University of Nigeria Research Publications

NWABACHILI , Ikenna

Aut

hor

PG/MBA/96/19287

Title

Consumer Behaviour as a Tool for Assessing the Credit Worthiness of Bank

Borrowers

Facu

lty

Business Administration

D

epar

tmen

t

Marketing

Dat

e

October, 1998

Sign

atur

e

CONSUMER BEHA VIOUR AS A TOOL FOR ASSESSING THE CREDIT WORTHINESS

OF BANK BORROWERS

IKENNA NWABACHILI REG. NO: PG/MBA/96/79287

DEPARTMENT OF MARKETING UNIVERSITY OF NIGERIA

ENUGU CAMPUS.

OCTOBER 7998

CONSUMER BEHAVIOUR AS A TOOL FOR ASSESSING THE CREDIT WORTHINESS OF BANK BORROWERS

IKENMA NWABACHILI IGWEDIMMA REG. NO: PG/MBA/96 /19287

DEPARTMENT OF MARKETING UNIVERSITY OF NIGERIA

ENUGU CAMPUS.

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRA TION (MBA) IN MARKETING

SUPERVISOR: PROFESSOR UK W U I. UK WU DEPARTMENT OF MARKETING

b

UNIVERSITY .OF NIGERIA ENUGU CAMPUS.

OCTOBER 7998

CERTIFICATION

I certify that MR. NWABACHILI IKENNA IGWEDIMMA, a postgraduate student in j

the Department of Marketing and with the Registration Number PG/MBA/96/ 19287,

coinpleted this research work for the award of a Degree of Master of Business

Administration (MBA) in Marketing under my supervision. To the best of my

knowledge, the work is original. . $ 0

Y V - Prof. Ukwu I. Ukwu Dr. Alex lfezue Supervisor I I Head of Department

DEDICATION

This research work is dedicated to the Almighty God who is my help in ages past and my hope for years to come. He is my ever present help in times of need. He alone initiated

and funded the pro'gram and above all saw me through in all things. God, I am grateful.

To you be all the glory, honour power and adoration forever more. Amen.

PREFACE

'- One of the legacies of the Structural Adjustment Program (SAP) is the establisli~nent of multitude of financial institutions all struggling for the lean purchasing power of about 100 J

nlillion Nigeria.

Expectedly, this upsurge in the number of operators has given rise to fierce competition among them. As a result, many are constantly positioning and repositioning themselves in order to remain relevant and indeed grow in the industry. They have learnt not only to attractively package their services but to deliver such services faster and more efficiently than others.

Traditionally, banks (and most other financial institutions) perform two major functions - taking money from'the surplus (investing) sector of the economy and giving them out to the deficit (borrowing) sector in forms of credit. Where as the former is relatively simple or has been made so by the high technology employed in the contemporary financial industry, the later still remains very complex, elusive and frustrating. Since it is necessary for financial instit~~tions to lend so as to earn interest (income) what is required is that these institutions must sltillfully meet the challenges posed by bad debts. To start with, the bad debt problem in the Nigerian banking industry is on the increase and is caused by the current credit evaluation considerations of banks. These considerations hinge mostly on the financial ratios derived from the audited accounts of prospective borrowers. Since these accounts are

1 1

historical in focus (i.e. they report past performances) and since an average Nigerian borrowcr will likely fake such accounts to report only the good aspects of his business operations, the current evaluation practice is due for a change.

This research aims at finding out how consumer behaviour analysis (a verihble marketing tool) could be deployed to the assessment of borrowers' credit worthiness. The research work was cond~tcted only with two merchant banks and two commercial banks.

Finally, this project is reported in five chapters. While chapter one introduces the work L

generally, chapter two reviews some relevant and related literature. The methodology of the research is contained in chapter three while chapter four presents and analyses the generated data. .The summary of findings, recommendations for better lending operations and conclusion are all contained in chapter five.

. .

ACKNOWLEDGEMENT

Taking a retrospective view of how i t all started and the systemtic way i t all ended, I

feel obliged to acknowledge first of all the invaluable assistance of my dearest Aunty Mrs - Margereth Okeke. Mama, you have actually sown a seed in my life which will actually

germinate to bear fruits.

I also feel delighted to acknowledge'th'e immeasurable assistance of my dear parents Mr

& Mrs Eliezer Nwabachili and the understanding and selfless assistance of my Chairman

Mr. Emenike Hy. Muoneme the M.D. of Hydon Int'l Ltd. I am very grateful to you all

and I can never disappoint you people. s 0

I am also grateful to my supervisor, Professor Ukwu I. Ukwu for his fatherly supervising

role. Sir, you are ;eally helpful to me. I am delighted passing throi~gh your supervision.

The assistance of my brother Chigbo and my friends i n the progrilm Chidi, Chinedu and

Ify Unobuagha is highly appreciated.

OCTOBER 1-998 NWABACIIILI IKENNA I.

TABLES OF CONTENT

CERTIFICATION ............................................................ I DEDICATION .............................................................. I I PREFACE .............................................................. 111 ACKNOWLEDGEMENT .................................................... IV

CHAPTER I . INTRODUCTION 1.1 Background of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.11 Nature of banking during the colonial era . . . . . . . . . . . . . . . . . . . . . . . 2 1.12 Banking during the post independence era . . . . . . . . . . . . . . . . . . . . . . 2 1 . 13 Banking and Structural Adjustment Programme . . . . . . . . . . . . . . . . . . . 4 1.14 Effect of SAP on Banking Institutions and Regulation . . . . . . . . . . . . . . . 5 1.2 Statement of Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.3 Research objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.4 Statement of Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.5 Significance of study 11 1.6 Limitations to study k2

CHAPTER 2 . BANK CREDIT 'IN NIGERIA: LITERATURE REVIEW AND TI?EORETICAL BACKGROUND

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.2 Bad-debt situation in Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.3 The deficiencies in the current lending considerations in Nigeria . . . . . . . 17 2.4 Bank lending and its legal framework in Nigeria . . . . . . . . . . . . . . . . . . 20 2.5 Consumer Behaviour (Character) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.51 Determinants of Borrower (Consumer) Behaviour (Character) . . . . . . . . . 24 2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

CTTAPTER 3: RESEARCH SCOPE AND METHODOTAKY

3.1 . Sources of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.2 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

. 3.3 Data Collection method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.4 Method of Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

CHAPTER 4 . DATA ANALYSIS AND HYPOTHESIS TESTING

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . , 34 4.2 Presentation of data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.2.1 Qualitative data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.2.2 ~uantitative data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.3 Analysis of DataIHypothesis Testing . . . . . . . . . . . . . . . . . . . . . . . . 46

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Hypothesis one Testing 46

CHAPTER 5 . DISCUSSION AND INTERPRETATION OF RESULT

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Summary of findings 48 5.2 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

APPENDIX I . Sample of Interview questions . . . . . . . . . . . . . . . . . . . . . . 55 APPENDIX I1 . List of Commercial and Merchant Banks surveyed . . . . . . . . . . 57 APPENDIX 111 . List of Tables .... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banking is arguably the oldest modern industry in Nigcria, albeit, it has not

become what it should be. The industry has in the main, nurtured some of I

the Nigeria's younger industries and economic sectfirs. For example, it

alongside government, spearheaded the capital market and engineered the

birth and growth of the modern industrial sectors'.

m ,

Banking in Nigeria started in 1891 with the commencement of business by

the African Banking Corporation founded by Elder Dempster. In 1894, its

business operations were taken over by the newly established British Bank

for West Africa (now First Bank Plc). This was followed by Barclays Bank

(D.C.0) (now Union Bank Plc) established in 1917. These two banks

dominated the scene until the 1930s. Essentially, they were established to

service the commercial and administrative interests of then Colonial power.

Because of the discrin~inatory practices of the two Ranks, the indigenous I I

business/political group was forced to go into the banking business in spite

of its lack of technical knowledge, acute shortage of skilled manpower and

low capital base'. Thus, the first indigenous Con~mercial bank, the Nigeria

~ndk t r i a l and Commercial ~ a n k , which was established in 1929, but went

into liquidation in 1930. Thereafter, several other incligenous banks came

into existence but most collapsed out as fast as they came, except for the

National Bank of Nigeria, established in 1933, Agbonmagbe Bank (now

Wema Bank), established in 1945 and the African Continental Bank,

established in 1947.

1.1.1 NATURE OF BANKING DURING THE COLONIIIL ERA

During the Colonial period, the banking system was characterized by factors

such as the relative newness of a banking culture, low market penetration,

country-wide branching and until 1952, complete liasses-faire operation3 i.e.

Policy of Non-Interference. A very important feature was the widespread

frlilure of the indigenous banks, due mainly to lack of skilled manpower,

under-capitalization, mismanagement, expatriate domination and government

action/inaction. The rapid rate of failure led to the setting up of the Paton

Commission of Inquiry in 1948. The Commission's recommendations which

were centered on regulation and control of the banking industry, were

enacted into law by the thep ,Colonial power in 1952. J

The most important development in the banking sector during the pre-

independence era was the establishment of the Central Bank of Nigeria in

1958 with the aims and objectives of performing the traditional jobs of

Central Banks as well as developing new arrangements and institutions in the

financial system and controlling the activities of such financial institution^.^

The first ten years of independence witnessed the Central Bank of Nigeria

at work, monitoring, executing and controlling the monetary and banking

policy of the government - in conjunction with the Federal Ministry of

Finance. The main guideline was the Central Bank of Nigeria Act of 1958

with subsequent amendments in 1959 and 1962. A new decree, Decree No.

24 of 1991 has however been promulgated recently to replace the Central

Bank of Nigeria Act of 1958.

I . i . t R~NICING DURING THE POST INDEPENDENCE ERA During the sixties, the banking system was still dominated by the

commercial banks which were predominantly foreign owned and an adoption

of the British banking conservative attitudes. The major features of this are

branch banking, conservative lending postures, urban banking orientation

and risk-averse stance. In 1960 and 1961, two discount houses were \ I

established and they acted more or less as merchant banks. .

The first monetary circular was issued in 1969, and in addition, a new

comprehensive banking ac t was promulgated also in 1969. The rules and

regulations contained in this Act served as guidelines for establishing and conducting' banking business in Nigeria until very recently when a new

comprehensive decree, Decree No. 25 of 1991, was promulgated to serve

as guideline for all banks and other financial institutions.

