Bank Lending and Credit Administration

CHAPTER ONE

LENDING: POLICIES, CONCEPTS, PRINCIPLES AND PRACTICES

General Introduction

Lending is one of the important functions of the banking industry. It is perhaps one of the riskiest of the activities. This is because the fund lent out by banks (deposit taking banks) belong to the public (deposit customers) which the bank is under contractual obligations (depending on the type) to provide when needed. It becomes very necessary that money lent out must be repaid by the borrowers, inclusive of whatever charges attached to it. Credit repayment default, therefore poses a great risk to the survival of a bank as its perception of good health by the public is hinged on its unfettered ability to meet its day —day obligation to its customers (especially depositors).

 Most banks that have become distress or liquidated is due to high non-performing loan in their books with its consequent effect of not being to meet its obligations as at when due. As the saying goes “there are no bad borrowers only bad lenders’’. Most loans goes bad due to so many factors such as absence or non adherence to well written credit policy, abuse of office by loan officer, incomplete documentation, poor referencing, and weak collateral position and so on. The most painful aspect of this gross negligence is that these are controllable variables. Even though there are uncontrollable variables which also affect repayment of loan.

BASIC PRINCIPLES OF LENDING

A bank through its intermediation role is able to channel surplus deposit of its customers as credit to the needy customers in order to earn a return. The success or failure of a bank depends on, among other things, its ability to grant recoverable credit facilities and make reasonable margins from them. Before granting any credit, an effective credit department/officer should be able to establish credible answers to the following questions:

v  What are the risks inherent in the operations of the business being considered for the credit request?

v  What have the managers of the business done or not done to mitigate those risks?

v  How can a lender structure and control his risks in supplying funds?

v  What are the loan proceeds going to be used for?

v  How much does the customer actually need, purpose and tenor of facility requested?

v  What are the company’s repayment sources and schedules?

v  How about the integrity and credibility of the customer, that is, background information and profile of promoter of the company?

v  If company, what is the state of the company’s current financial i.e. audited account, cash flow position and statement of accounts with other banks?

v  What is the customer other banks, level of transactions and state of relationship?

v  What is the market analysis of customer projects or services?

v  What about changes in economic conditions?

v  What about changes in law and regulations?

v  What collateral is available?

These questions, though fundamental are by no means exhaustive. They address the critical elements, which can significantly affect the safety, soundness and workability of a loan.  In addition, the credit department and officers should be guided by the basic consideration in credit.

GENERAL CONSIDERATION IN CREDIT

Lending is a very important banking function largely influenced by external factors. Some seekers of credit are only interested in securing the fund without bothering themselves about the means of repayment. Major considerations that cut across various lending or credit are the seven Cs, however lending principles becomes useless if the borrower right from the start has a primary intention of not repaying the lender whether he succeeds or fails in his business endeavor.

v  Character

v  Capacity

v  Cash flows

v  Capital

v  Collateral

v  Conditions

v  Other consideration

CHARACTER

This is largely influenced by heredity, exposure and environment. A credit analyst discovers to his dismay that it is difficult to evaluate a borrower’s character, due to the nature of human behavior which is very complex. The integrity of the applicant or its director should be considered hence in assessing the character of the borrower, facts and not opinions should be considered, what makes such an evaluation necessary is because it is one quality that provides some confidence, that is the decision to repay the facility being requested and being appraised, must be made favorable to the banks. It is this that defines the willingness to pay. One thing is being able or having the capacity to pay or satisfying all other conditions another is being willing to repay the debt. Investigating the character of the prospective borrower can be done by looking at a past record, his present activities as well as current relationship. References on the prospects could be got from their present and past customers. The whole essence of character evaluation is to know whether the customer can keep to agreements (to his words) take the positive decision to meet (satisfy) maturing obligations (as they fall due).

CAPACITY

While character is a necessary condition for debt repayment, it is meaningless if the capacity to pay back is lacking. Capacity has more to do with the borrower’s financial ability. The assessment is to determine, for example, in the case of a firm, whether it’s expected future income stream can cover its current and maturing obligations. This is often done through an analysis of the prospective borrower’s five year audited accounts. An insight into whether the facility, together with its accruing interest and other financial obligations are repayment will be revealed, other factors that relate to capacity include the nature of the firm, the size, its experience in the relevant line of business, its operating base, track record, and competitive strength in relation to its competitive weakness.

Generally, repayment capacity can be measured by identifying the borrower’s income source, his customers and their ability to back patronage with pay now and in future from their operating activity or core business.

CASH FLOW:

Cash flow is what eventually repays the debts as they mature; hence its projections against repayment schedules are critical. It could be defined for a given period as Profit Before Tax generated from the operation of the firms plus non cash Items such as depreciation and amortization for the period less relevant taxes. Decision in favour of credit request should be based among others, on projection of cash inflows of prospective borrowers business reasonably surpassing his/her cash outflow projections inclusive of repayment schedule. Request must be turned down where the reverse is the case. In fact, cash flow analysis should include seeing whether projected cash inflows will be able to cover compensation to shareholders as well as ensure the continuity of the business by the replacement of obsolete assets.              

CAPITAL

Here, the issue under consideration is equity capital available to the firm i.e. the borrower, whether it is enough to cover debt repayment in the event of failure of all other means of debt collection.

Equity capital is the cushion a lender has should the business go into liquidation. Thus should the assets of the business not shrink more than the value of equity, the lender will be repaid in full.

Accordingly, the equity capital represent some cushion of assets in the event of a loan default and the higher the equity capital the more comfortable a prospective lender bank because the adequacy or otherwise of a capital is important in credit appraisal. The quality of assets of the borrower is important also as they must have the capacity to generate revenue and must have reasonable financial worth if offered for sale in the open market.

