The Effect of Government Policy on Commercial Bank Lending Ability in Nigeria

The Effect of Government Policy on Commercial Bank Lending Ability in Nigeria

ABSTRACT

This research work is aimed at satisfying those who have an interest in the effect of government policy on commercial banks’ lending ability in Nigeria (1999-2005) especially the bankers throughout the world who are involved in a financial transaction with Nigeria.

The data required for achieving these questionnaires, Newspaper, Journals union bank Bullion were used.

Finally, the title the effect of government policy on commercial bank lending ability in Nigeria (Union Bank) as discussed in this project does not supply enough information needed, therefore there would be a need for an investigation into the extent of actual effect on the lending ability of commercial bank.

CHAPTER ONE

1.0 INTRODUCTION

This chapter deals with the background of the study, statement of problems, objectives of the study, research question, significance of the study, hypothesis, scope limitation of the study, and definition of items.

1.1 BACKGROUND OF THE STUDY

The banking system in Nigeria has undergone radical changes during the 35 years since independence. Banking developed from industry in 1960. was dominated by a small number of foreign-owned banks, one in which public sector ownership predominated in the 1970s and 1980s and in which Nigeria private investors have played an increasingly important role since the mid-1989’s government policies had a major influence on developments in the banking industry. Extensive government intervention characterized financial sector policies beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenization. Since 1987 financial sector reforms have been implemented, encompassing elements of liberalization and measures to enhance prudential regulation and tackle bank distress.

The effect of government policies on the commercial bank lending in Nigeria in the period since independence all examines how banks were affected by public ownership and policies of financial repression the reasons behind the growth of Local Private sector banks, to causes of the financing distress in the banking industry and the efficacy of financial reforms undertaken. We aim to explore two related issues first, that government control on financial markets. Public ownership of banks and the neglect of prudential regulation as opposed to allocative regulation had detrimental effects on banking lending, especially in terms of the quality of banks’ loan portfolios. Efficiency and competition second, that the efficacy of financial liberalization and other financial sector reforms to enhance the efficiency of intermediation in the banking market has been limited. In part because of the legacy of pre-reform intervention in banking lending, which left large sections of the banking industry in financial distress, but also because some of the reforms were inappropriately sequenced and others were not implemented in a consist ant manner.

On the commercial banks. Although other financial institutions have been set up in Nigeria including development finance institutions (DFIS), insurance companies, and a plethora of finance houses, hire purchase companies and mortgage companies, banking dominates the financial and merchant banks together accounted for 85 percent of the total asset of the emerged during 1980. Some of these banks were set up banks by state governments but the majority were stated by Nigerian private investors. The tensive growth of the local private banks was very rapid after 1986, particularly in the merchant banking sector by 1992 66 commercial banks were operating in Nigeria. Despite the growth of new entrants, however, the three largest banks have retained their dominance of the banking market, accounting for 48 percent of the total deposits of the commercial banks while Afric bank accounts for a further 7 percent.

The banking industry has been afflicted by widespread financial fragility almost half, the total number of banks in operation, were regarded as distressed or potentially distressed by the regulatory authorities in 1995. The state government-owned most of the distressed banks.

1.2 STATEMENT OF THE PROBLEM

The environment in which commercial banks operate has been the direct result of the banking sector has been subject to extensive regulation of the banking sector of the Nigerian government lending. There is competition among banks and non-bank financial institutions. It is now the survival of the fittest the central bank of Nigeria as well as direct participation by the federal government and state government during the post-independence period economic nationalism and developmental aspirations were the important motivation for interventionist policies. The character of these policies was that of financial repression in that control depressed interest rates and canceled resources away from areas where the private rate of return would have been maximized. The allocation control has been liberalized to some extent since 1986, although controls overlay areas remain in force. This section outline the efforts made by the Union Bank of Nigeria to influence resources allocation in banking lending through the use of administrative controls policies about public ownership of banks.