The 1970s witnessed a lot of new and dramatic development in the banking

industry in Nigeria. First, full merchant banking business started. Second,

the enhanced oil receipts, coupled with the need for physical developnlent

facilities through the estab,li$hment of more branches of existing banks,

decentralization of banks and services and machinery, leading to the creation

of area offices in major commercial/industria1 centres to improve efficiency

and service delivery, the unprecedented inflow of foreign exchange from oil

sales, increased banks' liquidity tremendously. Third, the restructuring in

the mid-1970s brought about by the indeginization decree changed the

ownership structure of the foreign banks. Prior to this time, banks could be

owned 100 per cent by foreigners, but with the decree, banking business

was placed in schedule 11. Under this schedule, ownership structure was 60

per cent indigenous and 40 per cent foreign. Consequently, there were , \

changes in the names of the biggest banks to reflect the restructuring. To

complement activities o f ' the only development bank, others were

esiablished, and some existing institutions were restructured into

developnlent banks. A savings bank was also created.

1.1.3 BANKING AND STRUCTURAL ADJUSTMENT PROGRAM (S.A.P.)

. The Nigerian Banking System subsequently remained fairly stable until 1986

when the Babangida Administration, under pressure from the International

Monetary Fund (IMF) and' the World Bank launched the Structural

Adjustment Programme (SAP). Prior to the introduction of SAP,

development in the banking industry in the first half of the 1980s did not J

change much from what obtained in the 1970s. SAP was designed to

achieve balance of payment viability by altering and restructuring the

production and consumption patterns of the economy, eliminating price

distortions, reducing the heavy dependence on consumer goods, import and

crude oil exports, enhancing the non-oil export base, rationalizing the role

of the public sector, accelerating the growth potential of the private sectors

and achieving sustainable growths.

To achieve the above objectives, the main strategies of the programme were

the adoption of a market ,determined exchange rate for the Naira, the

deregulation of external trade'and payment arrangements, reduction in price

and administrative controls and more reliance on market forces as a major

determinant of deregulation ~f the banking system. Bank licensing policy

was liberalized giving rise to the proliferation of banks and other finance

institutions. Between 1985 and 1992, for instance, the number of licensed

con~mercial and merchant banks on the country increased from 40 to 120.

Most of these new banks Were no more than Bureaux de Changes. The

deregulation of the economy, loopholes and sometimes outright evasion of

the law made it possible for some of the new banks to survive and'prosper

by mainly buying and selling foreign exchange6. b

The deregulation of the economy created both risks and opportunities for the

banks and there was increased competition not just among banks but also % ,

with finance houses which were also a creation of government deregulation.

SAP therefore fundamentally changed the structure of banking in the

country. The new spirit of competition meant that the decision as to

whether banks should fail or not was now to be determined by market

forces. Government therefore focused on protecting the depositors - thus

the establishment of the Nigeria Deposit Insurance Corporation (NDIC).

1.1.4. EFFECT OF SAP ON BANKING INSTITUTIONS AND REGULATIONS

Other institutional and regulatory developments entrenched by SAP include

the Nigeria Export Import Bank (NEXIM) introduction of the accounting I I

standard for licensed banks and the CBN prudential guidelines for banks, the

establishment of bureaux de change offices, promulgation of the Companies

and Allied Matters Decree (CAMD) of 1989, the National Ho'using Decree

(1992), the CBN Decree 24 and the Banks and Other Financial Institution

Decree 25 (BOFID) of 1991.

Others include the raising of equity capital requirements for commercial and

merchant banks on two occasions, the deregulation of the foreign exchange / market, the introduction of the guidelines for discount houses and the

subsequent licensing of three discount houses. Also far reaching has been

the developments in the management of monetary and credit policy by the

CBN; the most remarkable being the withdrawal of government deposits

from commercial and merqhpt banks in 1989, the abolition of off-shore

guarantees for naira denominated facilities and the frequent issuing of

stabilization securities7. h

~ l f these developments (some good, some bad and some ugly) took place as

aftermaths of SAP. However, due to the rapidity of their occurrence, they

have put the banking scene in a constant state of flux. They have also

5

created uncertainty and confusion like never before in the industry and have

made the business of banking more complex and risky. I I

The most visible result of these forces has been the emergence of distress d

in the banking system which first came to the limelight in May 1989 after

the withdrawal of treasury funds from the licensed banks. According to an

official figures, the number of banks which the CBNINDIC classified as

tcchnically~insolvent or distressed rose from 8 at the end of 1991 to 60 as

at the end of 1995. The distress in our banking institutions emanated from

a number of factors, including adverse economic condilions/incidence of bad

debts, the prior initiative policy environment (over-regulation), capital

inadequacy, manpower problems, political interference in management,

impact of deregulation etc. ' The rise in the number of crisis in the banking

system has heightened general interest in institutions that are experiencing

~lifficulties.~ I I

As has been mentioned earlier, the economic down-turn since the early

1980s is reflected by high inflation, large fiscal deficits, a heavy debt burden

and slow growth. There has also been significant disintermediation in the

system, with M2/GDP ratio declining from 32.3 per cent at the end of 1986

to 24.5 per cent at the end of 1992. Domestic credit as a percentage of

GDP declined from 49.2 per cent to 25.9 per cent over the same period.

Of this GDP to 10.7 percent of GDP by 1992. Arising from this stress in

the economy, many borrowers, both Corporate and Individual as well as Government have been unable to service their loans thereby making many

financial institutions to cdnie under severe distress. The inability of

borrowers to repay their loans gives rise to poor quality assets the number

oAe cause of bank distress9, ,

In 1996, the quality of risk assets of the distressed banks continued to

deteriorate as seventy-five percent (75%) of the total loans and advances were classified as non-performing loans or bad debts." This has adverseby

affected some banks that have been declared technically insolvent as a result J

of improper credit administration. The CBN has so far taken over some

banks, liquidated some and suspended the licenses of others due to I I

insolvency. Furthermore, a number of banks suffering the menace of bad

debt have taken to restructuring and are consequently forced to face labour crisis." Finally, a draft law to criminalize refusal to repay bank credit and

fraudulent lending by bank officials was made in 1993 for signing into law.

This bears eloquent testimony to the great concern bad debt problem is

currently generating in the Banking industry.

1.2 STATEMENT OF PROBLEM

The Structural Adjustment, Programme as discussed above has made the

success or failure of the financial sector predominated by banks dependent

on such factors as creativity and innovation in new product development and

modification, efficiency of ,product delivery, effective marketing activities

of banks and their responsiveness to customer needs.

Credit is a vital product of banks and goes a long way in determining their

long-term survival and success. This is due largely to two reasons. First,

it constitutes one of the most sought-after services by customers; i t therefore

effect customer satisfaction and by implication bank success. Secondly, it

provides one of the avenues for bank income. Income no doubt translates

into profit and by extension into survival. In recognition of this, banks have

consistently been increasing their lending activities. The aggregate banking

system credit to the economy was W 18.9 billion in 1991 192, N26.8 billion

in 1992193 and W34.3 billion in 1993194 re~pectively'~. No doubt, the

availability of credit is invaluable for the real economic growth of any

nation since it enhances resource allocation and capital formation.

Nevertheless, credit remains the most vulnerable and most risky of all bank

assets (See Table one). Despite the precautions usually taken when a loan

proposal is initiated, the growing incidence of bad and doubtful debts and

their attendant effect on operating results have given rise to serious concern

for owners and managers of bank funds. Non performing loans are rising

so dis-proportionately to good credits such that the credit size that can be

extended by the banks to new borrowers is curtailed. The problem rose to \ I

such alarming level that the apex regulatory authority of banks - the Central

Bank of Nigeria - in conjunction with the Nigeria Deposit Insurance

Corporation - NDIC) promulgated the prudential guideline that would help

classify banks risk assets according to their degree of realizability. It also

compels banks to recognize income on loans only when realized. The

ultimate impact of the guideline was the sanitization of the credit portfolio

of banks and the exposure of the managerial and operational inefficiencies

of banks in terms of credit administration. For instance, while First Bank

of Nigeria Plc, recorded in 1989, an after tax profit of over 105 million, a

whopping sum of W205 million was recorded as after tax loss in the

succeeding year (1990) when the prudential guidelines were applied.I3

Additionally, the ratio of non-performing loans to total advance was 30% in '

1991, 33 % in 1992 and 3 1 $, in 1993 re~pectively.'~

Quite a number of banks have been declared technically insolvent, one of

the reasons being improper credit administration. The Central ~ a n k of

Nigeria has so far taken over five banks, liquidated five and suspended the

licenses of two others due to insolvency. Furthermore, a number of banks,

suffering the menace of bad debt have taken to restructuring and are

consistently forced to face labour sizes. Finally, a draft law to criminalize

refusal to repay bank credit and fraudulent lending by bank officials was I I

made in 1993 for signing into law. This bears eloquent testimony to the

great concern bad debts problem is currently generating.

This research was necessitated by this big plague on banks. It therefore

aims at evaluating the current lending considerations, exposing any inherent

inefficiencies and proposin,g better and workable alternatives.

1.3 RESEARCH OJXJECTIVES

There is an indication that out of the total book values of the risk assets of i

the five closed banks amounting to BJ6,135 million as at December 31st,

1995, the Corporation recovered a total of N 105.21 million representing 2 percent of the total risk asset. Although recoveries made during the year exceeded that of 1994 which was only BJ13.54 million, the total amount

recovered appeared insignificant when compared with the size of the loan

portfolios of the distressed banks. The poor quality of the risk assets of the

failed banks was partially responsible for the low recovery made. Also,

unsecured loans extended to insiders which in most cases were fraudulently

granted constituted about 35 per cent of the total loan portfolio.15

From the portfolio of bad ,and doubtful debts maintained by banks, it is

obvious that banks in their credit appraisal give more attention to profit

making than the risk elements. Risk is the chance or danger of loss. It is

the likelihood that an expected stream of earnings or cashflow from a project 6

have associated with it, the undesired chances of non-attainment.