COLLATERAL

Collateral is a security by way of cash, near cash, assets (such as share certificates), household goods and fixed or movable assets (e.g. land, building, household goods etc) which a prospective borrower offers to the lending bank in order to get a credit facility of its request secured. Generally, we must note that collateral takes several forms which include:

v  A fixed charge on the fixed assets

v  A floating charge on the floating asset/working capital.

v  A guarantee or indemnity obtained from a third party.

Whatever form collateral takes; it remains the fall back of last resort by bank in the event of complete failure of the borrower to repay its debts from its operating activities.

Banks normally conduct a valuation of collaterals taking more into consideration, their forced sales value than their open market values. Thus environmental factors such as location, demand, etc play significant roles in most collateral valuation

The issue of collateral is a very sensitive one due to past abuses by relevant managers and employees of financial Institutions, especially banks. Government had to promulgate decrees to check the excesses. These decrees such as BOFIA, Recovering and Financial Malpractices Act 1994 has amended, which aptly capture various ramification of collaterals, make it a criminal offence for any manager, or official to willfully or otherwise grant or approve a loan, advance, guarantee or other credit facilities:

v  Without adequate security against the bank practice or regulations.

v  Without security or collateral where required

v  With defective security

v  Without perfecting security through negligence or otherwise

v  Recklessly approve a waiver of interest where the borrower has the ability to repay the loan with Interest.

v  Receive or participate in receiving gratification profit, property etc towards or after the procurement of a loan

v  The decrees also make it a criminal offence for any bank official to grant or approve a facility above his bank or in contravention of any law, regulation, circular in procedure

CONDITIONS/ INFLUENCE

These are pure environmental factors that must be analyzed because of their capacity to impede the borrower’s ability to repay the debts. Some of these are economic variable (inflation, deflation, demand for the borrower’s products, foreign exchange rate fluctuations, fiscal policies etc) political factors such as civil unrest or its possibility, electoral malpractices and their implication, intra and internal party frictions, political tension , possibility of truncation of the demonstration process etc. Legal factors e.g. industry and firm risks etc., another factor especially in the Nigeria situation is the level of influence through connection the prospective borrower has in the negative that will impede i.e. frustrate effort  at recoverability of the debts.

OTHER CONSIDERATION OR CONDITIONS

These are largely internal variable but deriving largely from external environment. These includes but not limited to:

v  The composition of the lending bank’s loan portfolio

v  The type or nature of business requesting the loans

v  One obligor credit ceiling or limit

v  Bureaucratic consideration

v  Purpose of the advance

v  Amount of the advance

v  Duration of the advance

v  Remuneration/margin

CHAPTER TWO

FINANCIAL STATEMENT ANALYSES FOR BANK LENDING

Lending is not pawn-broking. That is, lending is not only a security-based affair but other factors have to be taken into consideration. A good borrower in search of financial accommodation should approach the lender with a well-prepared and properly articulated project package. He should be able to package his loan application in a manner that will attract a prospective investor. There must be a good feasibility study and proper documentation before and after the credit is extended.

A feasibility study is a formal analysis carried out to ascertain the attractiveness of an envisage project in terms of its technical feasibility, social desirability and economic viability. The study should at least cover the Technical Requirements, Financial Requirements and Impact Evaluation. A feasibility study enables an entrepreneur to think through a project and to convince himself that it is a worthwhile venture. At the same time, it is an attempt to market the project so that would-be financiers will willingly commit fund to its execution.

 Financial statement is a written account of the financial transaction of an entity for a specified period of time, usually one year. Section 334 of the Companies and Allied Matters Act 1990 requires the directors of every company to prepare Financial Statement for every year which will include:

1. Chairman’s statement

2. Director’s report

3. Auditor’s report

4. Audit committee’s report

5. Statement of accounting policies

6. Balance sheet

7. Profit and loss account or income and expenditure account

8. Cash flow statement

9. Notes to the accounts

10. Value-added statement

11. 5-year financial summary

For holding companies group financial statement shall be prepared.

It is also mandatory for a private company to publish the following with its annual accounts:

1.          Cash flow statement

2.       Value-added statement

3.        5-year financial summary.

The financial statement of unincorporated entities (like sole proprietorships and partnerships) may consist of:

1.       Manufacturing account, as the case may be

2.       Trading profit and loss account or income and expenditure account, as the case may be

3.       Balance sheet as at the end of the year.

Financial statement analysis is the process of sorting and rearranging data on an entity and applying various accounting tools such as ratio analysis and analytical review to the data to formulate expectations and judgments on the strengths, weaknesses, opportunities and threats of the entity. Financial statement analysis can be level analysis or trend (time series) analysis. Level analysis can be cross-sectional or standard ratio Cross. Sectional analysis is when the evaluated financial performance of an entity for a specific financial year is benchmarked or compared to the average performance in its industry or some other ideal benchmarks. Standard ratio analysis is where comparison is made with standard measures or ratios. Level analysis can only be made among comparable firms having the same characteristics, namely:

v  Same industry group,

v  Similar size,

v  Similar accounting methods, and

v  Located in the same geographical area.

Trend or time series analysis is the historical trend in performance to provide a good basis for predicting future prospects or ratios. It entails selecting a base year and expressing the financial statement items of subsequent years or accounting periods as percentages of their values in the base year. The firm’s trend is later placed side by side with that of the industry in order to know the specific or industry factors that caused the noticed trends.

