THE RELATIONSHIP BETWEEN LOAN, ADVANCES AND PROFITABILITY IN COMMERCIAL BANK

CHAPTER ONE

1.1   BACKGROUND OF THE STUDY

In a developing economy like our’s it is believed that the provision of adequate financial resources is a pre-requisite for economic transformation. The pace of this transformation will be affected by the degree of financial intermediation that is prevalent in the economy. His role is performed by the commercial banks.

Based on this, commercial banks have always been perceived as an engine of growth in any economic because they performed the resources allocation function. This they do by mobilising and channelling resources from saving surplus economic units. This increasing or maximising the profitability of the banks and the level of ability and want of individuals. Commercial banks are also seen as more important than other financial intermediaries, in that they are able to make credits via public deposits in the commercial banks for loans, advances and other wise.

Particularly, loans and advances together constitute are of the most important components and highest profit yielding asset portfolio of most banks, this asset is essentially different from other asset like treasury bills, treasury certificate etc. In that the initiative lie purely with public, that is the bank customers who maintain deposit rather than the bank themselves thus the volume of loans is a function of demand as well as the supply condition as reflected in the banks, lending rate loans policies and non price rationing factors (Ogiogo, 1993).

However, the role of commercial bank loan and advances in facilitating banks profitability city and public economic activities cannot be over emphasized. When the demand for securities by the government is high implies that the availability of credit for loans and advances in the banks will also be high and as lending increase profitability is also expected to increase if prudently administered and managed so a positive relationship is expected to exist between loan and advances and profitability (Peasce, 1986, Ogingo, 1993). Moreover, the emergence of the merge bank, which because as a result of the twenty five billion naira recapitalisation, impose by the regulatory authority i.e. the central bank of Nigeria has  made the commercial bank now to occupy a strategies positive in the economic in that they are able to in all respect.

Influence the causes of development this is because bank can make credit through public deposit in form of loans, advances etc. this process could finally be inmulated into capital formation and profitability necessary for the bank growth. In exercising this factor highlighted above, the bank produce excess of its cost and the lost of doing business, thereby making profit which help to sustain the bank and its shareholders. This is done by using funds of deposition to make loans also to advances to business enterprise, house hold, farmers and even government.

However, commercial banks loan are of mixed blessing. This is also because, it will utilised as intended. It usually lead to increase in profitability and productivity in the bank and economy in general. But the reverse is usually the case not well utilised as it will lead to doubtful and bad debts which may eventually lead to lose or insolvency of the banks distress. This eventually lead to inflation and unemployment as the economy will be afloat or abound with unused and /or misused liquidity through arbitary and indiscriminate advances of loan and advances.

It is important to note here that the process of commercial banks profit performances cannot be divorced from the behaviour of savings in the bank. Also it should be noted that loans and advances are the most profit yielding component, in the asset portfolio of the commercial bank. Based on these observations we will analytically verify the relationship between loans, advances and profitability in commercial bank.

1.2   STATEMENT OF THE PROBLEM

Throughout the world, banks facilities economic growth in a variety of ways first, they acts as financial intermediaries and this intermediaries function is pertinent in two aspects, this two basic aspect of bank function are however brought with some difficulties basically because of the need for coincidence of wants. These banks, evolving into the system tends to eradicate or cushion the problem by marching the preference of saver with those of borrowers by way of loan and advances which increase the profit performances of the bank for sustainability, and inandjf help for economic growth. Hence the specific problem which aggreviated the research work, include.

1. What is the relationship between loans and advance?
2. What is the relationship between advances and profitability?

• What have been the major causes of bad debt in zenith bank plc?

1. How efficient has been the solution proffered for loan and advances.

A BRIEF HISTORY OF ZENITH BANK OF NIGERIA PLC

Zenith bank plc  was incorporated (under the companies and Allied matter act of 1990, as amended) on may 30, 1990 as a private company limited by shares. In July 2004, the bank become a public company limited by sharehfhsf subsequently launched what still remains the most successful initial public offering (IPO) in the history of the Nigeria capital market. It received an overwhelming investor affirmation by a subscription rate of 55% and about 289, 489 subscribers.

The bank’s 6,000,000,000 (Six billion) ordinary share of 50 kobo each were subsequently listed on the Nigeria stock exchange on October 21, 2004 Zenith bank plc achieved yet another mile stone when it raised N53.63 billion in February 2006 by a public offered of 3,000,000,000 (Three billion share) on of the largest amount in the history of the Nigeria capital market.

ZENITH FRANCHISE NETWORK

With over two hundred (200) business office, connected online real time, the zenith a conducive environment was prepared for banking services in Nigeria in 1982 in this year the first banking business opened to its branch in Lagos. The bank was then known as the African banking corporation. This bank was made possible with the help of Neville, the branch manager for elder Dumpster shipping company (EDA) this is to say Elder Dumpster Shipping Company was instrument to the establishment of the first banking services in Nigeria because it was seen as a viable instrument for the growth and survival of their company  but due to poor management the bank (Africa Banking Corporations) experienced some initial  difficulties which forced it to transfer it interest to Elder Dumpster Agency in 1893.

