1.1 Introduction
Bank Loan can be defined as the granting of money by one or more individuals, organizations, or other entities to other individuals or organizations. A debt is incurred by the collector and is liable to pay interest on that debt until it is repaid. In a loan process, the collector applies for a specific amount of money which is called the principal. The principal is paid back in installments according to the repayment plan of the individual or the loan organization. The cost of incurring a loan is known as the interest which is the stipulated rate of the initial loan amount. Banks are the most important savings, mobilization and financial resource allocation institutions. They have grown to be vital parts of most economies as they aid growth and development across the various sectors and improve the human capacities as well (Olokoyo, 2011).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of Study
Over the years, bank loans and advances to the Nigerian economy has been on the increase. According to the CBN annual report in 2007, commercial banks’ credit to the core private sector grew by 98 per cent which has been the highest ever. However, this incremental trend could not be sustained due to the prevailing harsh economic situation and its effects on the business sector thus leading to increased default on loan repayment. Furthermore, some bank customers misconstrue the loans and advances received from banks as national cake, hence, they deliberately shy away from repayment.
Greater prominence have been said to be associated with banking industry in Nigeria because of the role it plays in her economic environment. The banking industry plays a great influence and in the provision of credit facilities in Nigeria. However the tendency to incur financial losses due to failure to repay loans or credit facilities by borrowers which is regarded as credit risks are most often faced by banking institutions in the financial sector (Muhammad & Shahid, 2012).
The bank’s credit function enables investor’s exploits ventures that are considered profitable (Kargi, 2011). This function however, exposes the banks to the risk of credit default. Credit risk as defined in 2001 by the Banking Supervision of the Basel Committee as the possibility of an outstanding credit going absolutely or partially lost due to default effect (credit risk). Default effect or credit risk is assumed an internal measurement factor of the performance of banks. The higher the level of bank’s exposure to credit risk, the higher the possibility of the bank to likely experience financial crisis and so on. Credit risk is the most formidable amongst the numerous risks faced by banks and the profitability of the banks is highly affected since a greater aspect of banks’ income accrues from granting credit facilities from which interest is generated. However, credit risk is found to be linked with interest rate risk by implying that interest rate increment enhances loan default possibilities.
Interest rate risk and credit risk are related intrinsically to one another and not separately (Drehman, Sorensen & Stringa, 2008). According to Ahmad and Ariff (2007), the credit portfolio with greater non- performing assets limits the banks’ ability in achieving its stated objectives. Therefore, loans that are non-performing are expressed as the percentage of loan values which has not been service for 90 days and above. Consequence upon the huge rate of non- performing loans, credit risk management practices is highly emphasized by Basel II Accord Working in tune with the recommendations of the Accord is a sure approach to handling the risk of credit and generally the enhancement of bank performance. Through the effective management of the exposure of credit risk by banks, they end up facilitating the viability and profitability of their businesses and ultimately enhancing the systemic stability and smooth allocation of capital in the economy (Psillaki, Tsolas & Margaritis, 2010).
In Nigeria, the banking industry have witnessed a rapid growth and expansion as a result of high and immense competition from various institutions like finance houses, discount houses, insurance, private equity firm providing almost similar products and all aiming for the available funds from the same pool of customer base. As a result of this competition, banks are faced with decreasing market shares and reduced profit margins which encouraged bank’s management to take up riskier ventures in order to stand ahead in the industry. These ventures have also included and not limited to unsecured credit facilities due to high demand of their customers and the need to retain their existing customer base. However, while some of these unsecured credit facilities have turned out to be good contributors to the bank’s earnings, some have been bad leading to huge losses and some untimely ends to banks.
Banks have adopted various strategies of recovering their money, some orthodox, some unorthodox. It has been found that most borrowers are always willing to pay, but certain situation like economic recession, inflation, political instability, poor investment makes them not able to pay. According to Ojiegbe (2002), there are also the existences of bad borrowers in the banking industry whose primary assignment is to abandon their loan obligations in most banks and enter into new loan contracts with another bank. This low credit standard of borrowers along with poor management of portfolio and changes insensitivity in the economic environment by the bankers led to the banks witnessing rising non-performing credit portfolio. This ultimately causes many banks to fail and become insolvent. It is quite unfortunate that in spite the degree of carefulness, skillful, experience or tact of a loan officer, most of the loan facilities granted to borrowers sometimes go bad. The introduction of the Prudential Guideline in 1990 for banks licensed in Nigeria enable banks to properly classify bad and doubtful debt.
Therefore, in Zenith Bank PLC, Abuja where the research was carried out, the activities that was conducted is to know the Deposit Money Bank Loan Recovery Strategy and Bank Performance.
1.3 Statement of Problems
Investigation revealed that interest rate is a very important factor to consider in measuring the performance of banks in Nigeria; however the variation in interest rate tends to affect loan and advances in the bank. Increase in interest rate on loan collected could delay the recovery processes of loans by the bank.
Most borrowers might stop collecting loans from banks due to high interest rate. Secondly there have been series of research on loan and interest rate but not even a single study has been carried out The Effect of Interest Rate on Loan Recovery of Deposit Money Bank; hence a need for the study.
1.4 Aim and Objectives of Study
The aim of the study is to determine the Deposit Money Bank Loan Recovery Strategy and Bank Performance using Zenith Bank PLC, Abuja as a case study. In achieving this aim, the following specific objectives were laid out as follows:
- To determine the extent to which interest rate affect loan recovery of deposit money banks in the area under study;
- To determine the causes of variations in interest rate in deposit money banks in the area under study;
- To investigate the factors affecting interest rate in deposit money banks in the area under study; and
- To determine the relationship between interest rate and Zenith Bank PLC loan repayment in the area under study.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What is the extent to which interest rate affect loan recovery of deposit money banks in the area under study?
- What are the causes of variations in interest rate in deposit money banks in the area under study?
- What are the factors affecting interest rate in deposit money banks in the area under study?
- What are the relationship between interest rate and Zenith Bank PLC loan repayment in the area under study?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between interest rate and loan repayment in Zenith Bank PLC, Abuja
- H1: There is a significant relationship between interest rate and loan repayment in Zenith Bank PLC, Abuja
1.7 Significance of Study
The study on The Effect of Interest Rate on Loan Recovery of Deposit Money Bank will be of immense benefit to Zenith Bank plc in the sense that the study will educate the banking sector on various methods of recovering loan from debtors; the study will also determine the relationship between interest rate and loan repayment in Zenith Bank PLC, Abuja.
The study will serve as a repository of information to other researchers that desire to carry out similar research on the above topic. Finally the study will contribute to the body of the existing literature on interest rate and loan recovery of deposit money bank.
1.8 Scope of Study
The scope of the research is focused on the Deposit Money Bank Loan Recovery Strategy and Bank Performance using Zenith Bank PLC, Abuja as a case study.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition of Terms
Bank Loan: It is the granting of money by one or more individuals, organizations, or other entities to other individuals or organizations. A debt is incurred by the collector and is liable to pay interest on that debt until it is repaid.