I L * Evidence abounds to show that at the point of signing a loan agreement, the

borrower has the collateral to repay the loan. However, there are three

possible reasons a borrower may default payment: the borrower lacks the

resources to repay, experiences a temporary liquidity problem, or simply

refuses to repay. The first may not be the most important when we consider

that all loans by banks in Nigeria are supposed to be secured. The second

requires, an extension of loan period or further moratorium or granting of

an extra fxility. The most difficult is the borrowers refusal to repay. I I

Hence, no effort is made to use loans for the purpose they were granted

resulting in repayment difficulties. If there is willingness to repay, the

dobtor at all times does everything possibly to repay. Regrettably, the

contemporary lending decisions making process places undue emphasis on

studying financial statements more for the borrowers past and present

performance than their future potentials and yet the later is the key to risk

n~inimization.

The Objective of this research is to have a new insight into consumer

behaviour analysis - a ma'rketing tool - with a view to determining its

applicability to the task of bank lenders in their credit evaluation task.

Specifically, the objectives I of I this research include to:

Analyses the current lending consideration;

Expose the inherent deficiencies and inefficiencies in the credit

appraisal process which lead to bad debt;

Highlight the importance of consumer (borrower) behaviour as the L

single most important lending criterion;

Find out the extent to which this is realized in the present practice.

, ,

( 5 ) Highlight the determinants of consumer (borrower) behavior for bank

STATEMENT OF IIYPOTIIESIS

This research is set to prove or disprove the following hypothesis:

(a) That consumer (borrower) behaviour analysis could ensure better performing bank credits.

I I

SIGNIFICANCE OF STUDY

Commercial and merchant banks as well as other lending institutions, i

academics and students of business administration and researchers would

find the outcome of this work significant.

With the careful implementation of the result of this work and the conscious

application of it, bad debts in the financial services industry would likely be

solved. Most banks credits go bad ab initio due to lopsided credit analysis

and too much emphasis on' financial statement analysis which are not

futuristic but merely mirror the past and present performances. Although

the research may not eliminqtq bad debts in banks, it would definitely reduce

it to an insignificant level by developing a credit analysis model which

would highlight the a11 important canon of lending - character.

Furthermore, this research would highlight the synergy between finance and

marketing. People tend to parochially confine marketing to buying and

selling forgetting that marketing is multi-disciplinary and multi-dimensional.

The study will show in an unequivocal terms, the place of marketing in

banking.

1.6 LIMITATIONS TO S T I T ~ Y

Almost every human endeavour or phenomenon has a number of limitations.

This researcher is therefore constrained by a number of factors;

Firstly, the demand of the interview questions could not be met as many

respondents could not e;isily supply the necessary answers. They were

conscious of the corporate secrets and as such short circuited some

information that are necessary for this work.

It is noteworthy that due to these limitations and others, this present research

will not cover all aspects orland issues involved in lending or in consumer

behaviour. It does not also delve into other aspects/functions of banking just b I

as it was not interested in the in-depth study of the historical background,

structure or efficiency of banks nor those of other financial institutions.

It concentrated on only two merchant banks and two commercial banks in

Nigerian and studied their Head Office credit departments. Few customers

of Nigeria Arab Bank were interviewed since by the nature of this research,

little of their opinion is needed. Nigeria Arab Bank was chosen because of

the researchers affiliation with it.

. NOTES

. .

"Hundred years of Banking" Business Concord (April 20, 1993) P. 1.

I I

Ebhodaghe John U. "Nigeria Deposit Insurance Scheme, Problen~s and

Prospects". 1989 P.3.

E.jiofor Peter N.O. "Banking Failure in Nigeria, Nature and Causes" Journal of Mana~ement Studies. (Vol. 1 No. 1) 1991 P. 1

Ojo and Adewunmi "Banking and Finance in Nigeria" Graham-Burn,

Bedforshire 1982 P.24.

Central Bank of Nigeria, Monetary Policy in Nigeria (CBN Brief 95/03)

P.4. . .

C.U. Uche "The Nigeria Failed Bank decree: A critique" (1995) 10 JIBL I I

435 at 439.

Osayanley R.K.O. "The Banking Industry: An overview" Business Concord

(April 20, 1993). . ,

John U. Ebhodagbe, "content,' . . Context and Indices of distress in Banks:

Practical approach to definition of distressed Banks" NDIC quarterly review

~ ~ r i l 1996 p.17. \

Ibid.

"NDIC 1996 Annual Report and Statement of Account" p.42.

I I

% (1 1) "Owena Bank Crisis: Bankers . . National Union Wades in" Financial guardian

. .

(March 29, 1993) p.3.

(12) Agusto & Co. Ltd "Banking Industry Financial Conditions" 1993 Banking Industry Survey (September 15, 1994) p. 13.

(13) Whisky A.E. "Credit Administration and Banks profitability". Financial

Guardian (January 25, 1993) p. 1 1 1 I

(14) Agusto & Co. Ltd, op.cit.

(15) NDIC 1995 Annual ~ e ~ o r t : and Statement of Accounts.

To start with, a debt is bad when the possibility of recovering same becomes

remote. A bad debt is thus prima facie unrecoverable. It is sadtiming that

despite the fact that banking business has been operating in Nigerian for the

past century, the menace of bad debts is still growing at an alarming rate.

Osayameh3 traced this problem I , to poor analysis of financial data, depleting

quality of financial statements, bad credit judgment, incomplete knowledge

of customer's activities, bad management of loan accounts, inadequate

project monitoring, misrepresentation and dishonesty of customers, over

reliance on security as well as insensitivity to economic and environmental

trends. Although some of these causative factors are extraneous to the

lender, it is obvious that certain early warning signals could accurately

indicate the transition of a credit from performing to non-performing. Such

signals include protracted delay in producing financial statements, heavy

borrowing from other sources, inability to meet prompt loan instalmental

repayments, poor performance of custon~er's current account with the

lending bank etc.

Notwithstanding the causes ,of a bad debt or its manifestations, it is pertinent

to minimize, or if possible eliminate it. This will not only impact positively

on the bank's profitability, it will also give borrowers a greater access to

larger loan resources. The ultimate implication of these to the macro-

economy is predictable. It is perhaps in realization of this that Central Bank

of Nigeria and the Nigerian Deposit Insurance Corporation jointly came up

in 1990 with the Prudential Guidelines for Banks. This has successfully

exposed the magnititude of bad and doubtful debts in the financial system

and subsequently has triggered enough attention to the problem of non-

performing credits. i

Nevertheless, please recall that bad debts do not just occur. They follow

naturally from the deficiencies or inefficiencies of the process that brings

about credit decision. I

2.3 THE DEFICIENCIES IN THE CURRENT LENDING CONSIDERATIONS IN NIGERIA

Generally, good lending decisions are preceded by thorough credit

analysis/evaluation. Osaze4 identified common lending risks as those of

business, marketing, political, financial, exchange rate and management.

The essence of credit analysis is to appreciate the customer and the

transaction risks; optimally allocate the bank's limited financial resources;

and effectively price the credit.' In the words of Henderson6

sensible lending therefor involves making a reasonable

attempt to measure risk and decide whether the return to

be made justifies the risk being taken. Because guidelines

have been developed for looking at lending

propositions.. . . .

These guidelines or principles are popularly known as the canons of lending

and include; according to H. P i e r ~ o n , ~ character, capacity, capital, condition

and collateral.

CHARACTER in credit is the willingness of the borrower to repay. It is

all about the honesty, integrity, and attitude of the loan applicant in dealing

with others and towards obligations. It is perhaps the most important but

subjective principle.

CAPACITY refers to the borrower's ability to repay. Often determined by

the performance, profitability, and liquidity of the applicant, tapacity

determines' the propensity of the applicant to duly service the facility if

granted.

CAPITAL by definition is the shareholders' equity in a company. It is the

maximum cumulative loss that can be incurred by a company and still it will . . be able to repay all obligations to all the creditors upon liquidation of the

company. 1 I

-.

I

CONDITION means the prevailing circumstances within, the industry in

which the company operates.

COLLATERAL is any factor (tangible or intangible) which off-sets wholly

or in part, certain weaknesses in character, capacity, capital and condition

factors. For anything to serve as collateral, it must be valuable, marketable

and adequate.'

The contemporary lending consideration in banks seems to be lopsided. It

seems to place too much emphasis on capital, and collateral to the detriment

of the all-important character and condition. Specifically, credit analysis in J

banks is dominated by and focusses on such considerations as the nature of

business of loan applicant,, the need for the facility applied for, the asset

conversion cycle of the company, the viability, feasibility and profitability

of the proposed project, the repayment terms, security for the facility, loan,

loan pricing, tenor and funding, marketlindustry analysis, financial analysis,

risk appraisal and organizational structure.

The current lending considerations concentrate on evaluating the project, the

company, the industry and financial performance of the company. As has

earlier been pointed out, it appraises the viability, feasibility, profitability,

marketability and the risky nature of the proposed transaction to be financed.

While company analysis focuses on the nature of the company's products,

its competitive position in the industry, characteristics of the company's

factor market and the issue ,of management, industry evaluation assesses its

stability, size, expansionlgrowth and industry life cycle stage. i

Financiallratio analysis seems to dominate the entire credit analysis. Under

the Companies and Allied Matters Decree, all companies incorporated in

Nigeria are required to prepare and publish to their shareholders an annual

report and'accounts encompassing the balance sheet, the profit and loss

account and the statement of sources and uses of fund. cash flow statement

is also required for credit purposes to spy into the company's future since

the previous three are predominantly historical in approach and focus.

Relationships among items in a financial statement are analyzed with the aid

of financial ratios. These ratios are various and varied and have been

grouped by Van Horne9 into liquity, debt, profitability, and coverage. I b

However, Okafor1° re-classified the ratios into loan safety, management

efficiency and profitability ratios. No matter the classification or specific

ratios adopted, the ultimate aim is to gain a better insight into the

prospective borrower's performance and qualification for the sought facility.

Explaining the ratios, Osuchukwu" pointed out that liquity ratios show the

ability or otherwise of a firm to live up to expectations on its maturing

short-terms financial commitments. Gearing or leverage ratios measure the

level of firm's financing from debt; activity ratios measure the effectiveness

and efficiency in the use of a firm's resources. Finally, profitability ratios

are the positive resolution by a firm of intricate intervening variables in a . .

business matrix.