THE NEED FOR FINANCIAL STAIIEMENT

Each business entity should produce information about its activities because the stakeholders such as shareholders, bondholders, bankers, suppliers, employees, managements, government, financial analyst and advisers need to monitor how well their interests are being served. They rely on the periodic financial statements of business enterprises to provide the basic information on the profitability of the business. They may have invested their scarce funds in the business and want to see them efficiently managed. Therefore, they continually measure the performance of the business to determine the extent to which their interests are protected.   For instance, creditors, such as the banks, are generally interested in the liquidity of the business, whereas the shareholders are interested in its profitability. That is, the shareholders will want to know how effectively and profitably the management is running the firm’s operations and how much profit they can afford to withdraw from the business for their own use. Even the management; as the people appointed by shareholders to supervise the daily activities of the business need information to enable them to manage the business better.

Suppliers of goods on credit will want to know the company’s ability to pay its debts. Purchasers of the company’s product will like to secure the source of supply so that they will not be thrown out of business suddenly. Government may need the statement in order to assess the tax liability and other social responsibilities of the company. Employees’ future depends on the state of the company; as a result, they should have a right to the company’s financial statements to guide them in making their demands. Financial analysts and advisers need it in order to guide their clients well.

QUALITIES OF A GOOD FINANTIAL STATEMENT

The financial statement of any entity or organization should have the following qualities in order to be useful to the users:

It must be timely

It must be objective

It must be relevant

It must reliable

It must be comprehensible

It must be complete

It must be comparable

THE RELEVANCE AND USES OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is relevant and useful in the following areas:

v  In making judgment and building opinion on an organization in forecasting the state of a firm.

v  in making investment decision

v  In planning investment portfolio

v  In measuring management performance in terms of how efficiently the firm uses its assets. Is the firm in a position to meet its current obligations? Do investors consider the firm profitable and safe for the purpose of investing in the shares of the firm? Are the earnings of the firm adequate? Is there any danger to the solvency of the firm due to the use of excessive debt? However, the users of financial statement analysis include:

v  the investors, for making portfolio decisions

v  the Management team, for operational and financial efficiency evaluation

v  lenders, for assessment of the credit worthiness of a firm applying for credit facilities

v  Regulatory agencies, for controlling the operations of the firms in the industry.

v  Trade creditors, for determining of the firm’s ability to meet claims.

v  Labour or employees’ union, for establishing an economic basis for collective bargaining

v  Economic and business researchers, for studying the firm’s behavior and trends

KEY FACTORS A LENDER SHOULD CONSIDER WHEN ASSESSING LENDING PROPOSAL

1. The Borrower

The borrower should be examined for Character, Capital and Capacity.

Character borders on the integrity, honesty, ability and the financial dexterity of the individual(s) involved. This can best be accessed through a consideration of the lending bank’s previous relationship with the borrower, the borrower’s relationship with past lenders, the quality and number of references attached to the loan application, and the quality of guarantor the borrowers bring forward. Is he the type that is trustworthy and willing to liquidate the loan with minimum trouble? Check his ability, experience and track records in the line of business to which he belongs. Check his chronological age to make sure he is not a minor that is under 18 years. Check his mental and spiritual ages to make sure he is wise and with good conscience respectively. Check his physiological age to make sure he is healthy.

2. Assessment of Borrower’s Capital Stake and Commitment

To seek investable funds without one putting any personal funds into the investment is gambling. The borrower’s stake in the project must be substantial in terms of financial commitments. In this direction, the capital adequacy ratio have to be computed to determine the adequacy or otherwise of the borrowers capital contribution in the envisaged project. The borrower’s commitment and the amount of risk they are willing to take. Borrower’s contribution of at least 25% - 50% stake in the project is encouraging to any lending banker that has good rapport with the borrower.

3. Assessment of Borrower’s Capacity

Capacity borders on the possibilities that the borrower will be able to raise enough funds from his operations to liquidate the debt. It also borders on the loan applicant’s moral, vision, technical and managerial ability, and any specialized advantage he may have in his line of business. The usual expectation here is that repayment should come from the normal business operation proceeds. Based on these proceeds, what would guarantee repayment are adequate sales of the products or services on a continuous basis. If there are no diversions of sales proceeds and all sales proceeds are lodged into the bank account with the lending banker, it should be possible to obtain sales figures from the statement of account. Otherwise, sales figures could be confirmed from the customer’s books or the suppliers, showing average purchase per month or per annum.

It is a known fact though, that some shrewd businessmen avoid lodgment of some of the sales proceeds into the account in order to reduce the amount of COT they will pay when making withdrawals from the account. There are also some businessmen who knowing that the bank relies on the volume of turnover in determining the amount of credit facility to be extended, engage in fictitious lodgments into the account in order to increase turnover. The credit officer should thoroughly investigate in these respects, to recalculate and reconstitute or recast the profit and loss account as well as the balance sheet, having confirmed the authenticity of the information claimed in financial statement submitted. He should also ascertain the business turnover, average bank balance, range of the account balances such as lowest/ highest credit or lowest/highest debit, standing orders, direct debits and unpaid cheques.

The bottom line here is profit and cash flow: Profit is the excess of sales over cash flow, the wider the difference the better. The credit analyst should capture all the cost attached to the operation, including accruals and depreciations. Proper stock valuation should be done to ascertain the true cost of goods sold; in order not to overstate or understate the profit figure. The financial information gathered should be able to give a clear view of the figures and growth potential. The impact of inflation on the present and future sales performance of the company can only be deduced from the knowledge of the economy and the industry. The future business stability would also depend on whether the company is operating as a mono-product or multiple-product outfit.

