THE EFFECT OF INTEREST RATE ON LOAN RECOVERY OF DEPOSIT MONEY BANK

THE EFFECT OF INTEREST RATE ON LOAN RECOVERY OF DEPOSIT MONEY BANK

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

Banking is said to be more important in Nigeria due to the role it plays in its economic environment. The banking industry has a significant influence in providing credit facilities in Nigeria. However, the propensity to suffer financial losses due to borrower defaults on loans or lines of credit, considered credit risk, is most commonly affected by banking institutions in the financial sector (Muhammad & Shahid, 2012).

Bank lending functions allow investors to take advantage of projects judged to be profitable (Kargi, 2011). However, this feature exposes banks to the risk of loan default. Credit risk (credit risk) defined by the Banking Regulators of the Basel Committee in 2001 as the potential loss of all or part of outstanding loans due to the consequences of default. Default effect or credit risk is adopted as an internal measure of bank performance. The higher the credit risk of a bank, the more likely it is to experience a financial crisis or similar. Of the many risks faced by banks, credit risk is the most important, and since a large portion of a bank’s income is derived from the granting of interest-bearing credit lines, its profitability is severely affected. However, we know that credit risk is related to interest rate risk by suggesting that rising interest rates increase the likelihood of credit default. Interest rate risk and credit risk are closely related and not separate (Drehman, Sorensen & Stringa, 2008). According to Ahmad and Ariff (2007), a loan portfolio rich in nonperforming assets limits a bank’s ability to meet its stated goals. For this reason, bad debt is expressed as a percentage of the loan amount that has not been repaid for at least 90 days. As a result of the sheer number of non-performing loans, the Basel II Accord attaches great importance to credit risk management practices. Working with the Arrangement’s recommendations is a safe approach to managing credit risk and generally improving bank performance. Through effective management of credit risk by banks, banks ultimately promote business viability and profitability, ultimately improving system stability and smooth capital allocation in the economy (Psilaki, Tsola , and Margaritis, 2010). Banks have used a variety of strategies to get their money back, from orthodox to unorthodox. Most borrowers are always willing to pay, but certain circumstances such as recessions, inflation, political instability, and bad investments have proven to prevent them from doing so. According to Ojiegbe (2002), there are also unscrupulous borrowers in the banking industry whose main task is to waive their loan obligations with most banks and enter into new loan agreements with other banks. This low borrower credit standard, combined with poor portfolio management and bankers’ insensitivity to changing economic conditions, has led banks to experience an increase in bad debt portfolios. This will eventually cause many banks to fail and become insolvent. It is very unfortunate that despite the diligence, skill, experience, or tact of the loan officer, most lines of credit offered to borrowers sometimes go bad. The introduction of Prudential Guidelines for Licensed Banks in Nigeria in 1990 enabled banks to properly classify bad and non-performing loans. These guidelines require licensed banks to review their loan portfolios at least quarterly and classify loans appropriately (into nonperforming and nonperforming loans) (Mora, 2011). The introduction of these guidelines helped banksBanking is said to be more important in Nigeria due to the role it plays in its economic environment. The banking industry has a significant influence in providing credit facilities in Nigeria. However, the propensity to suffer financial losses due to borrower defaults on loans or lines of credit, considered credit risk, is most commonly affected by banking institutions in the financial sector (Muhammad & Shahid, 2012).