The contemporary credit ,eyaluation process is fraught with numerous

defects. Not only do the financial statements report past activities which

nuy not be relevant for future considerations, they are mostly "doctored"

and are therefore far from being factual. Furthermore, accounting involves

approximations while published financial statements are prepared for a

widen audience with different interests.

Secondly, Nigerian lenders over-emphasize on security. Iloha" noted that

collateral are fraught with business risks since the value given to a security

depends either on the fee the owner is willing to pay the assessor as value

for the professional valuation, or the value given them by related .business

experts. He also observed'that owners of acceptable marketable collateral

cpnstitute an insignificant percentage of loan seekers. Furthermore, disposal

of security property by any, bank has been shown not to be in the best

interest of the bank in the long run. It portrays the bank as being callous, J,

vindicative and inefficient.

Additionally, the current lending practices give room for subjectivity

whenever Factors like integrity and other personal c!~aractcristics of the

customer are being considered. Factors like ethnic, social and political

considerations may be given high values.

2.4 BANK LENDING AND ITS LEGAL FRAMEWORK IN NIGERIA

Not minding the menacing occurrences of bad debts and the deficiencies in I I

contemporary lending considerations, it is obvious that credit is the life wire

of any banking institution. To start with, lending (credit) is borne out of the fact of life that while some people have excess resources, others have

deficit. Banks as financial, intermediator try to close this income gap by

taking funds (as deposits) from the buoyant sector for on-lending to the

needing sector through their . credit e activities. 1

In doing this, they have developed a number of specialized credit products.

According to AdeusiI3; these include but are not limited to the following:

Overdruft: The permission'given to a customer to draw money in excess of

the balance on his account up to a certain limit. It usually has one year

tenor. I I

Term Loans: Any non-revolving facility whose repayment is agreed to be

made in specified installments or in bulk within a given time. It may be

short term (within one year) or long term (over one year) depending on the

tenor.

\

Current Line: Expires within one year. The bank has the sole option to

w,ithdrawlcall the line.

Euuipment Lease; A financial arrangement under which a lessor (banker)

buys an asset required by a lessee and gives it out to the lessee while

retaining legal ownership.

I 1

Iniport/Export Finance; As the name implies, is the sponsorship of a

customer's importation/exportation. It is usually secured by the subject

goods (asset based). , ,

B&ing Finance: Usually a short-term advance which repayment is -

expected from another source (i.e. not through the performance of the asset

funded by the loan).

Comniercial Papers and 13ankers Acceptances; A commercial paper is promissory note issued by a company at a discount to an investor for cash

for a specified maturity period. Bankers Acceptances, on the other hand,

are like commercial papers only that they have a bank's guarantee. I I

The credit objective of any bank is to have a credit portfolio mix that will

balance risk of loss, profitability, ease of management and liquidity which

are often conflicting. a ,

The impact of credit on any economy is quite profound hence the fiscal and

monetary authorities are concerned with its level at any time. In fact, bank

lcnding operates within an certain legal framework. The Banks and other

Financial Institutions Decree (BOFID)I4 contains several statutory

restrictions on the lending abilities of banks. Section 20, requires the

consent of the Central Bank of Nigeria (CBN) before certain transactions

could be legally undertaken by banks. These include lending without

security and lending any aqo,unt in excess of 20% of commercial and 50% of merchant bank shareholders' funds to any one borrower. Further, the

Companies and Allied Matters Decree specifies the maximum r a t i ~ of loan

to shareholders' fund that any company may maintain. Also, the yearly

Central Bank of Nigeria (CBN) credit and monetary policy guideline^'^ specify inter alia credit ceiling on banks, sectoral allocation of credit, loan

to rural borrowers and small-scale enterprises; and grace period on loans for

agriculture. Finally, the Prudential Guidelines guide banks' classification

of their loan portfolios as well as their provision for doubtful and bad loans.

It is worthy of note here that in compliance with the BOFID Decree, banks

take as security for their credit exposure to customers a number of

collateral. Gerrad and Doyle16 broadly classified these securities as either \ I

direct or indirect depending on who secures the facility and who enjoys the

benefit of the facility. OsayameI7 specifically identified land, debentures,

guarantees, stocks and shares, insurance policies, domiciliation of payment

and charges over credit balances as the common securities in banks. While

agreeing with Osayameh, Adeniji18 also identifies trust receipts and

equipment ,leasing as further securities. However, Adekanye19 noted that

there are four ways in which security can be taken, these according to him

are lien, pledge, mortgage or assignment.

2.5 CONSUMER 13EHAVIOUR (CHARACTER)

Having considered thus far the problems of bad debts and the defective

credit considerations that bring them about, we shall now evaluate consumer

behaviour and the factors that influence the behaviour.

J

A consumer refers to the ultimate user of a prod~ct '~. According to

Longman Dictionary of Contemporary English2', a consumer is a person

who buys and uses goods and services. Philip Kotler" has this to say.

The consumer market consists of all the individuals and

households that buy or acquire goods and services for

personal consumption.

This notwithstanding, there is yet no specific statutory definition ,of bank

consumer or customer but in Great Western Railway Vs. London and

Cpuntry Bank (1901) and Ladbuoke & Company Vs. Todd (1914)" it was

established that "to constitute a person a customer, he must have opened an

account with the banker and have at least one transaction on the account".

An account in banks could ,be credit, current, savings, deposit, etc. 8 ,

Cnnsun~er behaviour refers to the acts of consumers in acquiring and using

goods and services including the decision process that precedes or

delermines it. When related to the banking business, consumer behaviour

analysis seeks to determine who the bank consumers/customers are; what

banking services they patronize; why, how, when and where they patronize

as well as why they behave the particular way they do in the course of their

banking transactions. I I

It must be admitted here, however, that the study of consumer behaviour

p;lrticularly in banks is not an easy one. Difficult as consumer behaviour

analysis may be, however,, marketers must consciously pursue this study

since by understanding the "why"of consumer behaviour, the marketer can

ofien detect trends that in .effect allow him to peer into the futurez4. It is

actually this future that banks are concerned with while analyzing credit

proposals.

Furthermore, it is important to realize that buying behaviour does not begin

or end at the instance a consumer commits money in exchange for goods or

services nor when he obtains a loan. Lazer and Culley" pointed out that

any purchase involves a process that begins when a consumer starts to

recognize a need or desire for product, perhaps months before the actual

exchange takes place. And the process is not complete until the consunler

possesses the product/service and has evaluated its utility , which can be long

after the act of exchange. :

This, by irriplication, means that the decision to borrow and/or repay a loan

often precedes the extension of the loan and continues much after, This is

very important to lenders. 4

The consumer behaviour decision process, according to O ~ u a l a ~ ~ involves

need recognition, information search, alternative evaluation, purchase

decision (action) and post-purchase evaluation. These steps are all-

encompassing and are, however, independent assortment of actions but

usually are interrelated and frequently overlap. Since the borrower is a

special type of consumer, emphasis should go beyond this .decision process

to the actual use of the credit. Study should be made of the intended

project, its viability and feasibility, the total funds needed and the adequacy

of sought credit, how self liquidating the project is, how familiar the

borrower is with the project, how marketable the output of the project would

be etc. For novel projects, a feasibility report is needed. This should as

well be studied.

Furthermore, analysis of the behaviour of corporate borrowers should

norn~ally focus on the shareholders, the Directors as well as the management

of such entities. Since a company exists only in the contemplation of the I 1

law and it is not human, it is absolute that its operators reflect the joint

effort of all three parties above. A company's character (behaviour) can

therefore be seen as a mirror of those three parties. relevant information on

the behaviour of bank bk-owers could be obtained from banks via

confidential status reports; trade sources such as suppliers, trade associations

etc; major customers; and competitors.

2.51 Determinants of Borrower (Consumer) Behaviour (Character)

Consumer behaviour is rarely the result of a single motive. Several factors

combine to make one buy or'consume a product or service; or a borrower

to promptly repay or default repayment of a facility. Behaviour primacy

theory holds that common,b,ehaviour results mainly from an individual's , interactions with the environment. As the environment changes, individuals

tend to cope by changing their behaviourZ7. Thus Bank Borrowers'

behaviour is determined by economic, cultural, social, psych.ological,

personal and political factors:

b

Econoniic Factors

Economics was the first discipline to construct a specific theory of buying

behaviour. The Marshallian Economic theory postulates that consumers

strive to maximize their utilities and do this by consciously calculating the

consequences of any (purchase) decision. The key economic factors that

influence borrower behaviour are income, expenditure patterns, cost of h L

investment project, and marketing success of the project. Expenditure

pattern refers to the relative extravagance of the borrower in spending. The

higher the extravagance, the higher the chances of borrowing and defaulting.

The need for borrowing and the amount of loan needed depend on the cost

of the project for which the credit is sought. Sin~ilarly, the higher the

marketability of a borrower's project, the higher the chances of generating

enough income to repay any facility, ceteris paribus. J

Ctrltural Factors

A person's culture arguably, exerts the broadest influence on his or her

hehaviour. Lazer and ~ u l l e ~ ~ ~ defined culture as the learned patterns of

symbolism and behavior that are passed from one generation to the next; it I b

represents the totality of values that characterize a society. ~ w o k o y e ' ~

asserted that people live in a cultural milieu that embraces their history,

values, morals, customs, art, and language. Kotler3' also identified four

types of sub-cultural influences on consumers as nationality groups, religious

groups, racial groups, and geographical areas. Although there is no

empirical evidence in Nigeria, it is certain that variom sub-cultural groups

influence people's values, morals, custon~s, etc. and that the later factors

ir~lluence people's acceptance of credit as a source. of finance and their

attitude towards loan obligations.

Social Fwtors

Social psychologists view the,social environment as the chief determinant of

ccgnitive structure as well as of perceptual bias. Cognition is the process

by which we make sense of the things we perceive. Man, as a social being,

is often influenced by other persons and by group he belongs or aspires to

belong to. These may include family members, friends, neighbours, office

colleagues, reference groups, social roles, statuses,etc. The fear of being

ostracized by church or club members or reference groups could motivate

a borrower to repay a facility. Conversely, bad friends and neighbours

could influence one to default repayment of facility extended to him.

