The effect of interest rate on loan recovery of deposit money bank (a case study of first bank nigeria plc)

Thesis Overview

<p> <b></b></p><p><b><b>1.0 INTRODUCTION</b></b></p><p><b><b></b></b></p><b><b><p><b>1.1 BACKGROUND OF<br>STUDY</b></p><p><b></b></p><b><p>Greater<br>prominence have been said to be associated with banking industry in Nigeria<br>because of the role it plays in her economic environment. The banking industry<br>plays a great influence and in the provision of credit facilities in Nigeria.<br>However the tendency to incur financial losses due to failure to repay loans or<br>credit facilities by borrowers which is regarded as credit risks are most often<br>faced by banking institutions in the financial sector (Muhammad &amp; Shahid,<br>2012).</p><p>The<br>bank’s credit function enables investor’s exploits ventures that are considered<br>profitable (Kargi, 2011). This function however, exposes the banks to the risk<br>of credit default. Credit risk as defined in 2001 by the Banking Supervision of<br>the Basel Committee as the possibility of an outstanding credit going<br>absolutely or partially lost due to default effect (credit risk). Default<br>effect or credit risk is assumed an internal measurement factor of the<br>performance of banks. The higher the level of bank’s exposure to credit risk,<br>the higher the possibility of the bank to likely experience financial crisis<br>and so on. Credit risk is the most formidable amongst the numerous risks faced<br>by banks and the profitability of the banks is highly affected since a greater<br>aspect of banks’ income accrues from granting credit facilities from which<br>interest is generated. However, credit risk is found to be linked with interest<br>rate risk by implying that interest rate increment enhances loan default<br>possibilities.</p><p>Interest<br>rate risk and credit risk are related intrinsically to one another and not<br>separately (Drehman, Sorensen &amp;Stringa, 2008). According to Ahmad and Ariff<br>(2007), the credit portfolio with greater non- performing assets limits the<br>banks’ ability in achieving its stated objectives. Therefore, loans that are<br>non-performing are expressed as the percentage of loan values which has not<br>been service for 90 days and above. Consequence upon the huge rate of non-<br>performing loans, credit risk management practices is highly emphasized by<br>Basel II Accord Working in tune with the recommendations of the Accord is a<br>sure approach to handling the risk of credit and generally the enhancement of<br>bank performance. Through the effective management of the exposure of credit<br>risk by banks, they end up facilitating the viability and profitability of<br>their businesses and ultimately enhancing the systemic stability and smooth<br>allocation of capital in the economy (Psillaki, Tsolas &amp; Margaritis, 2010).<br>Banks have adopted various strategies of recovering their money, some orthodox,<br>some unorthodox. It has been found that most borrowers are always willing to<br>pay, but certain situation like economic recession, inflation, political<br>instability, poor investment makes them not able to pay. According to Ojiegbe<br>(2002), there are also the existences of bad borrowers in the banking industry<br>whose primary assignment is to abandon their loan obligations in most banks and<br>enter into new loan contracts with another bank. This low credit standard of<br>borrowers along with poor management of portfolio and changes insensitivity in<br>the economic environment by the bankers led to the banks witnessing rising<br>non-performing credit portfolio. This ultimately causes many banks to fail and<br>become insolvent. It is quite unfortunate that in spite the degree of<br>carefulness, skillful, experience or tact of a loan officer, most of the loan<br>facilities granted to borrowers sometimes go bad. The introduction of the<br>Prudential Guideline in 1990 for banks licensed in Nigeria enable banks to<br>properly classify bad and doubtful debt. These guidelines made it compulsory<br>for licensed banks to at least in a quarter, have their credit portfolios<br>reviewed and credit classified (into non-performing loans and performing loans)<br>appropriately (Mora, 2011).The introduction of these guidelines has assisted<br>the banks to promptly identify the deterioration of loans held by banks. For a<br>credit facility to be considered as non- performing, both the principal and<br>accrued interest is unpaid for three months and more; or this interest payment<br>must have been interest of 90 days or more may have been rescheduled,<br>rolled-over or capitalized into a new credit facility (unless these facilities<br>have reclassified and the borrower have made cash payment to the effect that<br>interest payment outstanding does not exceed three months). Over the years,<br>bank loans and advances to the Nigerian economy has been on the increase.