4. Purpose of the Credit

The borrower must specify the purpose of the borrowing from which the lender will ascertain the risk content. Loans for illegal and speculative purposes should be rejected. Loan for legitimate and non-speculative ventures are preferable. It is important to ensure that the borrowing is not used for a purpose different from which it was meant. In the case of corporate borrower, the purpose must be adequately covered by the MEMART (Memorandum& Article of Association)

5. Amount of Borrowing

How much? Is a relevant question the lending banker should ask in order to ascertain the adequacy of available funds and reduce chances of diversion, if the loan capital is too large or little available funds could mean that the borrower would not be able to increase business activities as much as it should. On the other hand, too much of available funds could mean that client might divert the excess resources to other uses outside of the business. However, the borrower’s capital stake should be sufficient when compared to the bank’s advance.

The cash budget is the primary document presented to a lender to indicate the need for funds and the feasibility of repayment. It indicates not only the total amount of financing that is required but its timing as well. The cash budget period may vary with the line of business, credit needs, the ability to forecast the firm’s cash flow for the distant future and requirements of creditors. It can be prepared to show the amount of fund needed month by month, week by week or even on a daily basis. It may be necessary to prepare alternative cash budget (otherwise called variable or flexible budget) on the assumption that worst situation(s) may arise. In such events, the management should prepare contingency measures in advance to prevent the worst situation arising.

The decision rule in cash budget is that when there is surplus during any period, there is no need for further financing and borrowing in the period the surplus occurs. Further financing is required when there is deficit occurring in any period, which may necessitate borrowing to fill the financing gap in the period in which the deficit occurs.

The timing and the least amount to borrow is the period with the least deficit. The timing and the biggest amount to borrow is the period with the biggest deficit.

6. The Working Capital Cycle or Cash Conversion Cycle

Working capital cycle is the length of time it takes a firm to covert its raw Materials back to cash.

7. Duration

The duration of the loan with the borrower must be definite and not probable. Matching concept must be observed as will be indicated in the cash budget and working capital cycle.

Period of grace should be given.

8. Source of Repayment

Even if adequate security had been taken, this is the most important consideration in the lending decision. To confirm the ability of the source of repayment, the banker should compute the amount of periodic repayment (which include interest portion) and look for evidence that the sources of repayment are likely to be sufficient

For example, for a personal borrowing with monthly salary as a source of repayment, the banker must ensure that the borrower’s regular income is ascertained by reference to his account and obtain details of the borrower’s regular cash outflows and debts such as standing order, direct debits, etc. After this enquiry, the format below is adopted to assess the repayment ability. Personal cash Budget for Personal Borrowing.

Regular income                                                                                                                N                                                             N

Wife’s Income (if both are engaged)                                                                                                                                               X

Other incomes                                                                                                                                                                          X

Total income                                                                                                                                                                              XX

Less outflows or fixed commitments:                                                                                                                                                                                                                   

Standing order (e.g. Insurance Policies, Clubs, societies, etc)                               x

Direct debit                                                                                                                x

Mortgage repayment                                                                                            x

Less rentals                                                                                                                x

Hire purchase installments                                                                                  x                                                              (x)

                                                                XX

Less family responsibilities:

House-keeping allowance                                                                                    x

Children maintenance                                                                                           x

Vehicle maintenance                                                                                             x

Others                                                                                                                          x                                                              (x)

Surplus available for loan repayment                                                                                                                              xx

Less loan repayment                                                                                                                                                              (x)

Surplus/deficit                                                                                                                                                         xx

CONCLUSIONS

          I.            If the surplus available for loan repayment exceeds loan repayment amount, the borrower’s source of repayment of the loan out of his income is not in doubt.

        II.            If the surplus available for loan repayment is less than the required amount of loan repayment, there is strong doubt about the customer’s source of repayment, i.e. ability to repay the loan.

      III.            If the surplus available for loan repayment is equal to the required amount of loan repayment, further enquiries should be made as to what would sustain the customer if he uses all for loan repayment.

For a business or corporate borrowing with source of repayment out of profit or cash revenue from the business, the lender must obtain evidence that the profit is likely to be okay from the business profit projection, cash flow projection and information gathered from past records.

9.  Conditions

Certain conditions relate to issues that are primarily external to the borrower’s business but very critical to the ultimate success of the business. They include the prevailing rules and regulations guiding the business or the prevalent economic conditions in the polity or changes in government policies. Check the ability of the borrower to handle any sudden change in the rules of the game in the Industry to which the business belongs. Such conditions are included in the terms of the loan to allow for easy monitoring, making room for periodic reviews. All conditions prior to drawdown must be fully satisfied.

10. Remuneration

Remuneration is the reward or return to a lender for the use of his funds at the prevailing risk level, by a borrower. It is a sacrifice made by a borrower in order to secure the benefit of using the lender’s funds, for a specified period of time at a prevailing risk level. In the financial market, the remuneration is called Interest rate and it is given as a percentage of the loan face value per a given period, usually one year.

There are specific factors every bank should take into consideration when fixing the price of any credit facility. They Include:

- Characteristics of the Customer

- Existing relationship of the bank with the borrowing customer

- Connection of the borrower with other valued customers

- Segment of the market served

- Prices of competitor

- Total and/or marginal cost of funds

- Cap on lending rate imposed by the CBN or as agreed to by the Bankers’ committee

- Price elasticity of demand for the credit facility, that is, the borrower’s willingness and ability to absorb price Increase.

- Size of the bank and borrower

- Structure of the market

- Peculiar circumstance

- Cost of administering the credit

- Price of alternative uses of the bank funds.

11. Collateral Security

Collateral is the tangible guarantee or realizable security provided by the borrower to assure the lender that the loan will be paid. It serves as fallback to the lender should the borrower default in the loan repayment. Features of good collateral include:

- Adequacy of value

- Durability

- Ready identification

- Marketability

- Stable value

- Measurability

- Standardization of value, and

- Easy assign-ability

12. Matters beyond Financial Statements

These are inferences drawable from available information or any matter that can put a lender on alert. They are embedded in the SWOT analysis.