The denomination of banking by expatriate banks during the colonial period provoked considerable resentment among Nigerians, including businessmen and politicians. The expatriate banks were perceived as acting solely in the interest of their foreign owners rather than in Nigerians and of the Nigerian economy in particular they were accused of discriminating against indigenous businesses in the allocation of loans and failing to finance the developmental needs of the country, instead of concentrating on the provision of short term loan related to finance to foreign companies. Consequently, government objectives following independence included securing greater local control over the banking lending and ensuring improved access to credit for indigenous businesses and the priority sector.

During the 1960s the union bank of Nigeria was given extensive powers to regulate the quantity cost and direction of bank credit. These powers were used to further monetary control a priority throughout most of the post-independence period because of inflationary pressures in the early 1990s by the issuance of stabilization securities by the Union Bank of Nigeria to those banks with excess liquidity. The consequence was a reduction in the aggregate liquidity of the banking system which contributed to a sharp rise in interest rates on later bank deposits. Interbank rates rose to us percent the availability of funds on the interbank market diminished sharply when some banks began to default on their interbank lending obligation. As the scale of the fragility in the industry become apparent depositors withdraw funds from banks suspected of being more secure. The difficulties involved in deposit mobilization combined with the nonservicing of a large share of their loan portfolios meant that the distressed banks became increasingly illegal and overdrawn on their accounts with the union bank of Nigeria.

The problem is the effect of lending has effectively mobilized deposits for the banks, this work is aimed at finding the night answer to the question raised.

1.3 OBJECTIVE OF THE STUDY

The purpose of the study is to find out.

1. Effect of lending policy on commercial bankability to grant the loan.

2. to assess the effect of government policy on the inflation rate in the country.

3. if the monetary policy will, in any way reduce inflation in the country.

4. how government policy on commercial banks affect its ability to grant loan

1.4 RESEARCH QUESTIONS

1. How does lending policy affect the commercial bank’s ability to grant loans?

2. Did government policy affect the inflation rate in their country?

3. How does monetary policy affect inflation?

4. How does government policy on commercial banks affect their ability to grant loans?

1.5 RESEARCH HYPOTHESIS

1. Ho: The lending policy does not affect the commercial bank’s ability to grant loans.

Hi: Lending policy affects the commercial bank’s ability to grant the loan.

2. Ho: Government policy does not affect the inflation rate in the country.

Hi: Government policy affects the inflation rate in the country.

3. Ho: Monetary policy has nothing to do with inflation.

Hi: Monetary policy has something to do with inflation.

4. Ho: Government policy on the commercial bank does not affect its ability to grant loans.

Hi: Government policy on commercial bank affect its ability to grant loan.

1.6 SIGNIFICANCE OF THE STUDY

The study is significant for the fact that many banks have been introduced and more are scheduled to hit the loan government’s progress on its efforts.

It is of great importance to the operation in banking lending in that it would enable them to assess the degree of the successes of their banks and be able to identify unprofitable ones. It will also serve as the first information for newcomers in the bank and those intending to lend some. In determining their targets in bank lending, again it will be beneficial to students in banking and finance and research who may be interested in this area of study.

1.8 DEFINITION OF TERMS

1. COMMERCIAL BANKS: This is an institution set up to do banking business accepting deposits from the public and making a profit by lending money out of the public.

2. LENDING: The giving of money to the customer by a bank with interest on the ground that such a bank has enough security to back up such loan when the due time is matured.

3. INTERBANK CLEARING: This is an arrangement by which banks settle instruments drawn on them by their customer in the clearinghouse, representatives of commercial banks deliver cheques drawn on other banks and receive instruments drawn on them by the bank.

4. LIQUIDITY: The liquidity of assets means the ease with which it can be turned into cash with certainty a bank has to keep an adequate volume of non-earning assets such as, cash call money, treasury bills, and other short term maturing instruments in its portfolio.