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This seminar work is aimed at satisfying those who have interest in the effect of government policy on deposit money bank wealth creation especially the bankers throughout the world who are involved in financial transaction with Nigeria. The data required for achieving these questionnaire, 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 need for an investigation into the extent of actual effect on lending ability of commercial bank.

The banking system in Nigeria has undergone radical changes during the 35 years since independence. Banking developed from an industry which in 1960. was dominated by a small number of foreign owned banks into, one in which public sector ownership predominated in 1970s and 1980s and in which Nigeria private investors have played an increasingly important role since the mid 1989’s government polices 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 measure 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 examine how banks were affected by public ownership and polices 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 detriment effects on the banking lending, especially in terms of the quality of banks loan portfolio. Efficiency and competition second, that the efficacy of financial liberalization and other financial sector reforms to enhance the efficiency of intermediation in banking market has been limited. in part because of the legacy of pre-reform intervention ion banking lending, which left large sections of the banking industry in financial distress, but also because some of the reforms were inappropriately sequenced and other were not implemented in a consist ant manner.
On the deposit money bank wealth creation. although other financial institution have been set up in Nigeria including development finance institution (DFIS), insurance companies and 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 the 1980. Some of these banks were set up banks by state governments but the majority were stated by Nigeria private investors. The tensive growth of the local private banks was very rapid after 1986, particularly in merchant banking sector by 1992 there were 66 deposit money bank wealth creation operating in Nigeria. Despite the growth of new entrants however the three largest banks have retained their dominance of banking market, accounting for 48 percent of the total deposits of the deposit money bank wealth creation while Afric bank accounts for a further 7 percent.
The banking industry has been afflicted by wide spread 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.
The environment in which deposit money bank wealth creation 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-banks financial institution. 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 important motivation for interventionist polices. the character of these polices was that of financial repression in that control depressed interest rate and cancelled resources away from areas where private rate of return would have been maximized. The allocate control have been liberalized to some extent since 1986, although controls over lay 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 polices pertaining to public ownership of banks.
The denomination of banking by expatriate banks during the colonial period provoked considerable resentment among Nigerian, 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 falling to finance the developmental needs of the country, instead concentrating on the provision of short term loan related finance to foreign companies. Consequently government objective following independence included securing greater local control over the banking lending and ensuring improved access to credit for indigenous businesses and 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 deposit. 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 non-servicing 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 in the effect of lending have 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 bank ability to grant loan.
2. To assess the effect of government policy on inflation rate in the country.
3. If monetary policy will, in any way reduce inflation in the country.
How government policy on commercial bank affect its ability to grant loan
Determinants of lending: these are factors which influence the lending decisions or lending principles of deposit money bank wealth creation. they include the volume of deposits of the banks, the preceding interest rate, the legal reserve requirement of the central bank of Nigeria, level of domestic and foreign investments of deposit money bank wealth creation, the banks liquidity ratio, the nature of their businesses, the prestige or goodwill of the banks, CBN monetary policies and/or guidelines, the general economic position of a nation, the political and socio-cultural environment in which they operate, the status of their individual customers, the internal policies of the banks, their capital bases to mention a few. Some have positive impact and some negative impact on the banks’ lending behavior.
Lending behavior: these are laid down principles which guide the lending practice of banks. These principles could be due to external or internal factors. These principles act as a blue print to measure the effectiveness of deposit money bank wealth creation’ lending activities.
Short term facilities: these are credits extended to customers that are expected to be repaid within one year e.g. bridging loan, overdraft and lpo financing.
Medium term facilities: these are credits extended to customers and repayable between 3 and 5 years. Examples include term loans and leasing.
Long term facilities: this includes banks loans or debentures which are repayable between 5 and 10 years or more depending on the life span of the project it is spent on. The main source of long term funds for business firms include bond, preferred stock, common stocks and hybrid securities such as convertible bonds and convertible preferred stocks.
Loans and advances: these are monetary facilities advanced by deposit money bank wealth creation to their customers who may be individual or corporate.