13.  Recommendation

Draw your recommendation based on your analysis above. If you want to lend, say why you want to lend. If otherwise, say why, the recommendation should contain the summary of your conclusions on the borrowers character, capital stake, capacity to repay, the purpose of the credit, how much is adequate for bank stake, the duration of the loan, stability and adequacy of the source of repayment, conditions to draw down, interest rate, collateral security, and matters beyond the accounts.

NOTE:

As a sole proprietor, partnership, Limited Liability Company or whatever, without ethics, even the biggest business will fall after rising beyond the level of its incompetence. ENRON corporate of the United State of America (USA) is a recent example. Keep good records and analyze your business proposal(s) carefully in order to win the confidence of the financier-the banks.

Apart from the points raised above two major techniques of lending appraisal are usually adopted viz a viz

1. The use of Ratio Analysis

2. The use of Qualitative Factors in the Financial Statement.

QUALITATIVE FACTOR IN THE FINANCIAL STATEMENT

Loan proposal can be appraised without necessarily calculating ratios. The following factors must be established.

                                  I.            Audited Financial Statement

                                II.            Three to Five years audited financial statement

                              III.            Purpose of the facility

                             IV.            Repayment Schedule

                               V.            Feasibility Study

                             VI.            Net worth of the company

                           VII.            Management/Board of Directors authorization and approval

                         VIII.            The amount of the facility

                              IX.            The tenure of the facility

                                X.            Bank / customer relationship

                              XI.            Fixed asset of the company

                            XII.            Security for the facility

                          XIII.            Status enquiry of the auditors of the company

                         XIV.            Management account

                           XV.            Other liabilities of the company

                         XVI.            Borrowing power/capacity of the company

                       XVII.            Memorandum and Articles of Association of the Company(MEMART)

                     XVIII.            Experience of the customer in the relative field

                          XIX.            The caliber / management team of the company

                            XX.            The nature of the customer business and the environment in which it operate

                          XXI.            Banks margin or remuneration

FINANCIAL RATIOS USEABLE IN BANK LENDING

CATEGORY OF  RATIOS	NAME OF RATIOS	METHOD OF COMPUTING	COMMENTS
1.      CAPITAL ADEQUACY	1.      Equity to total assets	Borrower’s Net-worth x 100 Net total Asset	Measure what is due to the shareholder after deducting the liabilities from the assets. It also gives indication of the extents to which the borrower is committed by outsiders and that from the owners of the business 25-50% is ideal.
	2.      Equity to total debt	Borrower’s Net worth x100  current liability + long term liability	Measures the extent of current borrowing in financing the business at least 50% is deal.
2.CAPACITY TO REPAY	3.      Fixed assets to equity	Net total fixed assets x 100 Borrowers Net worth	Measures the monetary value and the quality of the fixed assets in terms of the physical and technical condition, modernity and state of repair and utilization should be ascertained. 25 to 50% is ideal.
	4.      Equity to cost of investment.	Borrower’s stake x 100 cost of investment
	1.      Return on capital employed	PBIT X 100 Capital Employed
	2. Gross profit margin	Gross profit x 100  Sales	Measures the amount of gross profit earned on each Naira of sales value. The higher the rate the better. 25%- 50 is ideal.
	3. Net profit margin	Net profit x 100 Sales	Measures the amount of net profit earned on each naira of sales value. The higher the rate the better.10%-50% is deal
	4. Return on equity	Net profit x 100 Shareholders fund	Measures the ability of the management to give reward to owners of the business. The higher the rate the better. 10%-30% Is deal

	5.      Operating ratio	Operation Expense Sales Or Cost Of Goods Sold Sales	Measures the proportions of sales revenue that is consumed by cost of sales. Which area of the business is producing the chunk of the income? Is that area stable? Exception and extra ordinary items should be investigated and their effects on the published figure should be determined
	6.      Current ratio	Current Assets Current Liability	Measures the ability to meet debts when due, the ratio of 2:1 is highly recommended
	7.      Quick ratio	Currents Assets- Stock Current Liability	Measures the ability to meet debts when due without selling stock. The ratio of 1:1 is deal.
	8.      Liquid ratio	Cash Items Current Liability	Measures the ability to meet debts when due based on cash item only. The ratio of 1:1 is okay. A company would be solvent if it has the capacity to repay its debts as and when due. There are occasion when a company is making accounting profit, yet it is not in a position to meet its immediate obligations to suppliers, bankers etc.
	9.      Cash flow coverage	Profit + Depreciation Dividend + Debt retirements	Measures the adequacy of cash flow from operation to cover maturing obligation. Bank loans are repaid from cash flow generated from operations. The industry average and peculiar nature of the borrowing clients business should be considered before arriving at a conclusion. The higher the better.

	10.  Fixed charge coverage	PBIT Financial Charges	Measures the number of times profit generated covers financial charges.
	11.  Cash coverage	PBIT + DEP Interest payments	Measures the extent to which interest is covered by the cash flow  from operations
	12.  Stock holding period	Average stock x 360 Cost of Sales	Measure the number of days stock remain in store before being sold. Stock should be inspected to ensure that they are not obsolete or expired items that can only be sold at a high discount. The shorter the time the better.
	13.  Debtor’s period	Average Debtors x 360 Credit sales	Measures the number of days debts remain uncollected. Analysis of debtors is very important in order to expose irrecoverable or troublesome debtors and do away with them in the analysis. Look at the schedule of debtors and the age of the debts, the shorter the time the better.
	14.  Creditors period	Average Creditor x 360 Credit sales	Measure the numbers of days credit purchases remain un-paid. Ideally, a good company should endeavour to get more credit concessions from its suppliers than it is given to its own buyers. The longer the better based on creditors permission.