Additionally, one's social status and role in the society could predispose him

to perceive credit facilities

Psvchological Factors

Such psychological factors

.in a certain way.

I I

as motivation, perception, learning, beliefs and

aititude have profound impact on consumer behaviour. A motive is a need

that is sufficiently pressing toadrive the person to act. Thus, needs give rise

to drives which energize motives which then stimulate behaviour. Many

psychologists have developed theories of human motivation. Abraham

Maslow propounded the hierarchy of needs theory which sought to arrange

human needs into physiological, safety, social, esteem and self actualilation

and which shows that people are motivated at different times by these

different needs. Sigmond Ereud in his psycho-analytic theory assumes that

the real psychological forces shaping people's behaviour are largely complex

and unconscious even to the individual himself. Frederick Herzberg's two-

factor theory reduced Maslow's motivator into satisfiers and dis-satisfiers. I I

Kotler3' is of the opinion that a motivated person is ready to act. How he

eventually acts is influenced by his or her perception of the situation. He

contends that different people in same environment can perceive a

phenomenon in different ways due to the perceptual process of selective

attention, selective distortion and selective retention. Gestalt psychology

argues that our perception depends on patterns formed by various stimuli

and on the order of our expressions. We thus see an object in relation to 1

its background or environment12.

Furthermore, when people'act they learn. Learning refers to changes in

people's behaviour arising from experience. It is the more or less

permanent acquisition of teqdpcies to behave in particular ways in response

to particular situations or stimuli. Even Pavlov theorized that all human

bchaviours are learnt. Learning, he and other learning theorists believe, is 1

produced via the interplay, of drives, stimuli, cues, responses and

reinforcement.

Finally, beliefs and attitudes are acquired through acting and learning and

influence consumer behaviour. A belief is a descriptive thought that a

person holds about something. Attitude is a disposition to act. It comprises

cognitive, valuative, and action tendencies.

From the above analysis, the propensity to repay a facility depends inter alia

on the borrowers belief and attitude which are learnt and which depend also I I J

on perception and motivation.

Personal Factors 4 I

Consumer behaviour is also influenced by the consumer's personal

characteristics, notably his age, life-cycle stage, occupation, economic

circun~stances, life style, personality and self-concept. There is no

gainsaying the fact that older people are less prone to taking risks than

youngsters. This means they are more likely to repay debts than the later

people. Same argument goes for people at the mid and later stages of their

life-cycle. Additionally, professionals with sound occupation, personality,

self-concept and life-style will be higher in debt repayment rate than the

others. I I

Political Factors

Human beings are politica1,animals. Their involvement in politics project

them into limelight and thus make them less prone to loan defaults.

Additionall'y, political environment may make or mar a project financed by

debt and consequently enhance or hinder the prompt repayment of such debt,

2.6 CONCLUSION , L

It is disheartening that despite the scourging implication of bad debts to

banks, borrowers, and the economy; and despite the high incidence of it in

Nigeria, little study has been conducted on it by independent researchers.

The available statistic is mostly compiled by the Central Bank of Nigeria,

NDIC and ,banks.

This section has reviewed the problem of bad debts in Nigeria, the deficient

credit evaluation considerations that bring it about and the various types of

credit. It has also highlighted borrower behaviour and the factors that

determine them as a way of showing the link between borrower behaviour

and bad debts. The rest of this report will detail the methodologies of this

research, the various qualitative and quantitative data generated as well as L

their analysis, development of an optimal lending model and a sample

application of the model.

NOTES

"Draft Law to Criminalise -Bad Debtors Await President's Signature,"

Business Concord (June 8, 1993), p. 15.

Agusto & Co. l993/1)4 an kin^ Industry Survey (sept. 15, 1994), Appendix

1-6.

Osayemeh, R.K.O., Practice of Banking, Volume 2, (London: Collins

Publishers, 1986), p. 164.

Osaze, E.O., "Risk Analysis and Credit Appraisal Techniques", Financial

Guardian, July 14, 1992), p.13 and Financial Guardian, (July 20, 1992),

p.9.

Okoli, Ikenna, "Credit Analysis and Management; case study of Royal

Merchant Bank Limited," Paper Delivered at Royal Merchant Bank

Limited's staff Training session, July, 1993. p.3. h I

Henderson, M.J., Banking Operations: Study and Revision Manual,

(London: DP Publications Ltd. 1988)~. 1 15. a 8

H. Pierson Associates Ltd., "Credit Analysis," Paper Delivered at the

Comprehensive Banking Course Organbsied by H. Pierson Associates Ltd.,

I.agos, June, 1993, p.2.

Okoli, Op, Cit., p.5. i

V p Horne, J.C. Financial 'Manaprement and Policy, 8th Ed., (New Delhi:

Prentlce-Hall of India Ltd., 1990), p.755.

10. Okafor, F.O., Investment Decisions: Evaluation of Projects and Securities, ,.

(London: Cassell Ltd., 1983), p. 136.

, ,

11. Osuchukwu, Chuma, "Understanding Financial Ratios," Business Times,

(April 12, .1993), p.21.

. 12. Iloha, Chukwuemeka, "Bank and Collateral for Loan" Financial Guardian,

(July 6, 1992), p.1.

- 13. Adeusi Sehinwa, "Different Classes of Credit Facilities and their Impact on

Lending Portfolio," Lecture Delivered at the Bank Lending and Credit Administration course, Organized by Financial Institutions Training Centre

(FITC), Yaba Lagos, ~ e b r u a ' r ~ , 1993, pp. 2-1 1.

14. Federal Ministry of Justice, Banks and other Financial Institutions Co-decree

24 of 1991, Federal Republic of Nigeria Official Gazette, Vol. 78 (Federal

Government Press, Lagos, Nigeria), June 25, 1991, p. 140.

15. Central Bk of Nigeria, Monetary and Credit Policy Guidelines for 1993

Fiscal Year, Monetary Policy Circular No. 27, (Federal Government Press),

February, 1993, pp. 12-14.

16. Gerrard, P. and Doyle, E;P., Law Relating to Banking, 2nd Ed., (UK:

Northwick Publishers, Worcester, 1987), p.B2.

I I

17. Osayameh, Op. Cit., pp. 133-150.

18. Adeniji, O.A., "Types of Securities for Bank Lending; Documentation and

Perfection," Lecture at Bank Lending and Credit Administration Course,

Loc. Cit., p. 13. h

19. AJekanye, Femi, Practice of Banking, Volume I , (London: Collins

Publishers, 1986), pp. 121-122.

20. Daris Kenneth R., Marketing Management, (USA: Johnwiley and Sons,

Inc., 1981), p. 119.

21. Procter Paul, London ~ i c i i d n a r ~ of Contemporary Enelish, Low-Priced

Edition, (UK: Longman Publishers, 1978), p.236.

22. Kotler Philip, Marketing Man,a~ement: Anal sis. Planning. Implementation, I and Control, 6th Ed., (New Delhi: Prentice-Hall of India Plc, 1988), p.

23. Adekanye, Op. Cit. pp. 14-15.

24. Wentz, W.B. and Eyricn, G.I., Marketing: Theory and Application, (USA:

Harcourt, Brace and World, Inc., 1970), p. 182.

25. Lazer, W. and Culley, J.D. Marketing Management: Foundations and

Practice, (USA: Houghton ~ i f f l i n Co., 1983), pp. 354 - 355.

26. Osuala, E.C., Fundamentals of Nigeria Marketing, (Uruowulu-Obosi,

Nigeria: Pacific Publishers, l988), pp. 78-79.

27. Lazer and Dulley, Op. Cit., p. 371. . .

28. Ibid, p. 381.

29. Nwokoye, N.G., Modern Marketing. for Nigeria, (London and Basingstoke:

The Macmillan Press Ltd. 1981), p.35.

30. Kotler, Op. Cit. p. 176. I I

32. Hilgard, E.R. and Atkinson; R.C., Introduction to Psycholom, 4th Ed.,

(New York: Harcout, Brace and World, 1967), p.19.

CIIAPTER THREE

RESEARCH SCOPE AND METHODO1,OGY

b The research has been designed iobgather, organize and analyse useful data and

extract factual information relevant to this work. This is with a view to making

the outcome meaningful to academics and practitioners alike.

. . 3.1 SOURCES OF DATA

Data for this study were generated from both primary and secondary

sources.

First hand (primary) data. were collected from the Head Office Credit

Departments of 4 existing commercial and merchant banks in Nigeria.

From these sources came numerous data on the contemporary lending

considerations in banks, the inherent deficiencies and inefficiencies, and the 1 I

extent of application of consumer behaviour studies in credit analysis by

banks.

As is evident in chapters one and two, a number of already-existing facts

recorded by previous researchers and writers were also obtained from

secondary data sources. These sources consisted mostly of the libraries of

the University of Lagos and selected commercial and merchant banks,

Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance

Corporation (NDIC); others include friends, marketing professionals and

financial consultants. L

. .

3.2 RESEARCH DESIGN

I 1

Research design embodies the plan, structure and strategy for obtaining a

reliable and valid result. In lieu of this, the researcher personally ' administered the questionnaires to some bank customers as a way of

generating reliable data for, the study.

m m

The researcher thought it wise to make use of personal interview and

deliberations as this guaranteed objective answers to the research questions.

The factor of objectivity which was central to the success of this research

work con~pelled the researcher to draw up questions which, to a reasonable

degree, led to objective responses. J

The pop~lation of this study comprise of two exisling comn~ercial and

merchant banks in Nigeria and the personal interview were carried out in

their Head Office Credit ~k6artments. Moreover, the researcher used oral

interview to elicit first hand oral information from respondents. Each

question was aimed at gathering valuable data sufficient to either test the

hypothesis previously stated or to support other questions.

3.3 DATA COLLECTION METHOD

As stated earlier, the cardinal method adopted in collecting needed data from

the above sources was the survey method. Extensive use of personal

interview was made by the researcher, and questionnaires wmused to

extract information from few borrowers of the banks.

The researcher used the interview tool to elicit first-hand oral information I

from respondents. Interviews were conducted for the Heads of the Credit

Departments of the four banks surveyed.