deposit money bank wealth creation in playing their intermediation role do give their deposits mobilized out to the deficit economic unit as loan which may be on short, medium or long term basis. This assists them in achieving their profitability principles and other ends for which they are setup.
A lot has been reviewed in terms of deposit money bank wealth creation’ lending activities of various deposit money bank wealth creation. Some opinions deliberated on the factor responsible for banks willingness to extend much credits to some sector of the economy, while some discussed effect of such extension of credits on productivity and output. Most of these earlier studies agreed on the fact that it is logical for banks to have some basic lending principles or consideration to act as a check in their lending activities. since there are many studies in respect of bank’s lending behavior, it is therefore imperative to highlight and consider some factor that economist and professionals alike have proposed as virtually significant in explaining the determinant’s of deposit money bank wealth creation’ lending behavior.
According to Adedoyin and Sobodun (1991), “lending is undoubtedly the heart of banking business. Therefore, its administration requires considerable skill and dexterity on the part of the bank management”. While a bank is irrevocably committed to pay interest on deposits it mobilized from different sources, the ability to articulate loanable avenues where deposit funds could be placed to generate reasonable income; maintain liquidity and ensure safety requires a high degree of pragmatic policy formulation and application.
Commercial banking in Nigeria witnessed an era of impressive profitability, characterized by high competition, huge deposits and varied investment opportunities; in an effort to make quick profits the deposit money bank wealth creation relied essentially on self-liquidating loans and diversified their portfolio into less risky investments with safe margin. The current trend in Nigerian banking and finance sector, suggest that the days of cheap profits are now over and only banks with well conceptualized lending and credit administration policies and procedures can survive the emerging competition.
Ezirim (2005), further stressed that “bank lending decisions generally are fraught with a great deal of risks, which calls for a great deal of caution and tact in this aspect of banking operations. The success of every lending activity to a great extent therefore, hinges on the part of the credit analysts to carry out good credit analysis, presentation, structuring and reporting.
Osayameh (1991), supported this view by stressing that” the days of armchair banking are over and that the increasing trend in bad debts and absence of basic business/corporate advisor services in most Nigerian deposit money bank wealth creation, suggest an apparent lack of use of effective lending and credit administration techniques in these banks”.
Prior to 1984, the bulk of most commercial bank deposit was made up of demand deposit. The position has now changed with the evolution of improved treasury management by corporate savers and customers as well as favorable interest rate now payable on deposits, particularly since interest rates were regulated in 1987. The result of this is additional rise in cost of funds for banks. If they are able to meet the cost element in fund and eke out some profits to meet corporate growth and share holders’ expectation, they must really give adequate attention to the single most important source of their earnings- lending and credit administration.
Emphasizing this assertion, Osayameh (1996) further stressed that “the major objectives of deposit money bank wealth creation’ lending is to maximize profit”. The staggering increase in volume of deposit money bank wealth creation credit in nigeria, during the half of eighties alone, lends credence to this assertion. In 1980, aggregate commercial bank loan and advances was n6.4 billion. This increased to n113.6billion in 1986, a staggering increase of 94%. Management of such resources should therefore transcend the use of traditional techniques based mainly on the use of rule-of thumb, hunches and experience. The present volume and complexity of transaction in bank lending and credit administration in nigeria call for the use of scientific techniques like those of management science and operations research to aid their lending and credit administration.
The most important sources of funds for deposit money bank in wealth creation include; paid up capital, reserve funds, accumulated profits and deposits. The word deposit represents the money in the funds of the bank’s various deposit schemes. They include: savings deposit, fixed deposit and demand deposit. The deposit funds of deposit money bank wealth creation are collectively described as deposit liabilities. this name quickly reminds one that money in commercial bank’s deposit fund is one that the banks are bound to pay to their depositors, their agent or their creditors. The deposit liabilities of deposit money bank wealth creation neither are not permanent funds nor are they fixed. They fluctuate according to the flow of deposits and withdrawals made in the various deposit accounts. Banks lend money all the year round from their deposit liabilities funds. One needs to understand the behavior of the various deposit accounts i order to appreciate this very important source of bank lending.
Money received in a savings deposit account is money not immediately needed for use by a depositor. In places where people understand the use of current account, and make good use of its facility only, money meant to be saved against the rainy day is deposited in a savings account. This being so, money in a savings account is allowed to rest for a long time in the account. in the Nigerian context, owing to the high level; of illiteracy and the low level of Chequeing habit, much money that could have better been paid into a current account are lodged in a savings deposit account.