Note

If bank overdraft and short-term borrowings are included in the capital employed, the profit figure (PBIT) must be charging banks overdrafts and short-form interest. But if capital employed, figure excludes bank overdraft and short-term borrowing, the PBIT figure must be after deducting the bank overdraft and short-term loan interest. The growth in sales should be decomposed to determine part of it that was due to volume and/or price. This should be related to general price index or inflation rate in the economy.

CHAPTER THREE

CREDIT ANALYSIS

Banks are essential part of business activities, Companies borrow from hanks to acquire new equipment and build factories. Individuals who do not have enough money to pay the full price of a home, a car etc also borrows from banks. In other word through credit banks promote investments and sale of a wide range of goods and services. When loan is made, the lender is said to have extended credit: to the borrower, while at the same time accepting the credit of the borrower.

Credit can therefore, be defined as transaction between two parties in which one (the creditor or lender) supplies money, goods and services or securities in return for promised future payments by the other (the debtor or borrower).

TYPES OF CREDIT

Essentially, there are three types of credit, these are:

v  Commercial credit

v  Consumer credit

v  Investment credit

COMMERCIAL CREDIT: Has variants which includes bank credit (e.g overdraft, loans and assurance, trade credit (from suppliers, commercial paper (or note), invoice discounting, bill finance, hire purchase, factoring etc.

CONSUMER: Those are credits that permit individual or households to purchase goods they could not afford if they had to pay immediately. A person can use instalmental plan or deferred payment plan to purchase such consumption goods whose payment is from other services. e.g from wages

INVESTMENT CREDIT: This allows a business to obtain credit for capital goods e.g expansion of factory, procurement of machinery. It may involve capital deepening or widening.

Generally, the tenor of a loan varies from short to medium and long term. The period for each category varies according to institution, their nature and funding short term credit is repayable in less than two years. Short term method of financing are suitable for funding shortages in working capital or some farm operation, medium term credit extends from two to two years. They are manly used for procurement of plant and machinery. Long term loan usually exceeds five years and are mainly investment loans. These includes ordinary shares (or equity, performance shares, bank loan, debentures and other types of loan stocks.

IMPORTANT OF CREDIT

The importance of credit and consequently the role of banks in the economic growth and development of the country cannot be over emphasized credit performs two primary functions. First it facilitate the transfer of capital or money, thereby increasing the productively of capital by placing it where it will be most effectively and efficiently used.

The second function is that of economizing the use of currency or coin money. Furthermore, in monetary policy, cost of credit (notably interest and discount values) is one of the essential tools used to control and regulate money by the CBN. Others are the quantitative tools such as:

Ø  Open Market Operation

Ø  Special Deposit

Ø  Cash Reserve

EVALUATION OF CREDIT REQUEST

In order to extend credit, the banker must evaluate the project, promoters and prevailing economic situations.- In evaluating credit, three basic principles recommended by LC Matter (1972) (a banking author of great cc known) is recommended to serve as a guide they are:

Ø  Safety

Ø  Suitability

Ø  Profitability

SAFETY: The safety of any loan/advance is of paramount importance to the bank hence, banks lay great emphasis on the character (honesty) integrity and reliability of borrowers. There must be a reasonable certainty that the amount granted can be repaid from the profit and cash flow generated.

From the operations of the company, in support of the safety requirement, 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.

SLIITABILITY: The banker should also satisfy himself about the suitability of au assurance. The purpose of the loan must not be in conflict with the economic and monetary policies of the government courtesy the CBN guidelines and BOFIA. Apart from the guidelines, there are certain ventures e.g gambling betting and speculations to which bank should not extent their credit facilities.

PROFITABILITY: As a profit oriented outfit, banks expect their facilities to yield certain level of profit with which to declare dividend to the shareholders. The interest on loans constitutes a major source of income to the banks

FORMS OF CREDIT

Credit facilities are granted to both individual and corporate customers of banks. Some types of facilities are peculiar to the needs of individuals rather than corporate organizations. To deny this class of borrowers of credit assistance due to the size of loans and everyday is to underestimate the importance of individual credit needs for economic survival and growth. Credit can further he classified into:

        I.            PERSONAL CREDITS

      II.            PARTNERSHIP AND UNINCORPORATED ASSOCIATION CREDITS

    III.            INCORPORATE COMPANIES CREDITS

    IV.            OTHER CREDITS

PERSONAL CREDITS: This is credits given to individuals for business and personal needs. Personal can further be divided into:

Overdraft

Personal loan

Working capital loan

Bridging/mortgage loan

Capital Assets Acquisition loan

Farm Advance/Agricultural loan

Overdraft: is a credit facility approved to a bank customer holding a current account to enable him/her draw over and above the balance in his/her account. The facility has to be repaid on the receipt of the expected funds within the shortest possible time. The facility is usually for a short time and is to be repaid from a known source. Overdrafts can be obtained in two ways:

(i) Approved Overdraft

(ii) Unauthorized overdrafts

Approved Overdraft

These are overdrafts agreed by customer and the bank. It could be of short term duration not renewable as it is meant to cover specific need of the customer or the one that is revolving and renewable for individual tradition purposes. It is processed and approved by the bank before the customer can draw down. Assessment of application for the facility is usually done by appraising the individual applicant. The account is expected to swing into credit without developing hard core.