Bank lending functions allow investors to take advantage of projects judged to be profitable (Kargi, 2011). However, this feature exposes banks to the risk of loan default. Credit risk (credit risk) defined by the Banking Regulators of the Basel Committee in 2001 as the potential loss of all or part of outstanding loans due to the consequences of default. Default effect or credit risk is adopted as an internal measure of bank performance. The higher the credit risk of a bank, the more likely it is to experience a financial crisis or similar. Of the many risks faced by banks, credit risk is the most important, and since a large portion of a bank’s income is derived from the granting of interest-bearing credit lines, its profitability is severely affected. However, we know that credit risk is related to interest rate risk by suggesting that rising interest rates increase the likelihood of credit default. Interest rate risk and credit risk are closely related and not separate (Drehman, Sorensen & Stringa, 2008). According to Ahmad and Ariff (2007), a loan portfolio rich in nonperforming assets limits a bank’s ability to meet its stated goals. For this reason, bad debt is expressed as a percentage of the loan amount that has not been repaid for at least 90 days. As a result of the sheer number of non-performing loans, the Basel II Accord attaches great importance to credit risk management practices. Working with the Arrangement’s recommendations is a safe approach to managing credit risk and generally improving bank performance. Through effective management of credit risk by banks, banks ultimately promote business viability and profitability, ultimately improving system stability and smooth capital allocation in the economy (Psilaki, Tsola , and Margaritis, 2010). Banks have used a variety of strategies to get their money back, from orthodox to unorthodox. Most borrowers are always willing to pay, but certain circumstances such as recessions, inflation, political instability, and bad investments have proven to prevent them from doing so. According to Ojiegbe (2002), there are also unscrupulous borrowers in the banking industry whose main task is to waive their loan obligations with most banks and enter into new loan agreements with other banks. This low borrower credit standard, combined with poor portfolio management and bankers’ insensitivity to changing economic conditions, has led banks to experience an increase in bad debt portfolios. This will eventually cause many banks to fail and become insolvent. It is very unfortunate that despite the diligence, skill, experience, or tact of the loan officer, most lines of credit offered to borrowers sometimes go bad. The introduction of Prudential Guidelines for Licensed Banks in Nigeria in 1990 enabled banks to properly classify bad and non-performing loans. These guidelines require licensed banks to review their loan portfolios at least quarterly and classify loans appropriately (into nonperforming and nonperforming loans) (Mora, 2011). The introduction of these guidelines helped banks.

1.2 Problem Description

Interest rates are a very important factor to consider when measuring the performance of Nigerian banks.However, changes in interest rates tend to affect bank lending. An increase in interest rates on collected loans could delay the collection of the bank’s loans. Most borrowers may stop taking loans from banks because of high interest rates. Second, although there are many studies on credit rates and interest rates, none have examined the effect of interest rates on savings bank loan repayments. Therefore, it is necessary to study.

1.3 Objectives and objectives of the survey

The primary purpose of this study is to determine the impact of interest rates on savings bank loan repayments. Other specific objectives of this study are:

1. Determining the relationship between interest rates and loan repayments in First Bank Nigeria plc

2. Determine how interest rates affect loan collections from Nigerian deposit banks

3. Identifying the cause of interest rate fluctuations in the savings bank of Nigeria plc

4. A Study of Factors Affecting Deposit Bank Interest Rates in Nigeria

1.4 Research question

Research questions were formulated in the study to determine the above objectives of the study. The research questions for this study are:

1. What is the relationship between interest rates and loan repayments for First Bank Nigeria plc?

2. How do interest rates affect the repayment of deposit bank loans in Nigeria?

3. What Causes Interest Rate Fluctuations in Nigerian Deposit Banks?

4. What are the factors that affect interest rates for savings banks in Nigeria?

1.5 Description of research hypothesis

H0:
There is no significant correlation between interest rates and loan repayments at First Bank Nigeria plc.

H1:
There is a significant correlation between interest rates and loan repayments in First Bank Nigeria plc.

1.6 Importance of research

A study on the impact of interest rates on the collection of loans from deposit banks will be of great benefit to First Bank Nigeria plc as it will educate the banking sector on different methods of collecting loans from borrowers. The study also identifies the relationship between interest rates and loan repayments at First Bank Nigeria plc. This study will serve as an information repository for other researchers wishing to conduct similar research on the above topics. Finally, this study contributes to a corpus of existing literature on deposit bank interest rates and loan collections.

1.7 Scope of investigation

A study on the impact of interest rates on bank loan repayments focuses on Erste Bank Nigeria plc from 2000 to 2017.

1.8 Research Limitations

Financial Constraints – Lack of funding tends to prevent researchers from obtaining relevant materials, literature, or information and efficiently conducting data collection (internet, questionnaires, and interviews).

Time Constraints – Researchers will carry out this research in parallel with other academic research. As a result, less time is spent on research work.