The data collected from the primary sources through the instrument of

personal interview were used to test some of the developed hypothesis. The

balance of the hypothesis was tested using secondary data. The hypothesis

were tested at 95 % degree of confidence using one way analysis of variance.

L I

CHAPTER FOUR

DATA ANALYSIS AND HYPOTHESES TESTING - , 8

4.1 INTRODUCTION

The main aim of this work is to expose the inefficiencies of the

contemporary lending considerations and to suggest ways in which consumer

(borrower) behaviour - the most import single lending consideration, could

be used to assess the credit worthiness of bank borrowers. The field survey

carried out by means of oral interview and little questionnaire yielded a

number of results which are presented and analyzed in this chapter. 1 I

4.2 PRESENTATION OF DATA

The data generated from the field survey are categorized into qualitative and

quantitative and are presented below:

4.2.1 OUA1,ITATIVE DATA:

From the oral interview/discussions held with the heads of the credit

departments of the four banks it was discovered that:

A. Bank lending is always sectorial in nature. These sectors include:

Agriculture, Mining and quarrying, manufacturing, real estate and I I

construction, public utilities, General commerce, Transportation and

Communication and Finance and Insurance. I

, It is under these sectors that the borrowers or consumers are grouped.

These borrowers are classified thus:- Federal, State and Local

Governments, Parastatals (Federal and State), Companies, Individuals,

etc. Each of these sectors or their combination form the target

audience of any particular Bank and this form a major consideration

in loan granting to the customer. Suffice it to say that banks have

enough monitoring device put in place before chosing any sector as

their target or area of operation.

The credit controllers, all a g k d that:

B. At the point of evaluating credit proposals, thc cannons of lending

(e.g.) Capital, Condition, Collateral and Capacity are all analysed and

their worthiness approved remaining the unpredictable cannon - character (consun~er behaviour) which could be affected positively or

negatively by the environmental factors as time progresses. This

could result to non-payment of the loans granted, as a result, banks

especially the merchant banks are in constant check and monitoring

of the debtors as they lend huge amounts more than the commercial

banks. . .

C. In assessing a borrowers character, the following issues should be

addressed and analyHeh as earlier shown in section 2.51. This is

generally agreed upon by the respondents.

- How many times has the prospect borrowed from banks and other

lenders.

- Has the prospect ever defaulted loan repayment.

- Iias any bank ever turned down his loan request and why.

In the case of individual borrower, the following are considered:- ,

- . What is the age, sex, religion, occupation, social status, education, \ b

income etc of the applicant?

- How many wives/husbands, children and other dependents does he or

she have? , ,

- Any association with or participation in government?

- Is he ostentatious or conservative in his life style?

- What is his attitude to loans (National Cake, Favour, Business etc).

- What reference group does he have and what social group does he 1 I

belong to?

In the case of corporate entity:-

, ,

- Emphasis should be placed on the character of the Directors,

shareholders and management of such entities. These are the people

who give the organization it's specific character.

- Information on corporate entities could be obtained through the

instrument of status enquiry administered on other banks, borrower's

suppliers, distributors, major customers and con~petitors.

The merchant banks were of the opinion that bank lending should be \ b

based on long period of satisfactory relationship and good knowledge

of the prospective borrower. Lenders must emphasize relationship

management in their operations. The monitoring process should be

structured and well . streamlined. Specific customers should be

assigned to specific bank officers whose duty it would be to constantly

monitor the operations, businesses and performance of these clients.

The con~mercial banks were not left out of these but they approach

them in a less stringent way.

b

E. The debtors interviewed were of the opinion that bank lending should

be structured and priced in such a manner that will meet borrower's

needs and motivate them to repay. The high interest rates placed on

these loans form part of the reason for loan default. However, the I I

banks on their own were of the opinion that most debtors are not

always ready to pay unless they are closely monitored and the purpose

of the debt achieved before they could pay. The interest rate a 0

according to them has nothing to do with repayment.

- The banks are of the opinion that there is nothing like good or bad ' debtor, it all depends on the prospects willingness to pay irrespective

of time and ability to meet up to the obligations of the loan. This is

a function of the customers behaviour.

F. The banks are of the opinion that despite all their credit proposal assessment, no bad debt is known at the time of loan approval. There

are a lot of factors thai may result to bad debt. There may be shift

in government policies, instability in socio-political and economic

system etc. These may lead to an adverse investment climate that will

shorten the expectation of the borrower towards the loan repayment.

In situation whereby the borrower has clean records or has exhibited

good behaviours in the past, the Bank can re-schedule the repayment

period to accommodate him. However, in situation whereby the

borrower doesn't have the fund to pay back but has a viable business

that is yielding, the bank can still extend the loan period for him or

grant him more loans to ensure full repayment.

G. In situations of non-performing loans or customers indebtedness to the

Bank, Banks pull several efforts, which are geared towards amending I

the customers character to ensure recovery of' the loan. Amongst - these efforts are persuasion, moral suasion, subtility, debt collectors,

debt restructuring or at worst legal actions against the b~~rrower .

Moreover, the credit,controllers are trained in such a way that they

. understood the common psychology of borrowers (i.e. fast borrowing,

slow- payment).

4.2.2 OUANTITATIVE DATA

The loan distribution by 'banks (Commercial and Merchant) are done

sectorally. The banks distribute these loans with special consideration to the

sectors they are particularly interested in which of course must be yielding

and promising. However, investment in a sector by a bank demands that the

customers must have proven some great sense of integrity and reputation

concerning, pay-back on these loans. This is as a result of good consumer

behaviour. The table below shows the report on credit by sector, borrower

and their performance:

From the table above, we can discover that loans to Agriculture is only 1 1 -02%

of the total loan despite the incentive of grace period for Agriculture by the CBN

credit and monetary policy guidelines. There is no sectoral allocation to mining

and quarrying. The reason for this is because the industry has not developed and

investors in this sector are only self subsistence.

The manufacturing sector has only 18.48% of the total credit. This is so because

the free trade policy of the government that allows importation of every kind has

adversely affected the manufacturing sector and the feasibility of the loan

repayment period since the sales of locally produced goods are often choked up by

the imported products. However', because of the frequent change in government

and political instability, the Real Estate and Construction industry has only 4.48%

of the total bank credit just because contracts are being revoked arbitrarily by any

new government. . a

The loan to public utilities is only 7.34% of the total credit. It is surprising to

note that the bulk of this loan was granted only to state governments out of which

3.08% are non-performing loans. It was therefore gathered that this is the singular

cause of distress in most of the distressed state-owned banks.

General commerce which comprise of import, export and domestic trade has

31.6% of the total credit. 3.2% of this figure is for non-performing loans. This

area is feasible and most of the banks are focused nlainly on import/export

financing since the payback on loans to this area is always guaranteed , except in cases of seizure of product by the custom agents which form the singular

cause of non-performing loans in.this area. Companies and individuals form the

major customers of importation hut, with the state government in exportation.

However, because of the viability on this area of general commerce, most of the

banks interviewed are glued to this tcl the extent that they are always ready to pay

any .charge for violating the CBN credit and monetary policy guidelines which

points out some sectors incentives should be geared at (e.g.) Agriculture, rural

borrowers, small scale enterprises, etc. . .

Moreover, the transportation and communication industry'has 27.06% of the total

credit. Credit to this area aros'e 'because of the proliferation of mass transit

business and the privatization of the media. These businesses pron~ises quick

return on investment (R.O.I.) and thus the embrace by the banks. -

, ,

The state governn~ent's credit is 21+27% of the total credit which was drawn for

development in , Agriculture, Public utilities, Export, Transportation and

Communication. Suffice it to sa; that most of these loans often turn out to be non-

performing loans because of bad management by the state governments that took

them. The percentage of local governments credit to total credit is 7.6% which

was drawn for the acquisition of commercial properties, Transportation and

Communication. The local governments most often find it difficult to pay back

these loans because of arbitrary change in government.

The* percentage of the total cred'it owed by companies to the total credit is

44.96%. This cuts across Agriculture, manufacturing, commercial property,

importlexport, transportation and communication. On the other hand, the

percentage of the individual's loans . , to total credit is 26.15%. We can therefore

say that the companies and individuals form the greater percentage of banks target

customers because of their attitude and behaviour in loan repayment.

In the business circle as shown in the table above, the sectors that attracted the

highest credit is the Import business and Transportation and Communication

business which share 25% and 27% of the total credit respectively. The

percentages of the non-performing loans in these areas are almost insignificant.

This shows that the business is profitable. This is as a result of the free trade

policies by the government, the proliferation of mass-transit business, the I 1

privatization of the media amongst others.

However, it should be noted that the majority of the debtors in these areas

comprise mostly of individuals and companies whose characters and behaviour

could easily be determined within the credit appraisal period and their loan

purposes easily evaluated for efficiency. It therefore points to the level of -'

consumer behaviour effect on credit worthiness.

On the other hand, the Federal, State and Local Governments and most of their

parastatals d o not easily get access to loans reason being the inconsistency in their

administrative positions. This therefore poses a problem for effective project

monitoring and consumer behaviour analysis. b

Moreover, the manufacturing sectbr despite their market limitations constantly

enjoys credit facilities from the banks. Once a project is termed feasible and the

character or behaviour of the debtor not ascertained, the loans will not be granted.

It was discovered that 90% of the non-performing loans in the manufacturing . ,

sector were loans on viable projects that promises a good return on investment

(ROI) which suddenly becomes unyielding. This therefore portrays the relevance

of consumer behaviour analysis in'credit appraisal as feasibility studies and project 1

viability are not enough to ensure a steady return on credits.

INDUSTRY

TOTAL 36,432 38.23 4,116 22.77 40,548 33.73

SOURCE: Agusto & Co. 1996197 Banking Industry Survey.

BAD DEBTS

IN NM

In the commercial bankhg sub-sector, bad debts rose in aggregate naira terms by

22% in 1995 and further by 48% in 1996. Among merchant banks, it declined by

RATIO TO

TOTAL LOANS

13% in 1995 but rose in 1996 by 80%.

