from banks.  The availability of funds gives to the growth in other sectors of and economy.  As indicated earlier, there are direct and indirect beneficiciries of a loan administered by a bank.  The direct benefit is the one obtaining the loan for him even if it is for self employment.  However the facilities is there for other people who will directly benefit from it in terms of employment and job creation in the same way short and long term loans do the same.

1.2              STRUCTURE OF BANKING

The structure of banking in Nigeria is similar to that of united kingdom.  This could be attributed to the country’ colonial heritage as the first two bank to operate in Nigeria were of British origin while the new sur-country as a result of a decree copulating 40% indigenous participation in foreign banks was viewed which was put in place after the introduction of federal constitution in 1954 to indigence the banking system.  A part from the central bank, banking facilities in Nigeria were provided by two classes of banks.  The foreign banks and the indigenous banks on the other hand, dis satisfactory with the facilities provided by the foreign banks and led to the establishment of indigenous banks.

As a result of the indigenization process and also the oil boon of the 1970’s more commercial, merchant and development banks sprang up in the country soas to keep up with the increase of cash flow in the economy.

Banking services in Nigeria are rendered to various sectors of the country’s economy and they include Health, industry, Agriculture, trade and Tourism etc.

In order for the economy to remain buoyant, adequate funds have to be made available to these sectors to enable them function satisfactorily and also to ensure steady development.  In this country, the required capital in inform of funds from banks and other financial institutions.  Loans and advances, credit facilities utilized by individual companies, corporate bodies and the government for the purpose of expansion and development.  This facility is not only beneficial to those obtaining it directly but its also indirectly creates jobs for the people who will provide the labour for standard of living which in turn results in the development of the nation.  In considering the great importance of loans to the economy, it becomes imperative to explain the benefits derived from loans in order to show its importance in the development of a nation an in the maintenance of stable giving indigenous banks attracted the buck of their staff from the pioneer.  British banks are drawn extensively from British experience.  The banking business was defined in section 41 of Nigerian Banking Acts of 1969 as the business of receiving monies from outside sources as deposits irrespective of the payment of interest or the granting of loans and aceptane of credits or the purchase of bills and cheques or the purchase and sell of securities for account of others or the assumption of guarantees and clearing an such other warranties for others and the affecting of transfers and clearing and such other transactions as the ministry may on recommendation of central bank by order published in the federal gazettee designates as banking business.

Also according to Asuzu (1996), he states the section 61 of the banks and other financial institutions Decree No. 25 of 1995 (Bofio) defined banking business as the business of recovering deposits on current account savings account, or other similar accounts, paying or collecting cheques drawn by or paid in by customers provision of finance or such other business as the governor may be order published.

To differentiate between commercial banks and other banks, the act went further to state that any person who transacts banking business in Nigeria and whose business include the acceptance of deposits.  Withdrawal by cheque is a commercial banker.  While merchant banking was defined as whose sale banking, medium and long term financing, equipment leasing, debt factoring, investment management, issue and acceptance of bills and the issue management of unit trust.

COMMERCIAL BANKS

The main features of a commercial bank includes:- acceptance of deposits that are drawable by cheques procurement of short term loans.

In Nigeria, the commercial banking industry is a few large banks with a wise network of branches extending all over the nation.  This is the type of banking system being operated in the United Kingdom in contrast to that of the united states where they operate a unique two tier of banking structure which embraces both the branch banking and the united banking system.

In the unit banking system, there are numerous individuals, local or state banks with a limited number of branches in most cases just one branch.

MERCHANT BANK

They provide special services which includes

Corporate financing

Portfolio management

Equipment leasing

Acceptance of bill of exchange

Provision of medium and long term loans

Debt factoring and investment management

In Nigeria, merchant banks came into the line light with the oil boom of the 1970’s and the subsequent increase in liquid cash available in the economy due to the fact that the cash in circulation had wind led, merchant banks are diversifying participating in international finance and short term capital market.  Thus, the demarcation lines between the functions of merchant banks and commercial banks are not less clearly defined them in the past.

DEVELOPMENT BANKS

Their unique features as their name implies includes loans that help in developing the nation.  Loans for capital projects such as road construction, building of infrastructures.  Agricultural investment that provide for the nation, such banks in Nigeria have specialized sectors which they serve and they include the Nigerian industrial development bank (NIDB) for the industrial sector, Nigerian Agricultural and co-operate bank (NACB) for the agricultural sector.

The federal mortgage bank of Nigeria for assisting customers in acquiring their own houses.

THE CENTRAL BANK OF NIGERIA

According to Famoyin (1973), central bank is defined as an institution which is charged with the responsibility of managing the expansion and contraction of volume, cost and availability of money in the interest of public welfare, it is called central bank because it occupies a central position in the banking system in any country in which it operates and it is vested by the authority to exercise certain powers not possessed by other banks.

The Nigerian Banking industry has at it speak and in control of its regulation by the central bank of Nigeria.  This was created to achieve the following objectives.

1.                  To issue lender currency in Nigeria

2.                  To safeguard the international value of currency

3.                  To maintain external reserves.

4.                  The promotion of monetary stability an a sound financial structure in Nigeria.

Its main functions as a bank includes.

(i).        Currency issue

(ii).       Banker and adviser to the federal government.

(iii).      Banker and supervisor to the regulator of commercial and merchant banks and other financial institutions.

The central bank is empowered by law periodically to examine the books and affairs to each and every.  Licenced bank.  The main are in which banks in Nigeria maintenance of reserve funds, adequacy of equity extension of credit, reporting and auditing.  Bank are required to extend a minimum percentages of the total lending to indigenous exterprises.  A sector distribution of loans and advances is also enforced.  An overall cellina is usually imposed on the growth of the banks loan and advances through the annual monetary policy circulars issued by the central bank of Nigeria.