CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Banks generally provide avenue for saving to those who have surplus funds. The surplus deposits are then lent out to the needy personal, cooperate bodies and business customers in form of loans, advances and overdrafts. This proves the statement that “Banks serves as major intermediaries between the demand sector (which need credit to finance projects) and the supply sector (which provide such loan-able funds for such investments)”. Credits facilities are usually in form of loans, advances, bills discounted bonds and over drafts. Lending is one of the most intricate services rendered by banks and credit facilities are integral part of bank lending. Therefore, this project will in detail analyze the basic principles of bank lending and the mechanics of safe lending permeating the financial statement and interpretation.

It is an indisputable fact that most important asset items in the balance sheet of commercial banks are loans and advances; these items are reported for some good reason. From the bank perspectives they are the largest sources of income. Loans and overdrafts are the focus of prudential credit guideline, which are basis of monetary policy in Nigerian economy. This guideline normally set by CBN stipulates the minimum or maximum level of credit that could be given to particular sector of the economy. Bankers are therefore advised to follow strictly these guidelines on receipt and appraisal of a customer’s proposal for loan. There are some conditions, which must be fulfilled by customers before such facilities are granted popularly known as canons of lending which include the character of the borrower, the amount to be borrowed, purpose of the loan etc.

The first question that comes into focus is who the customer is (character) what is his or her previous relationship with the bank? And how does the previous transactional record look like? This goes into the integrity of whoever the borrower may be. Some borrower could pay will pay with ease but will fail to oblige due to lack of morality. Therefore, the lender should as a matter of fact make sure the integrity of the borrower is not in doubt. Most bad debts arise as a result of insufficient information about the prospective borrower. In order to avoid this, banks especially my case study (FIRST BANK NIG. PLC) are expected to carry out enough inquiries about the borrower so that adequate information would be obtained to enable them make better judgement.  
The lending procedure as it pertains to my case study (FIRST BANK NIG PLC) has immensely contributed to the development of the Nigerian economy. Bank lending is very relevant of all sectors in the economy both private and public sectors because it is one of the major sources of financial sources of finance. Banks in this idea entails commercial banks, which mainly grant short-term credit facilities and development banks, which grants medium and long term credit facilities. They later include Nigeria Industrial and Development Bank (NIDB), Nigerian Agricultural and Cooperative Bank, (NACB) as well as Merchant banks.          
In 1970’s, Agriculture was termed the mainstay of our economy. The fact is that Federal Government embarked on credit facilities otherwise known as Agricultural credit which gingered every farmer both subsistence and commercial to put more effort in the field. At the present time, there is a lot of changes in both commercial and industrial sectors. New structures abound all over the country. Commercial activities have become order of the day. Trades can easily secure loan and overdraft in order to raise capital for their commercial activities especially in Emene-Enugu Metropolis. FIRST BANK OF NIG. PLC has helped many customer in the area of credit facilities to enable them finance their various projects. Therefore, the problem of lack of fund for the execution of private and public projects has been ameliorated through bank lending especially First Bank Plc.  
1.2     STATEMENT OF RESEARCH PROBLEM          
The researcher has understood that industrialists, commercialists, profit and non-profit organizations, individuals, students, scholars and the society at large would benefit from the subject matter of this work. That is why the problem is brought for more analyses. The problem is the inability of some customers in the repayment of loan secured. Also inability of customers to secure credit facilities. People through ignorance and lack of knowledge or fear of uncertainty are unable to secure loan and advances for investments or to finance their projects.          
Some people may have a good project to embark upon but do not have collateral security normally required by their creditors. All these and other more are problems associated with this research. Again, insufficiency of fund to carry on various activities in this economy, limited expansion as a result of limited fund are low investment, which leads to low profit and retarded economic growth. If these trends are allowed to continue, it will have a devasting effect in this economy. This is why the empirical analysis of bank lending cannot be ignored. Hence this study seeks to identify the causes and to suggest some possible solution to them.  
