Abstract

The study was principally made to appraise the loan portfolio of DMBs in Nigeria with the aim of finding the magnitude and trend of non-peforming loans (NPLs) and the factor responsible fo that. The problem x-rayed here stems from the high magnitude NPLs in the loan portfolio of DMBs as evidenced in recent joint examination of banks carried out by CBN and NDIC. NPLs put bank in a position of under capitalization which will in turn lead to crises and distress. In order to tackled the above problem, six specific objectives and five research questions were designed to guide the study. Four hypothesis were formulated and tested in the course of the study. The study, which is a survey design, used six DMBs in Onitsha metropolies. Both primary and secondary data from these banks were used in achieving the set objectives. Though the population of the study comprised 410 staff of the six banks selected, the study however limited target population to only 111 senior bank officials who take part in decision – making. The questionnaire was the main instrument used to collect primary data. The 32 – item questionnaire was validated by three experts, and was pre-tested and it yielded a reliability coefficient of 0.857. The secondary data used included NPLs of DMBs and GDP of Nigeria (1997 – 2007). Mean, t-test, and Pearson correlation coefficient statistical tools were used to analyse the data collected. The result showed that NPLs of banks is in upward trend and stood at about 32% of the entire loans granted by banks. Poor credit administration by banks, lapses in CBN/NDIC supervisory over-sight, weak corporate governance, and poor economic situation in Nigeria contributed to the above problems. It was recommended among others that banks should review their lending policies; CBN should review the existing corporate governance code, and that the supervisory bodies should apply full weight of law on erring banks.

CHAPTER ONE

INTRODUCTION

Background of the Study
The relevance of banking to the Nigerian financial system and indeed the entire economy cannot be over emphasized. Without banks economic activities would grind to a halt. Undoubtedly banks serve as catalysts to the growth and development of any nation, Nigeria inclusive. The primary function of banking in an economy is to provide financial intermediation. Financial intermediation means the mobilization of funds from the surplus units at a cost for on-lending to deficit spending unit at a price, (Oboh, 2005). Through this process, deposits collected from surplus economic units are channeled to deficit unit in the form of loans and advances. Thus banks as financial intermediaries have two basic traditional functions: deposit mobilization and lending. But by far the most important function as far as banks are concerned is the lending
function.
Lending has become a vital function in banking because of its direct effect on economic growth and development. This is being pursued in most countries particularly the developing ones where banks and lending activities have been usefully integrated into government policy formulation in the national economic development process. Thus the lending activity of banks as it affects economic growth and development has continued to gain prominence in the light of modern economy.

As agents of development, banks provide loans and advances including a variety of contingent facilities. The bulk of the funds deposited with banks constitute the bases for loans and advances to personal and business customers to facilitate their individual economic activities. Like any other business entity, banks are in business to make profit and as such they charge interest on credit extended and pay interest on funds deposited with them. The difference between the interest received and that paid is the gross margin which constitutes the profit of the banks (Rose, 2003).
Lending is said to be the most profitable activity of banks. However, if lending decisions are not handled with care, it could turn out to be the most loss-making activity of a bank. The safety of any loan and advance is therefore of paramount importance to bank.
Banks therefore ensure that there is a reasonable certainty that the loans granted are likely to be repaid by the borrower. In order to keep these risk factors under control, the bank lending function is closely regulated to ensure prudent policies and practices. Banks also control risk in the lending function by setting up written policies and procedures for processing each loan request.
The bulk of loans and advances made by banks follow some basic principles which help to minimize the adverse effects of lending especially the incidence of bad debt. Banks lay great emphasis on the character, integrity and reliability of borrowers. There must be a reasonable certainty that the amount granted can be repaid form the operations of the firm. If the loan is granted to a personal borrower, the source of repayment must not be doubtful. The borrower must be able to provide acceptable security which will serve as something to fall back on if the expected source of repayment should fail
All these safeguards are built into the lending programme to help reduce credit risk. Credit risk is the risk that the principal or the interest, or both or part thereof of the credit extended to a customer will not be repaid by him in accordance with the loan agreement, (Anyanwaokoro, 1996). When this happens, the bank will end up classifying the credit as bad debt, and in due course it will be written off. The long-run effect of this on the bank can be very detrimental with its attendant effect on the entire economy. This is what has happened to many Nigerian banks that were classified in the past as distressed by the Central Bank of Nigeria.
It is therefore expected that a high degree of efficiency and effectiveness be maintained in the operations of banks especially in the area of loan-making considering its implication on the profitability, liquidity and safety objective of banks and the well being of the economy at large.

