CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Banks have played a critical role in the economic development of some developed countries such as Japan and Germany and most of the emerging economies including India. Banks today are important not just from the point of view of economic growth, but also financial stability. In emerging economies, banks are special for three important reasons. First, they take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs. Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks. Forms of banking have changed over the years and evolved with the needs of the economy. The transformation of the banking system has been brought about by deregulation, technological innovation and globalization. While banks have been expanding into areas which were traditionally out of bounds for them, non-bank intermediaries have begun to perform many of the functions of banks. Banks thus compete not only among themselves, but also with nonbank financial intermediaries, and over the years, this competition has only grown in intensity. Globally, this has forced the banks to introduce innovative products, seek newer sources of income and diversify into non-traditional activities.

A commercial bank is a retail financial institution that helps community members open checking and savings accounts and manages money market accounts. It also provides customers with deposit, withdrawal and transfer services. This is a financial institution providing services for businesses, organizations and individuals. Services include offering current, deposit and saving accounts as well as giving out loans to businesses. Commercial banks make their profits by taking small, short-term, relatively liquid deposits and transforming these into larger, longer maturity loans. This process of asset transformation generates net income for the commercial bank. Note that many commercial banks do investment banking business although the latter is not considered the main business area. Commercial banks are the principal source of credit for all sector of the economy comprising millions of individuals and families and for multinational units of government.

The need to strengthen regulatory standards of banks against systemic crisis, which negatively affects the investors‟ confidence and financial system at large by the supervisory and financial regulatory authorities, has been reinforced by the Basel Committee on Banking Supervision (BCBS) through its release of a new regulatory capital standard called Basel II in 2004. Basel II is the second Capital Accord of the BCBS, which requires higher capital buffer for banks to accommodate credit as well as operational and market risks in the business of financial intermediation. Its objectives among others include eliminating regulatory arbitrage by getting risk weights right and align regulation with best practices in risk management. It provides banks with incentives to enhance risk measurement and management capabilities and seeks to align regulatory capital of banks with economic risk. It sets regulatory benchmark of capital for three categories of risks, which are credit, operational and market risks; and unlike its predecessor called Basel I, the capital charges of the Basel II standard are based on asset quality rather than on asset type. With a broader objective of halting the erosion of capital standards in the international banking system, Basel II was released as a substitute for the first Capital Accord of 1988, which was approved and adopted by the Governors of the Group of 10 countries in July 1988 under the auspices of the Bank for International Settlements.

Moreover people associated with businesses ranging from grocery stores to automobile dealers, are largely depend on banks for major source of their credit to stock the shelves with merchandise or to fill a dealer‟s showroom with new cars. In making payments for purchase of goods and services, majority of the customers in the present day world use bank provided checks, credit or debit cards, or electronic accounts connected to a computer network. In addition when people need financial information and intends to make financial planning, it is the banker to whom they turn most frequently for advice and counsel. If we look at the scenario of global banking we can observe that, the banks have emerged as the major financial institution granting more installment loans to consumers than any other financial institution.

However, the study tends to examine the source and application of funds to a commercial banking sector: A case study of Access Bank Plc, Enugu branch.

1.2       Statement of the Problem

Most Commercial Banks in Nigeria are currently being threatened by huge bad debt burden. This incidence has eroded the confidence in the industry and eroded shareholder funds in most cases. Have BOFID (1993) and prudential guidelines helped in arresting these trends? The roles of regulatory framework is analyzed to ascertain level of assistance to the financial system. Hence, this study is conducted to find out the source and application of funds to a commercial banking section. A case study of access bank plc, Enugu branch.

1.3       Objectives of the Study

The main objective of this study is to examine the source and application of funds to a commercial banking section. A case study of access bank plc, Enugu branch.

Specific objectives include;

i.                    To examine the various ways commercial banks source for their funds

ii.                  To examine the credit policies of Banks and regulatory guidelines if properly implemented can help reduce bad and doubtful portfolios in Nigeria Banks.

iii.                To find out the challenges of source and application of funds to a commercial bank.