Improving the Management of Learnable Funds in Commercial Banks in Nigeria
COMMERCIAL BANKS AND ECONOMIC DEVELOPMENT
Banks have always been perceived as engines of growth in an economy because they perform a resources from saving surplus to economic activities in various sectors of the economy, thus increasing or maximizing the level of utility and report of individuals. They are much more involved in the development of the economy than any other financial institution.
The commercial bank is a crucial factor in national development and economic growth. This is because whatever we do, whether as individuals, students, businessmen, entrepreneurs or government agencies we depend to a great extent upon the commercial bank for financial support or for capital mobilization. Indeed, they need and likely to remain the dominant financial intermediaries in Nigeria for they presently account for a greater percentage of the resources of the financial system.They is a wide gap between the surplus spender (saver) and the deficit spender (borrower) and hence the commercial banks plays a significant role in mobilizing savings from the surplus spenders to the deficit spenders through the process of inter-mediation.
In doing this, the commercial banks mobilize a large number of customer by motivating them to save, which will in term be extended as credit to the borrowers for investment and hence economic development.
- BANKING CREDIT FACILITIES AND THE NIGERIAN ECONOMY
It is worth nothing that credit is born out of confidence in a debtors ability to honour repayment obligation at some future time. It therefore involves the existences of two parties, the lender, who extends or is ready to part with his money an a borrower, to whom the credit is granted.
In essence, the need for credit arises from the need or desire either household or firms wanting to Ostain economic goods ahead of their ability to pay for them. The importance of credit in a modern economy, cannot be over emphasized especially when it is realized that the rate o development might be slowed down without credits.
Generally, credit performs the following vital functions to the development of the economy:
Credit assists in the creation of opportunities, enables in individual to use his own benefit and society to the fullest eg. NDE programme for unemployed graduates.
- Credit enhances the transfer of purchasing power and this enables borrower to have funds necessary for the purchase of goods and services, which they need for acquisition of capital equipment for productive operations. Beyond this, credit enables an entrepreneur to increase his total surplus value by any amount greater than the interest due.
- credit service as a major avenue for resources allocation. By mobilizing
funds surplus economic nuits and channeling them to delight minits, credit allows for the survival of the debtor, while at the name time relieving the creditor of the burden of maintaining idle funds. The two parties thus optimize their position because creditors obtain returns for parting their money while debtors make profit on money borrowed.
- Credit aids the creation of money. In the process lending, commercial banks create money, they create liability in 0000demand deposits against themselves in favour of the debtor and indirectly help to create value elsewhere.
- Credit is thus a powerful instrument that could be employed by the monetary authorities as a tool of policy to turn the economy around. It could be used to achieve macro economic objectives of full employment, price stability and balanced growth. Though credit can be a catalyst in the development of an economy as evident above, yet administrate credit expansion could be dislocatory or disfunctional to the growth of the economy. Thus, credit, as a tool of policy must be handled carefully.
Executive credit could be inimical in a situation of full employment, because of this level the flow into the system could result to an inflationary spiral especially of the existing productive capacity cannot sustain the swelling spending stream. Credit may tend to postpone stump while making it more violent when at last it erupts. This might happen if producers fail to observe that their products might not find on flets. These result in the product failing up and eventually result in slump.
2.3.1. THE BANK LOANS AND ADVANTAGES
Loans and advances together constitute the most important component of the assets portfolio of commercial bank. This asset is different from other assets like treasury bills a treasury certificates etc; in that the initiative his with the public that is banks customers, who maintain deposits rather than the banks themselves. Thus, the volume of loan is a function of demand as well as the supply conditions as reflected in the banks lending rates, loan policy and other non profit retaining factors.
Similarly, the willingness of banks to extend credits depends among other things, on their liquidity. Bank loans and advances can be broadly classified into the following;
OVERDRAFT:
Commercial banks are usually more interested in short term lending, so funds advanced as overdraft are in theory repayable on demand, while interest is payable on the outstanding balance on a daily basis.Overdraft are generally granted to the business customers, large overdraft is expected to fluctuate within the agreed limit, but need not always be utilized (that is, the account can sometimes be in credit).
Bank overdrafts are usually the cheapest means of finance available and are very flexible and quickly obtained. They are normally renewable and sometimes can be unsecured. However, they are technically repent able on demand and very vulnerable to changes in government and banking policies. They are usually applied wrongly because of their cheapness.
SHORT TERM LOANS:
Short term loans are loans running for a period of one month to twelve months. Under this arrangement the bank is committed to allow the borrowers to make use of the money for the period of time in the loan contract.
The time available allows the customer enough time to apply the money and generate enough funds with which to pay back. They are costlier than overdrafts as they run for a longer period of time and therefore constitute a higher risk for the bank. They are all uneconomical if funds are not really required as the interest starts running immediately, the contract is signed. They require securities incases where overdraft may resolve some restrictions to the borrowers as a condition.
MEDIUM TERM LOANS
These are loans for the period of two years and seven years. Under a medium term loan contract, the commercial bank is committed to allow customer to make use of an agreed sum of money for specified purpose for the periods between two to seven years. Commercial banks do sly and from loans of this duration because of the nature of their deposit liabilities, which are short-term deposits.
However, the monetary authorities through its credit guidelines encourage commercial banks towards this type of loan. This they have done by setting up corporate services offices, which specialize in providing short and medium term finances are provided to businesses for factory construction and for the purchase of plant and machinery (i.e. project financing).
Commercial banks in Nigeria do not give long term loans, this is attributed to the fact that their deposits liabilities are of short – term nature.
As earlier mentioned, there loans and advances are the life wire of the commercial banks, whose primary source of making profit is the interest charged on these loan and advances. Banks are not charitable organizations neither are they “father Christmas”. They survive on profit and therefore extent credit in line with some set economic criteria or what most people call cannons or principles of lending. It is pertinent to stress that Nigeria commercial banks have some policies in terms of lending.
2.4 COMMERCIAL BANK LENDING CRITERIA
2.4.1 BASIC PRINCIPLES OF LENDING.
Lending appears to be one of the most intricate services provide avenue for savings for those who have surplus funds.The bulk of such funds are then let out to the needy personal and business customers as loans and overdrafts.Thus, banks have lending principles, and policies to establish the direction and use of funds from shareholders and depositors to control the composition and size of the loan portfolio and to determine the general circumstances under which it is appropriate to make a loan. These principles must be carefully weighted and implemented with open mind. The three basic principles behind all bank lending are safety, suitability and profitability.
2.4.1.1 SAFETY OF ADVANCE
The safety of any loan and advances is of paramount importance to the bank. Hence, banks lay great emphasis on the character, integrity and reliability of borrowers. There must be a reasonable certainty that the amount granted can be repaid from the profit and cash flows granted from the operations of the company or individual.
In support of the safety requirement, the borrower must be able to provide acceptable security, which will serve as something to fall back on, if the expected source of repayment should fail.
According to J.M. Holders “the security for the borrowers financial position appears to be sound, a borrower’s position can change and sometimes does change quickly. The appropriate time to obtain security is at the outset, when the loan is being negotiated. It is desirable for the bank to satisfy himself as far as reasonably possible from a careful consideration of all relevant facts, that the borrower is capable of affecting repayment in accordance with his promise.
This article was extracted from a Project Research Work Topic
“IMPROVING THE MANAGEMENT OF LEARNABLE FUNDS IN COMMERCIAL BANKS IN NIGERIA.(A COMPARATIVE STUDY OF TRADE BANK (TB) AND INLAND BANK OF NIGERIA (IBN)”
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