BAD

DEBTS IN

NM

Furthermore, table two shows that bad debts when expressed as percentage of total

BAD

DEBTS IN

NM

RATIO TO

TOTAL

LOANS

loans booked declined in commercial banking sub-sector by 1 5 % in 1995 but rose

marginally by 12% in 1996. Similarly, in the merchant banking group, it shrank

by 12% in 1995 and thereafter rosebsharply by 14% in 1996. This shows that the

RATIO TO

TOTAL

LOANS

problem of non-performing credits is worse in merchant banks than in commercial

banks. This result is collaborated by the fact that merchant banks by their nature

are risk takers. They lend more than commercial banks do. . ,

More explanations from the credit units of the banks surveyed suggests that the

total of W 18.2 billion non-perfoirning credits booked in the Banking industry in

1996 wire spread among the various types of credits (refer to Section 2.4) as

shown in table three below:

TABLE FOUR: DISTRIBUTION OF BAD DEBTS BY LOAN TYPES (1996)

LOAN TYPES

SOURCE: Agusto & Co. 1996197 Banking Industry Survey.

\ I

Ovard I.;I l I

Term Loan

Currant Line

Equipment

Leasing

I~nportlExport

Finance

Bridging

Finance

CPlBA

TOTAL

Although in aggregate terms, term loan, current line and overdraft portfolios have

the highest figures of bad debts representing 28%, 21% and 16% of the total

industrial figure respectively, there is generally no pattern of variation by tenor of

facilities. This implies that the variation may have been caused by other factors

like character than by tenor of facility.

. A survey of the opinion of credit staff of banks on cannons of lending shows that

COMMERCIAL BANKS

2,962

4,723

3,579

1,472

8 18

1,144

1,654

16,352

though emphasis was being misplaced on the various cannons of lending as in the

(NM)

column marked "Actual" min table four below, it should ideally be as shown in

column marked "Ideal" in same table. b 5 ,

%

MERCHANT BANKS

18

29

22

9

5

7

10

100

(NM)

INDUSTRIAL TOTAL

% (NM) - -

469

338

206

750

3 8

75

1,876

%

25

18

11

40

2

4

100

2,962

5,192

3,917

1,678

1.568

1,182

1,729

18,228

16

28

2 1

10

9

6

10

100

TARLE FIVE: TI11' RANKlNC O F T H E FIVE CANNONS O F LENDING

SOURCE: Agusto & Co. 1995196 Banking Industry survey. J

An ideal rating of the five critical factors in lending should be character, capacity,

condition, capital and collateral. This runs counter to the contemporary position

where over reliance is placed on ~ollateral and condition to the detriment of other

considerations. The opinion in the colun~n "ideal" looks correct and is supported

by common sense and rational judgement. A person who is morally sound would

repay facilities extended to him' dven in adverse conditions. This aspect of

customer behaviour forms the basis for credit worthiness in banks.

i

TARLE SIX: T l l E PROPORTION O F I'NS~DER LOAN T O TOTAL LOAN

SIN BANK

OPINION

Capital

Capacity

Condition

4 ( NAB

TOTAL

TOTAL LOANS ADVANCED AS AT CLOSING NM

COMMERCIAL BANKS

TOTAL LOANS 6t TOTAL LOANS TO PERCENTAGE OF ADVANCES AS lNSIDERS AS AT INSIDER L O A ~ AT DEC. 1995 DEC. 1995 TO GENERAL

1.M NM L O A N 1

Actual(%)

10

9

25

SOURCE: Agusto & Co. 1995156 Banking Industry survey.

A<

Ideal (%)

15

2 1 s

16

43

5

100

MERCHANT BANKS

Character

Collateral

Total

INDUSTRY TOTAL

Actual(%)

29

12 i

17

7

35

100

10

46

100

Actual(%)

18

10

22

9

4 1

100

Ideal (%)

3

18

13

60

6

100

Ideal (%)

10

20

15

50

5

100

The table above shows the proportion of insider loans to the total loan of

sclectecl banks. The percentage of insider loan to total loan in Merchant

Banks are 10.5% and 11.45% which portrays that Merchant Banks do

extend their credits more tom the outsiders. Moreover, insider loans seem

to dominate in the Commercial Banking Credit extension. The percentages

as show above are 71.9% and 57.8%. This is attributed to the fact that

insiders (State Governments, Director, etc) has greater percentage of the

ownership structure of these banks.

However, it was discovered that most distressed hlerchant Banks were

destroyed by this singular factor, which only resulted to non-performing

credits and thus distress. As a result of this most banks' credit appraisal

process for insider borrowers becomes more stringent.

4.3 ANALYSIS OF DATAIHYPOTI-IESIS TESTING z 8

To test the various hypotheses developed in Section 1.4, we use some

empirical data:-

4.3.1 IIYPOTIIESIS ONE

The focus of this research is to assess the extent to which consumer

behaviour could be considered in credit evaluation to secure high-quality

credit portfolio for banks. To test the hypothesis "that consumer (borrower)

behaviour analysis could \ensure better performing bank credit", the

respondents as earlier outlined in table five would be analyzed.

From the table, an overwhelming 50% of the respondents agree that

chqracter (borrower behaviour) is the most important lending factor to

analyse in making credit judgement. This is outstanding considering that 1

only l o % , 2 0 % ' 15% and 5 % of the respondents felt that capital, capacity,

condition and collateral respectively are important lending considerations.

The hypothesis shall be tested using the said data as fullows:

First, we hypothesize that:

H, = Character is the most important lending criteria for performing

credits.

H , = Character is not the most important lending criteria for

performing credits.

At 0.05 level of significance and

V , = K-1 = 2-1 = 1 and V, = K(r-1) = 2(5-1) = 8

We shall accept H, if computed F is less than the observed F We find that:

. .

I I

However, to compute F, we have that

SST = ( 1 85)?+ (260)'+ (200)'+ (53012+ (SO)'+ (2 112+ (1 53)'+ ( I 10Y+ (502)' + (44)2-(2.064)2

2 x 5

SSW = SST - SSB = 290,086.40 - 16,321.60 = 273,764.80

MSW = SSW/K(r-1) = 273,764.8018 = 34,220.60

Therefore, F = MSBIMSW = 16,321.60/34,220.60 = 0.48 I 1

b

We therefore accept the null hypothesis. This is because the computed F = 0.48 is less than the

observed F = 5.32.

CONCLIJSION: , ,

In an ideal credit evaluation situation, the credit officer should give 50% attention to borrower character.

This would ensure good quality risk asset portfolio.

CHAPTER FIVE . ,

DISCUSSION AND INTERPRETATION OF RESlJLT

5.1 SlJMMARY OF FINDINGS

The Nigerian banking industry has for the first time in its over one century

of existence witnessed the kind of phenomenal changes that accon~panied the

1986 Structural Adjustment Programme (SAP). The program forced the

banks into unorthodox activities all in the bid to survive. Most of the banks

did not survive an as a resili massive distress in then banking industry.

However, the few surviving ones are battling with the lending function of

banks which from their traditional role. This research, having examined in

detail the bad debt problem and their possible solutions has come up with

a number of findings.

It has in relation to hypothesis one "that insider borrowing form greater

percentage of the bad debts recorded in Banks".

Firstly, it was discovered that insider borrowing was the bane of most of the

distressed banks and as a result the few surviving ones, part of which form

the sample of this study have mounted adequate check on this phenomenon. I t

Consequently the greater percentage of the bad debt record in banks are not

from insider borrowing as the credit policy of most banks has been

restructured to extricate this plague. 80 percent of the respondents attests

to this. b

Secondly, ,the respondents were in general agreement on the second

hypothesis "that consumer (borrower) behaviour analysis could ensure better

performing bank credit". The opined that the character (borrowers'

behaviour) is the single mokt'important lending consideration which should

he treated seriously in the lending process or credit judgement.

Furthermore, it was established that borrower (consumer) behaviour, though

a subjective thing, could never-the-less , , be analyzed objectively for lending

purposes.

Furthermore, it was established that no bad debt is known at the time of

loan approval. There are a lot of factors that may result to bad debt J

situations which include, shift in government policies, instability in political

and economic system etc. These may lead to an adverse investment climate

that will shorten the expectation of the borrower towards the loan

repayment. In situations like this, it is only the customer's (borrower) past

record with the bank (behaviour) that can determine whether his loan period

can be re-scheduled or extri incentive granted as opposed to taking outright

action to recover the loan.

Bank lending is always sectorial in nature. These sectors include:

Agriculture, Mining and quarrying, manufacturing, real estate and

construction, public utilities, General commerce, Transportation and

Communication and Finance and Insurance.

It is under these sectors that the borrowers or consumers are grouped.

These borrowers are classified thus:- Federal, State and Local

Governments, Parastatals (Federal and State), Companies, Individuals, etc.

Each of these sectors or their combination form the target audience of any

particular Bank and this form a major consideration in loan granting to the b I

customer. Suffice it to say that banks have enough monitoring device put

in place before chosing any sector as their target or area of operation.

At the point of evaluating 'credit proposals, the cannons of lending (e.g.)

Capital, Condition, Collateral and Capacity are all analysed and their

worthiness approved remaining the unpredictable cannon - character

(consumer behaviour) which could be affected positively or negatively by

the environmental factors as time progresses. This could result to non-

payment of the loans granted'.

In assessing a borrowers character, the following issues should be addressed and analysed as earlier shown in section 2.51.

, ,

- How, many times has the prospect borrowed from banks and other

lenders.

- Has the prospect ever defaulted loan repayment.

- Has any bank ever turned down his loan request and why.

In the case of individual borrower, the following are considered:- I I

- What is the age, sex, religion, occupation, social status, education,

income etc of the applicant?

* 8

- How many wives/husbands, children and other dependents does he or

, she have?

- Any association with' or participation in government?

* - Is he ostentatious or conservative in his life style?

- What is his attitude to loans (National Cake, Favour, Business etc).

- What reference group does he have and what social group does he

belong to?

In the case of corporate entity:-

- Emphasis should be placed on the character of the Directors,

shareholders and management of such entities. These are the people

who give the organization it's specific character. J

- Information on corporate entities could be obtained through the

instrument of status enquiry administered on other banks, borrower's a 0

suppliers, distributors, major customers and con~petitors.

