THE EFFECT OF GOVERNMENT POLICY ON COMMERCIAL BANK LENDING ABILITY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

This chapter deals with the back ground of the study, statement of problems, objectives of the study, research question, significance of the study, hypothesis, scope limitation of the study and definition of items. The banking system in Nigeria has undergone radical changes during the  35 years since independence . Banking developed from an industry which in 1960. was dominated by a small number of foreign owned banks into, one in which public sector ownership predominated in 1970s and 1980s and in which Nigeria private investors have played an increasingly important role since the mid 1989’s  government polices had a major influence on developments in the banking industry. Extensive government intervention characterized financial sector policies beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenisation. Since 1987 financial sector reforms have been implemented, encompassing elements of liberalization and measure to enhance prudential regulation and tackle bank distress.

The effect of government polices on the commercial bank lending in Nigeria in the period since independence all examine how banks were affected by public ownership and polices of financial repression the reasons behind the growth of Local Private sector banks, to causes of the financing distress in the banking industry and the efficacy of financial reforms undertaken. We aim to explore two related issues first, that government control on financial markets. Public ownership of banks and the neglect of prudential  regulation as opposed to allocative regulation had detriment effects on the banking lending, especially in terms of the quality of banks loan portfolio. Efficiency and competition second, that the efficacy of financial liberalization and other financial sector reforms to enhance the efficiency of intermediation in banking market has been limited. In part because of the legacy of pre-reform intervention ion banking lending, which left large sections of the banking industry in financial distress, but also because some of the reforms were inappropriately sequenced and other were not implemented in a consist ant manner.

On the commercial banks. Although other financial institution have been set up in Nigeria including development finance institution  (DFIS),  insurance companies and plethora of finance houses, hire purchase companies and mortgage companies, banking dominates the financial and merchant banks together accounted for 85 percent of the total asset of the emerged during the 1980. Some of these banks were set up banks by state governments but the majority were stated by Nigeria private investors. The tensive growth of the local private banks was very rapid after 1986, particularly in merchant banking sector by 1992 there  were 66 commercial banks operating in Nigeria. Despite the growth of new entrants however the three largest banks have retained their dominance of banking market, accounting for 48 percent of the total deposits of the commercial banks while Afric bank accounts for a further 7 percent. The banking industry has been afflicted by wide spread  financial fragility almost half, the total number of banks in operation, were regarded as distressed or potentially distressed by the regulatory authorities in 1995. The state government owned most of the distressed banks.

1.2   STATEMENT OF THE PROBLEM

The environment in which commercial banks operate has been the direct result of the banking sector has been subject to extensive regulation of the banking sector of the Nigerian government lending. There is competition among banks and non-banks financial institution. It is now the survival of the fittest the central bank of Nigeria as well as direct participation by the federal government and state government during the post independence period economic nationalism and developmental aspirations were important motivation for interventionist polices. The character of these polices was that of financial repression in that control depressed interest rate and cancelled resources away from areas where private rate of return would have been maximized. The allocate control have been liberalized to some extent since 1986, although controls over lay areas remain in force. This section outline the efforts made by the Union Bank of Nigeria to influence resources allocation in banking lending through the use of administrative controls polices pertaining to public ownership of banks.

The denomination of banking by expatriate banks during the colonial period provoked considerable resentment among Nigerian, including businessmen and politicians. The expatriate banks were perceived as acting solely in the interest of their foreign owners rather than in Nigerians and of the Nigerian economy in particular they were accused of discriminating against indigenous businesses in the allocation of loans and falling to finance the developmental needs of the country, instead concentrating on the provision of short term loan related finance to foreign companies. Consequently government objective following independence included securing greater local control over the banking lending and ensuring improved access to credit for indigenous businesses and priority sector.

During the 1960s the union bank of Nigeria was given extensive powers to regulate the quantity cost and direction of bank credit. These powers were used to further monetary control a priority throughout most of the post independence period because of inflationary pressures in the early 1990s by the issuance of stabilization securities by the Union bank of Nigeria to those banks with excess liquidity. The consequence was a reduction in the aggregate liquidity of the banking system which contributed to a sharp rise in interest rates on later bank deposit. Inter bank rates rose to us percent the availability of funds on the inter bank market diminished sharply when some banks began to default on their inter bank lending obligation. As the scale of the fragility in the industry become apparent depositors withdraw funds from banks suspected of being more secure. The difficulties involved in deposit mobilization combined with the non servicing of a large share of their loan portfolios meant that the distressed banks became increasingly illegal and overdrawn on their accounts with the union bank of Nigeria. The problem in the effect of lending have effectively mobilized deposits for the banks, this work is aimed at finding the night answer to the question raised.

1.3   OBJECTIVE OF THE STUDY

The purpose of the study is to find out.

1. Effect of lending policy on commercial bank ability to grant loan.

2. to assess the effect of government policy on inflation rate in the country.

3. if monetary policy will, in any way reduce inflation in the country.

4. How government policy on commercial bank affect its ability to grant loan

1.4    RESEARCH QUESTIONS

1. How does lending policy affect the commercial bank ability to grant loan?

2. Did government policy affect inflation rate in their country?

3. How does monetary policy affect inflation?

4.  How does government policy on commercial bank affect its ability to grant loans?

1.5  RESEARCH HYPOTHESIS

1.Ho: Lending policy does not affect the commercial bank ability to grant loan.

Hi: Lending policy affect the commercial bank ability to grant loan.

2. Ho: Government policy does not affect inflation rate in the country.

Hi  : Government policy affect inflation rate in the country.

3.   Ho: Monetary policy has nothing to do with inflation.

Hi  :Monetary policy has something to do with inflation.

4.   Ho:Government policy on commercial bank does not affect its

ability to grant loan.

Hi:Government policy on commercial bank  affect its   ability to grant loan.

1.6   SIGNIFICANCE OF THE STUDY

The study is significant for the fact that many banks has been introduced and more are scheduled to hit the loan government progress on its efforts.

It is of great importance to the operation in the banking lending in that it would enable them assess the degree of the successes of their banks and be able to identify unprofitable ones. It will also serve as the first information for new comers in the bank and those intending to lend some. In determining their targets in bank lending, again it will be beneficial to student  in banking and finance and research who may be interested in this area of study.

1.7   DEFINITION OF TERMS

1. COMMERCIAL BANKS:        This is an institution set up to do banking business accepting deposit from public and make profit by lending money out of the public.

2. LENDING:The giving of money to the customer by a bank with interest on the ground that such bank has enough security to back up such loan when the due time is matured.

3. INTER BANK CLEARING:This is an arrangement by which banks settle instrument drawn on them by their customer in the clearing house, representatives  of commercial bank deliver chques drawn on other banks and receive instruments drawn on them by the bank.

4. LIQUIDITY:The liquidity of an assets means the ease with which it can be turned into cash with certainty a bank has to keep adequate volume of non-earning assets such as, cash call money, treasury bills and other short term maturing instruments in its portfolio

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