LOAN LOSSES IN COMMERCIAL BANK LENDING A COMPARATIVE STUDY OF GOVERNMENT CONTROLLED

CHAPTER ONE

1.0     INTRODUCTION

“Neither a borrower nor a lender be” goes the popular saying.  Deriving from the above saying is a simplicity that in the lender – borrower relationship, the lender who gives has had to face problems, basic among which is that the borrower might not honour his or her debt obligations.

By virtue of their highly recognizable and incontestable role in the process of engineering economic growth through the lending function, commercial banks are most vulnerable to this non-repayment phenomenon.

In the process of accelerating economic growth in Nigeria, as in other countries, commercial banks have served as most important institutions of resources allocation and financial intermediation between surplus and deficit economic units.  However for obvious reasons of low level of capital formation in the country, emphasis of this purveying function is on lending, with its multiplier effect.

A second and consequent issue arises with due considerations to the primary motive of the investors in the banking business.  The commercial bank owners desire profit and it is largely through the interest on their loans and advances that is primary profit is satisfied.

Thirdly, besides all the important lending role and profitability consideration commercial banks lending activities demand concrete understanding of the depositors’ position since a good part of their abilities goes into the loan portfolio ie. the liquidity considerations.

The foregoing vividly underscorses the causative role of commercial banks in the process of engineering growth as well as indicating the nature of their relationships with depositors.  On the role of commercial banks as growth engineers. ORJI (1989) aptly stated.

“they are much more involved in the development of the economy than any other financial institution.  Indeed, they have been and are likely to remain the dominant financial intermediates in Nigeria for they presently account for over 80% of the resources of the financial system, they therefore occupy strategic position in the economy and are more than most other units, able in all events to influence the course of development”.

Roles of resources allocation and profitability the commercial banks commit sizeable audits of their asset portfolio in the form of loans and advances.

1.2     STATEMENT OF PROBLEM

Deriving from the above introductory background is that loan losses among commercial banks have assumed some canker wormic dimension and demands serious “financial diagnosis”.  Accordingly, it has therefore attracted the chagrin of keen observers of and commentators on, the financial systems who believe that it is a major problem which present day banks in Nigeria are facing.  In fact, of recent “The bad debts in the banking system was estimated at N73 billion (this day of April 24,2005).

However, while there is a general wider standing of high rates of loan losses among the banks, augments in many circles highlight a higher magnitude of the losses among banks wholly owned or substantially controlled by government.  This does not go to suggest a situation of no debts among the private banks, but