1.3     SCOPE OF STUDY          
Development has made of possible for this country to have myriad of banks such as Commercial Banks, Development Banks, Merchant Banks, People Banks and Community Banks. It is assumed that bank lending is a peculiar services of all the function of banks because of some constraints in that process. This research covers all the above banks and First Bank Plc, has chosen for the purpose of the study. Even though First Bank Plc has been chosen, the researcher cannot cover the whole First Bank Plc branches throughout the country because of time and financial problems. Therefore, the study has been limited to the branch in Emene – Enugu along airport corner.  
1.4     OBJECTIVES OF STUDY          
The objectives of this research includes:
1.  To examine how important bank lending is to the Nigerian economy.
2.  To examine the basic principles of bank lending
3.  To examine the response of customers in repayment of loan.
4.  To examine the various types of acceptable collateral securities.
5.  To eradicate the fear people do have in securing credit facilities.
6.  To educate students and other people about bank lending etc.  
1.5     DEFINITION OF TERMS
The related terms below are defined to the understanding of lay people.
BANK LENDING: - This term is used in banking system in which the banner arranged with its customers to secure credit facilities. Therefore, the borrower is expected to pay interest on the amount borrowed.
ECONOMIC DEVELOPMENT: - An overall trend or process in which socio-economic is socio-political transformation is achieved with little or no reference to other significant degree of technological economic growth plus changes.
CREDIT GUIDELINES: - This is the C.B.N annual guideline to commercial banks in respect to the credit that may be extended to various sectors and sub-sectors of the economy.
CREDIT FACILITIES: - This includes loans, overdrafts, discounting, drafts and advance. They are granted by banks to various potential customers.
COLLATERAL SECURITIES: - Collateral serves as security or fall backs to the banker for the loan offered to the borrower should the later become delinquent in repayment.
CAPITAL: - This is the amount being sought by potential borrower, which must be seriously assessed with respect to its adequacy or otherwise for the execution of the project in question.
CHARGE: - This is legal transfer of ownership by a way of mortgage or assignment.
MORTGAGE: - This is the conveyance or transfer of an interest in land or others asset as security for a debt.
SECURITY DEPARTMENT: - This is the department charged with the responsibility for granting and accepting advances and securities in First Bank Plc.
BOND: - This is a document under seal where by a person binds himself to pay a certain contract.
DEPOSIT ACCOUNT: - This is an account opened for the purpose of earning interest.
OVERDRAFT: - One of the methods of bank lending, under here the borrower is given permission by bank to draw more than what is deposited in the persons account.
ADVANCES: - These are granted in form of overdraft upon a current account or by loan upon a separate account loan.
SECURITY LOANS: - These are referred to as loans secured by marketable securities or other market valuables.
UNSECURED LOAN: - These are made by bank upon credit information of the borrow and his integrity to pay his obligations.
DEMAND LOANS: - Those loans with fixed maturity date payable upon demand of the bank, borrowers billed at specified interval for the interest due.
ACCOUNT: - A statement of dealings expressed in words and figures according to book-keeping form. (ETUK-UDO JS 1975).
LOANABLE INTEREST: - Interest paid by the borrower to the bank on the amount borrowed.
FINANCIAL ANALYSIS: - This section deals with the assessment of the project from monetary point of view. It does this by using the information gathered form the marketing and technical studies to estimate the total project cost, project and cost accounts cash flow projection and project balance sheet. (John Udeh 1990).
WORKING CAPITAL: - This is the total amount needed at the beginning of a new venture in order to meet operating expense as money for the payment of employees, rent and utilities supplies, money for fuel, water etc.
PRELIMINARY EXPENSES: - These are expenses incurred at the initial stage of making investigation and formation of company.
CAPITAL INVESTMENT: - Under this section, costs involved are the cost of the land and its development, buildings and site facilities as well as the cost of machinery and equipment including installation charges.