Unauthorized Overdraft

An unauthorized overdraft occurs when a customer without consent of the banker issues cheque in excess of his credit balance and the cheque is paid. This is sometimes done by salary earners in anticipation of receipt by the bank of their salaries that are mandated. A banker is not bound to honour a cheque issued in that manner. Before the banker returns a cheque unpaid, however; he has to satisfy himself that the customer has no credit with the bank to cover the cheque.

Personal Loans: As the name implies personal loans are granted for personal use rather than for business use. Usually the purpose will be for purchase of durable consumer goods, house repairs and education. Any purpose that appears illegal or speculative would be declined by the bank. In granting this facility the banker would obey lending principles discussed earlier.

The contribution of the customer must he considered in relation to the amount requested. A proper analysis of the customer cash flow needs to be carried out to confirm that the savings or earning of the customer has not be fully utilized, the consequence of this will put the repayment of the facility in doubt. The illustration below gives an apt example of personal loan:

Illustration

Mr. Rahman has been in account with the branch for years. He is a successful businessman. Mr. Rahman’s account has been satisfactory conducted and has been trouble free. Though, there has been an occasional small overdrafts but prior approval have always been obtained. Notes from a recent interview shows that Mr. Rahman who earns a salary of N150, 000 per month, receives as dividend an average of N1, 350,000 per annum. He requires a personal loan of N1, 500,000 to buy a new car. Repayment is to be over a period of twelve months. He has the following commitments to meet every month, rent N20, 000, food and maintenance N60, 000, energy N6, 500, car fuel and maintenance N35, 000 and other N15, 000. He approaches if there is any assistant your bank can render in this regards.

Required

How will you deal with the customer’s request?

Answer

Ø  The customer have a good relationship with the bank

Ø  The customer’s account has been satisfactorily conducted

Ø  Mr. Rahman appears reliable as there has not he complain on his overdraft

ü  With a salary of N150,000 and dividend of N112,500 per month, his financial position looks favorable

ü  The purpose of the facility was clearly stated in the proposal

ü  The amount of the facility was also stated in the proposal

ü  The tenor of the facility is one year i.e. 12 months

ü  Security for the facility is conspicuously missing

ü  The customer sources of repayment can be affirmed thus:

N                                             N

Average monthly income (150,000+112,500)                                                                      262,500

Less Expenditure

Rent                                                                                                     20,000

Food and maintenance                                                                                60,000

Energy                                                                                                                 6,500

Fuel and maintenance                                                                  35,000

Others                                                                                                                 15,000

Loans repayments                                                                          125,000     

                                                                                                                                                               261,500

Surplus                                                                                                                                                                1,000

After taking account of the monthly repayment lie would have a surplus income of N1, 000.

ü  Will the amount be enough to care of his personal and family need

ü  Facts must be obtained as regards his monthly expenses

ü  What and what made up of the others as stated in his proposal

ü  What type of car his he buying?

ü  Payment of dividend is a lump sum and not monthly as indicated above

ü  What happens if dividend is not declared?

ü  How much is the customer commitments

ü   What is the bank margin

ü  As security the bank may take a mortgagee of his stocks and shares

CONCLUSION

If adequate answers can be provided for the questions raised above, the bank may be willing to assist Mr. Rahman.

Bridging loan: is most commonly found in property deals. It is meant to tide over a financial request, whose sources of repayment have been identified as certain. A bridging advance can either be a closed (where contracts have been exchanged for the sale of the existing house) or opened ended (where contracts on the existing house have not been exchanged and the period for which finance is required is now known).

A good credit analyst should consider the following points when assessing customer for bridging loan:

(i)          Price of the house being purchase

(ii)         The bank should identify whether it is a closed ended or open-ended.

(iii)        Amount of mortgage being arranged with evidence

(iv)       Valuation to be made by the branch

(v)        Has any deposit been made in respect of the purchase?

(vi)       Does mortgage provision depend on the repayment of the existing mortgage on the house being sold?

(vii)      Price of the house being sold

(viii)     Present of outstanding mortgage to be confirmed

(ix)       Are contracts exchanged or not? If yes, what is the completion date? If not, what effort is being made on sale of the house? Is the customer prepared to reduce the sale price in case of need?

ix)         The branch will have to sight the property and value it

(xi)       Check whether the property is in joint names or not. If in joint names, has the joint owner consented to sale?

(xii)      Allowance to be made for legal and agency fees

(xiii)     Removal expenses including where applicable, the cost of internal decorations

(xiv)     Provision for cost of insurance cover

(xv)      Repayment of outstanding mortgage on the existing house

(xvi)     The asking price of the existing house. If reduced by say 10-20% will it still be adequate to meet the repayment of the advance after deducting costs of sales?

(xvii)    Will the repayment cover the principal sum, interest and other charges, most especially if it is an open ended. Bridge?

(xviii)   Has customer other liquid resources to cover any short-fall?

(xix)     In case there is a short fall can the customer repay over a short period of time e.g. 12 months? Financial position of the customer has to be assessed.

(XX)     If the proceed of the property to be sold is agreed payable to the solicitor’s the bank will have to obtain the solicitor’s undertaking to pay such money to the bank on receipt.

Illustration

Mr. OGA is a production Manager. He is about 36 years old working for a liquor manufacturing company. He has had a satisfactory account with the branch for about 9 years, he came to your office for financial assistance and at the interview he disclosed that he had just secured a new employment at a higher grade with another bigger company in the extreme side of the town, and requires a bridging loan to finance his change of home.

His present house worth N9, 000,000 and subject to a building society mortgage of N2,700,000. The new house will cost N10, 800,000 and a mortgage of N9, 900,000 has been arranged by the same building Society, but to be available only when the present mortgage is repaid. There is no firm buyer yet for his present house but the vendor of the new property is pressing for exchange of contracts. The Bank is being asked to lend the full purchase price plus. N200,000 for legal expenses, renovation and cost of movement to the new house. The bank is to be repaid when the present property is sold.

