AN ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON PROFITABILITY IN ECO BANK PLC LEVENTIS ROUNDABOUT BY AHMADU BELLO WAY, KADUNA
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AN ASSESSMENT OF LOAN
DEFAULTS AND ITS IMPACTS ON PROFITABILITY IN ECO BANK PLC LEVENTIS ROUNDABOUT
BY AHMADU BELLO WAY, KADUNA
CHAPTER ONE
INTRODUCTION
1.1 Background of
the Study
Attempts to explain the operation of commercial banks began
with the inception of banking institution. Lending has become a vital role in
banking operations because of its direct effect on economic growth and business
department. In most countries, banks and their lending activities have useful
integrated into government policy formulation. As far as banks are concerned,
their role as lenders is important as that of deposit taking into
consideration; the interrelationship in banking system. All commercial banks
have common attributes, they keep deposits for their customers, permit certain
deposits to be transferred by cheques from an individual account to other
accounts in any bank in the country, make loans and invest in government
securities.
It is these common features particularly the holding of
demand deposits that distinguished commercial banks from other financial
institutions, banks like all other business organization have the commercial
objective or primary to objective maximize profit, they do this through
granting of loans and generate interest from such loans, this translate into
profits to banks in their bid to maximize profit.
According to Clarke (2009) problem loans crises as a result
of default in the payment agreement caving undue delay in payment and or
possible loss. In the banking industry, problem are often inheritable
consequence, which have serious cost implication for banks, conservative
lending through suppresses profit while supportive leading the possibility of
default.
We are Nigeria’s leading retail bank, we emerge from the
largest merger and consolidation in Nigeria’s banking industry following the
landmark banking consolidation spearheaded by the Central Bank of Nigeria (CBN)
mire financial institutions with competences in investment banking corporate
and retail banking came together in January 2006 to form ECO Bank.
The banks have 216 business officers spread across the
country and we are working to increase this number in the nearest future it has
7 largest bank by business locations with Head Office at 785, Herbert Macauley
Way, Central Business District Abuja, while the Head Office is at Annex 290A
Akin Olugbade Street, Victoria Island Lagos.
The Bank have seventeen (17) regional offices in Lagos
Island, Lagos Mainland Ibadan, Benin, Port Harcourt, Kano, Abuja, Kaduna,
Bauchi, Minna, Maiduguri, Apapa, Enugu, Makurdi, Yola, Dutse, and Sokoto. This
helps it to maintain one of the fastest decision making processes in the
industry today.
As the Nigerian financial sector grows we are gradually
transforming into a financial super-market with subsidiaries covering
insurance, pensions fund management, share registration and stock broking. In
this regard, we have majority shareholding in Fug Pension Limited, Insurance
Brokers, Caranda Management Services Ltd, Pelican Press and Unity Registration
Ltd in consolidating this strategic business direction. Eco Bank has equally
acquired majority shares in Unity Capital Assurance Plc a leading Insurance
Company.
Today the bank is one of the largest employers of labour in
Nigeria and contributor in Nigeria and contributor to its gross domestic
product (GDP). The bank and its subsidiaries employ about 5,000 people. In the
first year of operation the bank grew other balance sheet size 29% profitability
also grew by 418% to N2.57 billion which is equivalent to USD 20.43m. The
result of the second year of operation also holds great promise.
Services Offered
Eco Bank in line with its mission statement to remain the
best in providing financial services and create superior wealth to their
shareholders has developed numerous in tech. services and product apart from
the traditional product such as saving, current and time deposit accounts. Eco
bank provides a lot of other products and services both locally and foreign
grouped as follows:
a) Core Banking
Services
i. Deposit
Accounts, Current Account, Saving Account
ii.
Domiciliary Accounts
b) International
Banking
i. Foreign
exchange transaction
ii. Travelers
cheque
iii. Export
banking and finance
c) Corporate Finance
i.
Equipment leasing
ii. Loans and
advances
iii. Cash
management services
iv. Import
financing / issuance of letter of credit
v. Consumer,
retail and e-banking
d) Special Banking
Services
i. Issuance
of borides, guarantee and indemnities
ii.
Collection of custom duties
iii. Acceptance
of payment of m-tell bills
iv. Financial
advisory services
1.2 Statement of
Problem
Banks occupy a critical position in a complete financial
system that supply the money and credit need of the economy.