The eventual failure of the Africa banking corporation in Nigeria opened door for the formation of another bank know as the British bank for west Africa (BBWA) in 1883, it first branch was also in Lagos with its incorporation in 1894. The British silver coin in West Africa amidst the hue and cries of businessmen and some governmental official the challenges were made franchise covers all the state capital, the federal capital territory (FCT) and major towns and cities in Nigeria. The bank’s wide area network facilities is efficiently deployed  and seamlessly integrated through a related communication company. The bank business strategy and infrastructure deployment reflect its commitment to customer enthusiasm at all time in all business offices nationwide. The same unique brand of financial services awaits customer in each location. This has made the brand of first choice in banking to all the multinational companies in Nigeria and accounts for its wide customer base. Zenith bank plc ahs continue to meet and surpass customer needs, anchored on it in-dept  knowledge and intensive financing experience of the public and private sectors in Nigeria.

CORPORATE PERFORMANCE

Zenith bank plc is one of the larges and most profitable bank (post consolidation) in Nigeria with total asset plus contigents of over N714.5 billion as at 30 June 2006. The operating result for the year ended 30 June 2006 showed that profit before tax was N15.2 billion while it shareholders fund stood at N93.8 billion. The performance on several parameters, and a strong endorsement of the brand across the country. Zenith bank’s growth and performance has earned excellent ratings from both local and international rating agencies. The bank has been rated in Nigeria consecutively for the past six (6) year by Augustine & co. Ltd. It also has the honest non performance loans to total loan ratio of 1.7% against the industry average of 18% and has growth its asset base at a average of over 50% per annum in the last five years. Zenith bank plc continues to be committed to being a leading  light in the deployment and utilisation of information and communication technology (ICT) for financial services delivery, with it service offering covering, but not limited to.

• Corporate and commercial banking services
• E-business solution including local and international card business.
• Treasury and cash management services.
• Foreign exchange and trade finance services.
• Funds/asset management
• Private banking
• Investment banking and financial advisory service.

1.3               OBJECTIVE OF THE STUDY

The basic objective of this study includes:-

1. To determine the relationship between loan and profitability
2. To determine the relationship between advances and profitability,

• To determine the loan profile over time in zenith bank plc,

1. To find out the major causes of bad debt in zenith bank plc,
2. To determine how efficient has been the solution proffered for loan recovery in zenith bank plc,
3. To evaluate the extend the bank have help to stimulate economic growth.

1.4   HYPOTHESIS OF THE STUDY

The thrust of this research has remain the relationship between loans, advances and profitability in commercial banks. So to empirically evaluate our study, hypothesis is formulated, this hypothesis are formulated both in it nulls and alternative forms. This hypothesis includes:

H_i: Loans have no relationship with profitability

H_o: Loans have a relationship with profitability

H_i: Advances have no relationship with profitability

H_o: Advances have a relationship with profitability

1.5   SIGNIFICANCE OF THE STUDY

Commercial banks are the major financial institution and intermediaries that performed the role of mobilising deposit in the economic from the capital surplus sector and channelling such funds to the deficit sector of the economic for balance growth and profitability for bank sustenance. The role may how ever be jeopardized, if funds mobilised are not disbursed in form of loan and advances which stimulate profitability and productivity and growth.

Thus, because of the usdhdfh in preference of the banking system in Nigerian economic, this research work on the relationship between loans, advances and profitability in commercial bank cannot be over emphasized. Hence the basic significant of this work include:-

1. It will enable us to determine the loan profile of Nigeria bank over time using the zenith bank of Nigeria plc as a case study.
2. It will enable us to determine the relationship between loans and profitability in commercial bank.

• It will enable us to determine the relationship between advances and profitability in commercial.

1. It will also enable us to find out the causes of the increase in bad debt in Nigeria bank.
2. It will also help to determine how efficient has been the solution proffered for loans recovery.

1.6   SCOPE/LIMITATION OF THE STUDY

The cruse of this study centre on the relationship between loans, advances and profitability, in commercial bank using zenith bank of Nigeria as a case study. The period of our analytical survey will be 1990-2005. This preview is choosing becausssse it covers some major economic reformation era as well as the incessant change of governmental powers, which result in the introduction of different monetary and fiscal policy. The zenith bank of Nigeria plc which is regarded one of the strongest, after the consolidation and recapitalisation era is choosen, thus the period of the study roil enable advances and profitability in commercial bank reasonably current.

This analytical study of the relationship between loans, advances and profitability in commercial banks using zenith bank of Nigeria plc an a case study is linged on some observable limiting factors this are state below:-

1. Data collations: Prominent among these problems is the dearth of data for easy analysis in Nigeria. Also where these data are available, the bank are always sceptical in divulging information necessary for a research work with the pretent that such information are classified.
2. Finance: Another major problem which poses a hindrance to research work in Nigeria University is the inability of student to fund them. In this vein, this work is limited by adequate finance need to carry out a project of this magnitude.

• Time: This work is also limited by time. This is because of the epileptic nature of academic calendar. In all it is assumed that these problems are due to the underdeveloped nature of our economy.

1.7   METHODOLOGY OF THE STUDY

The analysis employed in this study is both historical and analytical. The sources of data are basically secondary, such sources include, the Central Bank of Nigeria (CBN) statistical bulletin, International Monetary Fund (IMF) financial statistic, published annual report of the zenith bank of Nigeria plc, Nigeria Deposit Insurance Corporation (NDIC). Publication, journals, magazines, text book etc. information and data so collected are presented in their appropriate form to allow for easy analytical and statistical verification.