<br>According to the CBN annual report in 2007, commercial banks’ credit to the<br>core private sector grew by 98 per cent which has been the highest ever.<br>However, this incremental trend could not be sustained due to the prevailing<br>harsh economic situation and its effects on the business sector thus leading to<br>increased default on loan repayment. Furthermore, some bank customers misconstrue<br>the loans and advances received from banks as national cake, hence, they<br>deliberately shy away from repayment.</p><p><b>1.2 STATEMENT OF THE<br>PROBLEM</b></p><p><b></b></p><b><p>Interest rate is<br>a very important factor to consider in measuring the performance of banks in<br>Nigeria; however the variation in interest rate tends to affect loan and<br>advances in the bank. Increase in interest rate on loan collected could delay<br>the recovery processes of loans by the bank. Most borrowers might stop<br>collecting loans from banks due to high interest rate. Secondly there have been<br>series of research on loan and interest rate but not even a single study has<br>been carried out the effect of interest rate on loan recovery of deposit money<br>bank; hence a need for the study.</p><p><b>1.3 AIM AND<br>OBJECTIVES OF THE STUDY</b></p><p><b></b></p><b><p>The main aim of<br>the research work is to determine the effect of interest rate on loan recovery<br>of deposit money bank. Other specific objectives of the study are:</p><p>1. to<br>determine the relationship between interest rate and loan repayment in first<br>bank Nigeria plc</p><p>2. to<br>determine the extent to which interest rate affect loan recovery of deposit<br>money banks in Nigeria</p><p>3. to<br>determine the causes of variations in interest rate in deposit money banks in<br>Nigeria plc</p><p>4. to<br>investigate on the factors affecting interest rate in deposit money banks in<br>Nigeria</p><p><b>1.4 RESEARCH QUESTIONS</b></p><p><b></b></p><b><p>The study came<br>up with research questions so as to ascertain the above stated objectives of<br>the study. The research questions for the study are:</p><p>1. What<br>is the relationship between interest rate and loan repayment in first bank<br>Nigeria plc?</p><p>2. To<br>what extent does interest rate affect loan recovery of deposit money banks in<br>Nigeria?</p><p>3. What<br>are the causes of variations in interest rate in deposit money banks in<br>Nigeria?</p><p>4. What<br>are the factors affecting interest rate in deposit money banks in Nigeria?</p><p><b>1.5 STATEMENT OF RESEARCH HYPOTHESIS</b></p><p><b></b></p><b><p>H0:<br>there is no significant relationship between interest rate and loan repayment<br>in first bank Nigeria plc</p><p>H1: there<br>is significant relationship between interest rate and loan repayment in first<br>bank Nigeria plc</p><p><b>1.6 SIGNIFICANCE OF STUDY</b></p><p><b></b></p><b><p>The study on the<br>effect of interest rate on loan recovery of deposit money bank will be of<br>immense benefit to first bank Nigeria plc in the sense that the study will<br>educate the banking sector on various methods of recovering loan from debtors;<br>the study will also determine the relationship between interest rate and loan<br>repayment in first bank Nigeria plc. The study will serve as a repository of<br>information to other researchers that desire to carry out similar research on<br>the above topic. Finally the study will contribute to the body of the existing<br>literature on interest rate and loan recovery of deposit money bank</p><p><b>1.7 SCOPE OF THE STUDY</b></p><p><b></b></p><b><p>The study on the<br>effect of interest rate on loan recovery of deposit money bank will focus on<br>first bank Nigeria plc from the year 2000-2017.</p><p><b>1.8 LIMITATION OF STUDY</b></p><p><b></b></p><b><p><b>Financial constraint</b>– Insufficient fund tends to impede the efficiency of<br>the researcher in sourcing for the relevant materials, literature or<br>information and in the process of data collection (internet, questionnaire and<br>interview).<b></b></p><b><p><b></b></p><b><p><b>Time constraint</b>– The researcher will simultaneously engage in this<br>study with other academic work. This consequently will cut down on the time<br>devoted for the research work.</p></b></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>