Bank lending should be based on long period of satisfactory relation and

good knowledge of the prospective borrower. Lenders must emphasize

relationship management in their operations, The monitoring process should

be structured and well streamlined. Specific customers should be assigned

to specific bank officers whose duty it would be to constantly monitor the

operations, businesses and performance of these clients.

Bank lending should be st;ukured and priced in such a manner that will

meet borrower's needs and motivate them to repay. The high interest rates

placsd on these loans form part of the reason for loan default. L

- However, there is nothing like good or bad debtor, it all depends on b

the prospects willingness to pay irrespective of time and ability to

meet up to the obligations of the loan. This is a function of the

customers behaviour.

No bad debt is known at the time of loan approval. There are a lot of

factors that may result to bad debt. There may be shift in government

policies, instability in socio-political and econonlic system etc. These may

lead to an adverse investment climate that will shorten the expectation of the 0 0

borrower towards the loan repayment. In situation whereby the borrower

has clean records or has exhibited good behaviours in the past, the Bank can

re-schedule the repayment period to accommodate him. However, in

situation whereby the borrower doesn't have the fund to pay back but has

a viable business that is yielding, the bank can still extend the loan period

for him or grant him more loans to ensure full repayment.

In situations of non-performing loans or customers indebtedness to the Bank,

several efforts, which are geared towards amending his (customers)

character are put in place io'ensure recovery of the loan. Amongst these

efforts are persuasion, moral suasion, subtility, debt collectors, debt

restructuring or at worst legal actions against the borrower. Moreover, the

credit controllers are trained in such a way that they understood the common , 4

psychology of borrowers (i.e. fast borrowing, slow payment).

With a view to making banks credit portfolio more performing and in line

with all the facts presented thus far, the following recommendations are not

only relevant but obviously timely now that the banking industry is

undergoing period of revolution. . \

(I) All lending must emdh'asize borrower behaviour. This for corporate b

entities encompass the characters of the Directors, shareholders and j

management of such: organizations since companies as legal entities

exist and are given their character by these people. Business proposals

are inseparable from the entrepreneurs. It is the investors who see to

it that the project is properly developed to yield profit. Obviously,

the entrepreneur should be the banks collateral.

(2) Credit officers and rfidnagers must know their customers very well

since such knowledge easily help in loan administration. Relationship

management should be encouraged. A banker should be able to

assess the customer's needs, potentials, constrains, strengths and < ,

weaknesses, and designs products that will satisfy him. Through it

also,, he can assess the customers' willingness to repay. It is not

proper for banks to lend long-term funds to work-in prospects or new

customers. Such prospects must have been in account for a time long

enough for the lenders to have studied the loan applicants before any

application is considered and granted.

(3) The Central Bank of Nigeria (CBN) or the Bankers Committee should

establish or cause to be established a Credit Bureau in Nigeria which

would give banks mo're information on customers. Banks would thus

be able to check from the credit bureau the credibility of any

customer wanting to borrow from them. This would, no doubt,

enable banks to blacklist . , all those who have track record of default in

loan repayment.

(4) All loan agreement must be incentive compatible. At the time the

loan is made, the lender must be sure that after disbursement, it will I

be in the borrowers interest to repay the loan. Lenders must be

satisfied that loans given must improve the borrowers position. All 8

these need to be brought to the knowledge of the borrower.

5.3 CONCLUSION

the importance and applicability of consumer behaviour Having researched

analysis on the determination of credit worthiness of bank borrowers, we

make bold to conclude that this is the ripe time for banks to make a sharp

turn and embrace "character-" as a very vital focal point for credit analysis.

This is necessary because banks in their quick approach to their businesses

have made a lot of defective credit judgements that if not checked now could

totally erode the customer co'nfidence in the industry.

The researcher feels that if the recommendations of this work is embraced

and quickly exploited, more and more banks would further fall easy preys a ,

to gullible and criminally-minded business men in the century who engage

in bank borrowing as an end and business. They often go about trying

banks in turns and enticing credit personnel who are bound to yield due to

lack of a standard credit worthiness indicators.

L

APPENDIX I

DEPARTMENT OF MARKETING SCHOOL OF POST-GRADUATE STUDIES

UNIVERSITY OF NIGERIA ENUGU CAMPUS

OUESTIONS ON CONSUMER BEHAVIOUR AS A TOOL FOR ASSESSING THE CREDIT WORTHINESS OF BANK BORROWERS

What are your bank's procedure for loan application.

How many applications for'ldan did you receive within the last and present

financial year.

How many was approved and granted within this period and what are the < ,

major considerations.

What percentage of these are old custon~ers and new customers respectively.

What are the different categories of the borrowers that get their loan

application approved and granted.

Do the borrowers have outstanding performance record with the bank in lieu

of loan repayment. b I

What are your bank's major consideration in credit evaluation. \

For optimum performance'of booked credits, what is the most important

cannon of lending. J

9. Do you addict strictly to the laid down procedure for credit approval or are

there other factors that influence the credit approval process.

10. Has your bank ever recorded a bad debt.

1 1. What is the percentage of bad debt to total loan portfolio.

, ,

12. When a loan is approved, what are the necessary steps taken to ensure its

payment (monitoring process).

13. Have you recorded any insider borrowing (shareholders, BOD, managers,

etc) within the period in question.

14. What is the percentage of insider loans to total loan.

15. Has there been any bad debt arising from insider loans. 1 I

16. What is its percentage to the total debt.

17. What makes the credit worthiness of a customer (borrower) and what are the

determinants or indices.

18. How do your bank treat bad debt cases.

'APPENDIX I1

LIST OF COMMERCIAL AND MERCHANT BANKS SURVEYED

COMRTERCTAL BANKS

I

(1) FIRST BANK O F NIGERIA PLC. I I

(2) NIGERIA - ARAB BANK

MERCHANT BANKS

(1) FBN MERCHANT BANKERS

(2) AFRIBANK INTERNATIONAL LTD (MERCHANT BANKERS)

APPENDIX I11

LIST OF TABLES

Table 1 : Asset quality of Banks in Nigeria.

Table 2: Annual Report on Credit by Sector Borrowers and Performance.

Table 3: Growth of bad debts in the banking industry.

Table 4: Distribution of bad dehts by loan types.

Table 5: The ranking of the five cannons of lending.

Table 6: The proportion of insider loan to total loan.

I i

BIBLIOGRAPHY

, ,

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(3) Ejiofor Peter N.O. "Banking Failure in Nigeria, Nature and Causes" Journal

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(9) Ibid.

(10) "NDIC 1996 Annual Report and Statement of Account" p.42.

(1 1) "Owena Bank Crisis: Bankers National Union Wades in" Financial guardian

(March 29, 1993) p.3. , . , .

(12) Agusto & Co. Ltd "Banking Industry Financial Conditions" 1993 Banking

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(13) Whisky A.E. "Credit Administration and Banks profitability". Financial

Guardian (January 25, 1993) p. 1 1

(14) Agusto & Co. Ltd, op.cit.

(1 5) NDIC 1995 Annual Report' ahd Statement of Accounts.

(16) "Draft Law to Criminalise Bad Debtors Await President's Signature,"

Business Concord (June 8, ~1993), p. 15.

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I 1

p.9.

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. .

(21) Henderson, M.J., Banking Operations: Study and Revision Manual,

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(22) H. Pierson Associates Ltd., "Credit Analysis," Paper Delivered at the Comprehensive Banking Course Organbsied by H. Pierson Associates Ltd.,

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(23) Okoli, Op, Cit., p.5.

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(29) Federal Ministry of Justice,.Banks and other Financial Institutions Co-decree . 24 of 1991, Federal ~ e p b i i c of Nigeria Official Gazette, Vol. 78 (Federal

Government Press, Lagos, Nigeria), June 25, 1991, p. 140. *

(30) Central Bk of Nigeria, Monetary and Credit Policy Guidelines for 1993 Fiscal Year, Monetary Policy Circular No. 27, (Federal Government Press), February, 1993, pp. 12-14.

(31) Gerrard, P. and Doyle, EIF., Law Relating to Banking, 2nd Ed., (UK: Northwick Publishers, Worcester, 1987), p.B2.

(32) Osayameh, Op. Cit., pp. 133-150. 8 a

(33) Adenij i, 0. A., "Types of Securities for Bank Lending; Documentation and Perfection," Lecture at Bank Lending and Credit Administration Course,

Loc. Cit., p. 13.

(34) Adekanye, Femi, Practice of Banking, Volume 1, (London: Collins

Publishers, 1986), pp. 121-122.

(35) Daris Kenneth R., Marketing Management, (USA: Johnwiley and Sons, Inc., 1981), p. 119. \ I

(36) Procter Paul, London Dictionary of Contemporarv English, Low-Priced Edition, (UK: Longman Publishers, 1978), p.236. ,

a ,

(37) Kotler Philip, Marketing Management: Analysis. Planning. Implementation, . and Control, 6th Ed., (NewaDelhi: Prentice-Hall of India Plc, 1988), p.

0

C: (38) Adekanye, Op. Cit. pp. 14-15. . . , 8

(39) Wentz, W.B. and Eyricn, G.I., Marketine: Theory and Application, (USA: Harcourt, Brace and World, Inc., 1970), p. 182.

(40) Lazer, W. and Culley, J.D. Marketin Management: Foundations and

Pr;rctiw, (USA: Iloughton Mirllin Co., 1 XU), pp. 354 - 355.

(41) Osu;~la, E.C., F_ucJ3menl;\ls of N ~ I M . . I & . ;~rQ:\ijlg, (1 Jruowulu-Obosi,

Nigcriu: l'ilcil'ic Publishers, 1988), pp. 78-79. I d J

(42) L u e r ;ml Dulley, Op. Cit., p. 37 1 .

(43) Ibid, p. 381.

(44) Nwokoye, N.G., Modern Marketin? for Ni~er ia , (London and Basingstoke: The Macmillan Press Ltd. 1981), p.35.

(45) Kotler, Op. Cit. p. 176.

(46) Kotler, Ibid. p. 188. -

(47) Hilgard, E.R. and Atkinson, R.C., Introduction to Psychologv, 4th Ed., (New York: Harcout, Bra& 'and World, 1967), p. 19.