Empirical evidence exist which suggest a positive correlation
between real economic growth and bank; asset and between money supply, banks
asset and economic development are both financial liberalization and repression
school of thought see the development of banking as a critical factor in
economic development of developing countries like Nigeria, this fact is evident
in the assertion that no other financial institution contributes more
significantly to the successful functioning of a nation economy than that of
commercial banks.
Apart from promoting the payment mechanism, banks after an
efficient mechanisms or channel for the mobilization of savings and their
allocation to the problem of most commercial banks is in the area of loan
default. Banking distress occurs when a bank experiences liquidity or
insolvency resulting in a situation where depositors fear the loss of their
deposits and a consequent breakdown of contractual obligation.
1.3 Objective of the
Study
Although there are certain basic condition and procedures
necessary for consummating transaction between the lender (the bank) and the
borrower, none of these conditions completely protest the lender against the
risk of default if the borrower became irresponsible and unable to pay.
The primary objective of this research will be to find
practical means of minimizing the incidence of default on loans in our banks.
To achieve this, the following secondary objectives have been
specified:
a) To identify causes
of loan default on operation of the bank
b) To recommend
measures for reducing cases of loan default
c) To access the
impact of loan default on the profitability of the bank
d) To review existing
literature on problem of loan default
1.4 Significance of
the Study
The importance of this study lies in the fact that the
performance of the banking industry mirrors the performance of the economy an
efficient financial service industry is a pre-requisite for the efficient
functioning of the economy.
A failed financial system is an indication of a failed
economy. A study of bank default therefore will go a long way in expressing the
underlying cause of the distress phenomenon and contribute towards eliminating
obstacles to growth and development in Nigeria.
This research work will also seek to enlighten the general
public, investors in the banking industry customers of banks, the government
and regulatory authorities of the Nigeria banking industry as to the cause and
implications of loan default problem.
This research enhance the operation of commercial bank in
area of loan and credit management as well as to positively affect the quality
of services provided by Eco Bank to the public. The study is significant in
that it would serve as a base for future researchers who will like to carry out
a research on similar topic.
1.5 Research
Questions
The research will seek to find answers to the following
research questions:
a) What are the
practical means of minimizing the incidence of loan default in the bank
b) What are the
causes of loan default on the operation of the bank?
c) Are there
measures for reducing cases of loan default?
d) Is there any
impact of loan default on the profitability of the bank
1.6 Scope of the
Study
This research will focus on commercial banks with reference
to Eco Bank Plc Kaduna. Data for the study will be within the year 2009 to 2011
it is limited to the operation efficiently as regards credit and the management
of credit, loan recovery and the impact of loan and suggested solution default
to Eco Bank.
In other to attain the objectives of this research, the scope
of the study will be defined to embody all relevant aspect of loans and default
in banking operations. The different types of loans, frequency, amount involve,
measure of loss to banks, causes level of effectiveness and preventive
measures.
1.7 Limitation of
the Study
The major limitation of this study research risk stem from
the difficulty in obtaining classified information on Nigeria Eco Bank in
particular consequently all relevance drawn must be seen from this perspective
as the sample may not cover the whole industry.
Since ration are to be used in the analysis of data another
limiting factor is the shortcoming of the performance of a business concern
financial rations do not give out up to date to current position of things in
the bank financial statement.
1.8 Definition of
Terms
For proper understanding of this research work by the
researcher, the researcher have defined some relevant terms used in the
research work.
Loan: An agreed amount made available to a customer
transferred from a loan account in the customers current account.
Interest: The amount of money charged by the bank for the use
of its money by the way of loan.
Liquidity: It is the ability of a bank to meet its current obligation
as they fall due, if measures short term debt paying ability.
Distress: Is the process whereby bank is unable to meet its
financial obligation that fall due, such as inter-bank indebtedness and deposit
funds
Credit Worthiness: This is the assessment of the customer’s
ability to pay and test that the credit will be attended to him will not him
bad.
Overdraft: This involve allowing the customers current
account to be overdrawing by the customer as a type or a loan.
Credit Period: Length of time which credit is allocated or
granted.
Collateral: These are security pledge for repayment of loan.
It consists of property that can be valued easily and converted to cash.
Advance: These are money level by the bank inform of order,
draft on current or by personal loan.
Statement of Account: This is a document showing the position
or the statement of the account owns the bank.
Reserve: Amount set aside out of profit other surplus that
one designed to meet any liability contingency, commitments in value of assets know
to exist at the date of balance sheet.
Monetary policy: The actual management of the money supplied
to achieve national economic goal.
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