Statement of Problem
There is consensus among banking experts that the greatest source of bank profitability is credit delivery. However if lending decisions are not handled with care, it can turn out to be the most loss- making activity of a bank. The safety of any loan and advances is of paramount importance to banks.
The expectation of every banker is that customer to whom the credit is extended will repay both the principal and the interest as agreed. But this expectation does not always materialize. Banks may incur risks and experience some losses if certain borrowers fail to repay their loans.
In order to keep risk factors associated with lending function under control, a lot of caution is applied by both banks and regulatory/ supervisory authorities. The bulk of loans and advanced given by banks follow some basic principles so that certain adverse effects of lending will not occur especially the incidence of bad debt. Moreover, the bank lending function is closely regulated to ensure the safety of bank and the safety of customers’ deposit. The responsibilities of monitoring the lending activities of banks in Nigeria are vested with Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) to ensure strict compliance with the laid down rules and regulations. All these precautions are built into the lending programme of banks to help minimize credit risk associated with lending.
With all the precautions highlighted above, one expects the problem of credit risk to be very minimal in the Nigerian banking system. It is however disheartening to observe that the magnitude of non- performing loans in the loan portfolio of Deposit Money Banks (DMBs) in Nigeria is on the increase. This trend is generating a lot of concern among stakeholders in the banking industry. Umeaba (2009) observed that bank loans classified as non-performing in 2008 amounted to 40% of total bank loans. Infact the magnitude of non-performing loan in the loan portfolio of deposit money banks in Nigeria has questioned the professional credibility of banks management and integrity of regulatory/supervisory authorities who are responsible for protecting the banking system. Uzor (2009) noted that the increasing share of loans classified as non-performing is evidence that something was wrong with the system of credit delivery of the banking sector.
It is obvious that a bank that has the bulk of its assets as non- performing debts stand very little or no chance of surviving in the industry, especially in the face of the present global financial crises. Classified debts put banks in a position of under capitalization which will in turn lead to crisis and distress. Recently, the joint examination of banks carried out by CBN and NDIC revealed that ten banks were in grave danger of collapse because of burden of non-performing loan. The CBN, in order to prevent systemic crises, had to extend a life-line of □ 620 billion to these banks in a bid to breathe life into them, (Business Day, 2009).
Although there has been several attempts by the relevant authorizes to check the ugly incidence of non-performing loans, all efforts made by these authorities seem not to have yielded the desired result as the problem has continued to persist as evidenced in the current credit crises in the system. This means that the major factors which have fostered the issue of classified debts among deposit money banks in Nigeria have not been properly scanned and diagnosed. The need therefore arises for further studies on the problem which is the issue of the research.

Objectives of the Study
Based on the problems highlighted above, the broad objective of this study is to examine the performance of the loan portfolio of Deposit

Money Banks (DMBs) in Nigeria. Specifically, the study will achieve the following objectives:
1. To determine the extent and trend of non-performing loans among banks in Nigeria.
2. To ascertain the extent poor credit administration is responsible for the high incidence of non-performing loans in the banking sector.
3. To examine if poor supervision by supervisory/regulatory authorities is responsible for high incidence of non-performing loans in the banking system.
4. To identify if the level of non-performing loans among banks is as a result of poor corporate governance by the operators.
5. To find out if economic performance of the country is responsible for non-performing loans in the banking sector.
6. To suggest various ways through which the problem of non- performing credit in the banking system will be minimized.

Research Questions
The study is guided by the following questions:
1. What is the magnitude and growth rate of non-performing loans in the banking sector?
2. To what extent has poor credit administration contributed to the high incidence of non-performing loans in the banking system?
3. To what extent has poor supervision by supervisory/regulatory authority impacted on high incidence of non-performing loans in the banking system?

1. To what extent has poor corporate governance by bank management contributed to non-performing credit in the banking system?
2. To what extent does the economic situation in the country contribute to credit crises in the banking system?

Significance of the Study
This study is coming up at a time when the banking industry is passing through a serious problem of non-performing loans with its negative consequences in the sector. The study will therefore be of immense importance to various stakeholders in the banking sector particularly the operators of banks, borrowers, depositors, regulatory bodies and even the general public.
The outcome of the study will help managers of banks to identify the causes of bad debts and its effects on the activities of banks so that they can take the necessary steps to check the ugly trend.
The study would be of significance to the investing public who obtains loans from banks. They would be educated on the need to make efficient use of credit extended to them as the reverse often leads to inability to honour their obligations. The study will show them that by defaulting in loan repayment they make it impossible for banks to address their function of credit provision in the economy.
Unprofessional and unethical practices among bank operators constitute the greatest threat to banking industry. It is hoped that the findings and recommendations of this study will help to expose some of the unethical and unprofessional practices carried out by both bank management and staff. With this exposure, it will position the supervisory and regulatory authorities to tackle the problem in order to minimize it.
To bank management, the study will enlighten them on the importance of efficient risk management techniques in the management of loan portfolio.
To the academia, the research work would be significant because salient issues in loan portfolio management will be highlighted to enhance their knowledge of the topic, and this will increase the pool of knowledge from which reference can be made in future.

Scope of the Study
The researcher would have liked to extend the scope of this work to cover both development banks, specialized banks and other categories of banking institutions in the banking system, so as to get to the root of the problem identified in this study. However in order to carry out more accurate and detailed study, the scope of this work is strictly narrowed to loan portfolio of Deposit Money Banks (DMBs) in Nigeria. The study covered a period of eleven (11) years (1997 to 2007).

Hypothesis
The following hypotheses were tested in the course of the study.
All the hypothesis are in the null.
Ho1: There is no significant difference in the mean responses of Accountants and Managers on the extent poor credit administration contributed to the problem of non-performing loans in DMBs.

Ho2: There is no significant difference in the mean responses of Managers and Accountants on the extent the supervisory/regulatory authorities contributed to the problems of non-performing loans in the banking system.
H03: There is no significant difference in the mean responses of
Managers and Accountants on the extent poor corporate governance contributed to the problem of non-performing loans in DMBs.
Ho4: There is no significant relationship between the level of banks’ non- performing loans and GDP of Nigeria.

Plan of the study
In order to present detailed account of what the researcher has done and found in the course of this study, the work is presented in five chapters.
The first chapter is introductory chapter. The chapter presents the background of the study, the problem to be studied, objective of the work and the significance of the study. The chapter also specifies the research questions that guided the study, the hypothesis and the scope of the work.
Chapter two reviews related literature. In this chapter the opinions of eminent scholars and commentators are reviewed. The review is divided into eight sub-topics.
Chapter three presents the methods and procedures adopted in data collection and analysis. The presentation is made under the following sub-headings: research design, area of study, sources of data collection, population and sampling procedure, instrument for data

collection and how it is pre-tested and validated, techniques adopted in data analysis, and problems encountered in data collection.