The determinants of deposit money bank lending behavior are the interest rate, the liquidity requirement, the reserves requirement, the volume of deposit and the diversity of such deposits, the credit guidelines issued from time to time by the controlling body (CBN), public recognition and the internal policies of banks. These determinants are considered one after the other as follows:
Interest Rate
A major regulation affecting deposit money bank wealth creation in Nigeria is the restriction on the amount of interest they are allowed to pay depositors in an effort to attract additional depositors and the interest they charge on other fund based services. The 1994 CBN guidelines returned the country to a regime of fixed interest. the 1995 CBN guideline while still maintaining a maximum lending of 21% replaced the ceiling on the minimum deposit rate specified as 13.5% in 1994 by a provision that banks were to maintain a maximum spread of 7.5% between their lending and deposit rate. By year 2004 the maximum and prime lending rate had increased to 20.62% and 19.15% respectively while the rate on deposits and savings decreased to 10.67% and 4.37% respectively. There is no doubting the superiority of forces over administrative fiat in the determination of key economic variables such as interest rates. The ceiling on interest rate has no doubt, acted as disincentive to saving in our highly inflationary environment. The pegging of interest rates at artificial levels therefore impacts negatively on the liquidity and profitability of banks. Funds are being diverted from banks by customers seeking higher rates or yields. This has led to banks offering deposit rates close to their lending rates in order to remain in business. in these circumstances, there is pressure on banks to discern the ways of earning effective returns that are higher than the ceiling on lending rates.
Causes of high interest rates
• The huge fiscal deficit and consequent ’crowding out’ of the private sector in credit allocation.
• Deregulation of interest rate and the undue discretion it conferred on key market players in pricing their funds as well as the arbitraging activities of market speculators.
• High rate of domestic inflation requiring compensating high nominal interest rates.
• Technical insolvency and serious cash flow problems on the part of some weak banks, resulting in distress, borrowing (at all cost) in order to stay afloat and pervasive default in risk premium and penal rates.
• The use of stabilization securities and the system of allocation of foreign exchange both of which induced the sterilization of large funds at the CBN.
The following were major measures adopted by the government to address the identified causes of high interest rates in order to ensure a more investor friendly regime includes:
• Instilling of fiscal discipline, resulting from the zero-deficit budget by releasing more loanable funds to the private sector, which is expected to exert a downward pressure on the interest rate structure.
• The expected declaration in money supply growth and inflation rate which should reduce the cost of funds.
• The change in the foreign exchange allocation system which had included the sterilization of huge funds at the CBN and had been a factor in the high interest rate structure.
• Efforts of the regulatory authorities to deal with defaults and distressed in the financial system to enhance confidence.
Some disturbing features of the interest rate structure as reported by cbn include:
• A widening margin between saving and lending rate
• A wide disparity in the rates charged by different banks for savings and deposits
• The distorted and highly volatile interbank rates.
• The effects of high interest rates in discouraging investment.
The reserve and liquidity requirements
Banks’ liquidity means their capacity to meet promptly demands, that is, pay their obligations. Deposit money bank wealth creation must pay more attention to liquidity than any other type of financial institution such as life insurance companies. This results from higher turnover of their debt liabilities. A large part of the gross out payments by these banks is met from current gross receipts of funds in the normal course of business. Reserves are the cash holdings that deposit money bank wealth creation are required to keep as deposit at the CBN. Reserve requirements are important because they give CBN some leverage in controlling the monetary and credit condition of the economy. The liquidity of banks is also regulated to ensure that they can meet withdrawal of funds by depositors.

At the beginning of each financial year, the head of state presents to the nation his budget for the ensuing year through what is officially known as the head of state’s budget speech. Aspects of the budget speech which represents monetary policy for the federal government for the year are usually expanded by the central bank of Nigeria (CBN) within a few days of the budget announcement and circulated to the banks. The central of Nigeria credit guidelines is one of such circulars that emanate from the CBN to the deposit money bank wealth creation. Commercial bank’s lending activities are thus subject to important legal and regulatory constraints. Some of these constraints are primarily designed to prevent banks from taking undue risks which might impair their safety and soundness. The more important of such restrictions in Nigeria are as follows:
The amount a commercial bank can borrow is limited to 20% and 50% of the shareholders fund, (unimpaired by losses) within the bank’s portfolio and thus list concentration of risks. The term and amounts of loan to bank insiders (directors or bank officers) are also restricted. A bank is not allowed to grant unsecured credit facilities of an aggregate amount in excess of one year’s emolument to any of its officers and employers (Bofid section 20). Without the necessary prudential guidelines, the liquidity, capital adequacy and hence the financial health of the bank could be eroded without the regulatory authorities detecting early enough. Accordingly, the CBN has retained the “prudential guidelines for licensed banks” issued in 1990 for the early recognition of losses and adequate provision for bad and doubtful debts.
Government often regulates the deposit money bank wealth creation in the attempt to direct credit towards priority sectors. The CBN prudential guidelines always provide for this. The area accorded priority includes; agriculture, manufacturing export, solid minerals and small scale enterprise to which deposit money bank wealth creation are directed to allocate stipulated portion of their loan portfolios. The sanction for non- compliance with this regulation is that the bank will deposit with CBN for on lending to the affected sectors through the relevant development banks at concessionary rates. regulations concerning credit allocation however, have important drawbacks, often a large share on non-performing loans originate from such policies, creating bank distress and complicating the task of bank supervision.

Deposit money bank wealth creation remain dominant in the banking system in terms of their shares of total assets and deposit liabilities. their total loans and advances, a major component of deposit money bank wealth creation’ money creation process and total credits to the private sector, though still on the increase, could become jeopardize with the presence of the major constraints posted by government regulations, institutional constraints and other macro-economic factors. Therefore, both government and deposit money bank wealth creation should be mindful of the fact that the environment in which they operate is an important factor in the banks’ performance and behaviour. Where the environment is conducive and supportive, performance is enhanced and good lending behaviour guaranteed. But where the environment is unstable and harsh, the banks’ performances suffer.
Also deposit money bank wealth creation should note that even where a good measure of macroeconomic stability is achieved, a lot needs to be done by them in order to ensure good lending behaviour. Apart from the recommendations that are given below, deposit money bank wealth creation should seek enhanced cooperation amongst one another on one hand and the regulators and supervisors on the other hand.
Such enhanced cooperation will promote understanding and resolve possible conflict that may arise in the objectives of the regulators and that of operators. It therefore follows that efforts should be made by deposit money bank wealth creation to enforce the most easily realizable policies and good credit management in every situation.
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