Required:

What would you consider when assessing the customer request?

Answer

v  This is an open — ended bridging finance, which is usually avoided by banks. However due to the long relationship with Mr. Oga the bank might wish to assist.

v  Since Mr. Oga is taking on a new employment at a higher grade his income will be enhanced

v  The bank will make an independent valuation of the old house and confirm that house is of a type suitable for security and located in the area where buyers would easily be found at a price that will be enough to pay off both principal and accrued interest plus Cost of sale.

v  The bank will limit its exposure to N3, 800,000. i.e. N2, 700,000 to pay the old mortgage and N900, 000 for the new mortgage, N200, 000 for legal cost, renovation and cost of movement.

v  The sum of N3, 600,000 will be paid direct to the building society and the building society will add his own advance. Afterwards it will issue its cheque for the cost of the new house to the seller or his agent. The customer’s proposal is thus modified to suit the bank and also to meet his own needs.

v  The sale of the old house will be handled by the banks solicitors or estate agent.

v  The amount required is N11,000,000 but the bank may wish to reduced it to N3,800,000 at stated below:-

N

Outstanding mortgage (old house)                                                    2, 700,000

Amount needed to balance new house                                           900,000

                                                                                                                          …………………..

3,600,000

Other cost                                                                                                     200,000

                                                                                                                          ____________

N3, 800,000

v    Repayment would be from the proceeds of sales of the present house worth N9 million.

v  The term of the loan is unknown since it is an open - ended bridge. However it is expected not to last for more than 12 months.

Conclusion

House building loans or house loans have to do with provision of financial assistance to individuals who intend to build their personal house. This is quiet difference from bridging loan where the intention of the applicant is to exchange an existing house for new one.

When application for house building is been forwarded by customer the following points will be considered:

·         Total cost of building i.e. cost of land, contingencies and cost of construction

·         Does the customer already own land or he is yet to buy it?

·         What proportion of the table outlay is the customer contributing?

·         Loan interest, insurance premium and other charges.

·         For self employed, account for at least the past 3 years will be required to show reliable level of income.

·         Whether the customer can cover mortgage repayment plus interest on the bank advance.

·         Investigation of title and confirmation that the land is free from encumbrances.

·         Has Town Planning Authority approved the building plan?

·         Stages at which payments will be made against architect’s certificates

·         Is the builder technically good to handle the contract? Status opinion to be obtained from his bank If not known.

·         What is the starting date and completion date? Is there any penalty for late completion?

·         Estimate approximate value of the property for security purposes

·         Legal mortgage on the new property.

·         lf inadequate, consider additional security

·         Insure the property and note the bank’s interest on it

·         Consider life insurance cover i.e. mortgage protection insurance for the customer during the period of the advance.

Illustration

Miss HAESHAT is a young chartered accountant. She has been in account with the bank for about 8years. She was promoted 6 months ago to the post of Deputy Chief Accountant in a cable manufacturing company she is working with. With the new promotion Miss HAESHAT feels that she could start a building project if the funding is provided by her bankers. She had bought a piece of land about 6 months ago from the state housing corporation from her personal savings. She read recently in the news paper about the new product of the bank on mortgage finance for personal customers interested in the development of owner occupier properties. With the condition stated in the advert she thought she is qualified to take a loan of N8, 000,000 repayable within 20 years. She has now approached the bank for an assistance having mentioned that her annual total take home pay per annum is N2, 000,000. She has a husband with two kids and lives in an accommodation with a rent of N360, 000 per annum. She is the bread winner of the family. How would you deal with her request?

Solution

In assessing her request consideration will be given to the following point:

·         Customer  is well qualified with good job prospect

·         The purpose conforms with the bank’s advert

·         Type of house and location of the plot

·         Has she obtained san approved building plan?

·         Is there any regulation on the type of building to be erected on the plot by the Housing Corporation?

·         The customer will provide total estimated cost of building and the underlying assumptions should be verified.

·         Who are the builders? Are they known to the bank, if not, references should be taken as to their competence and integrity

·         The builder to provide information on the starting and completion date.

·          The customer will be asked to provide income and expenditure statement per month. The statement will be evaluated to deduce whether she would be able to meet repayment obligations of N3, 333:33 per month without interest.

·         Consider moratorium until completion of the project.

·          Stage payments will be made against architects certificates

·         Security — legal mortgage on the property.

·                  Insurance — fire and mortgage protection policies with reputable insurance company.

CONCLUSION: if satisfactory answer could be provided to the questions raised and the repayment could be met from the income and expenditure budget the bank may wish to assist.

Capital Assets Acquisition: Individual personal customers may apply to their banks for facilities to purchase capital assets.  In assessing such proposition banker will apply the canons of lending. The application will be easy to deal with if the customer has had track record with the bank. Some banks have standard application form, which the customer will complete, which easily lend itself to credit scoring and may thus make personal interview unnecessary.

Repayment of such facility will come from the surplus income of the borrower. In addition to the application form the customer will need to complete a statement of income and expenditure form which will enable the banker to determine the ability of the customer to meet the repayment within the stated time.

The Facility will be made on a loan account and not by overdraft for easy control. The borrower’s expected contribution will depend on;

        I.            The type of asset to be acquired.

      II.            Whether the asset is new or second hand; and

    III.            The policy of the lender, for instance, if the facility is to be used to buy a second hand car, the lender would expect the borrower’s contribution to be higher than if he is buying a new car.

The age of the vehicle will also influence the level of contribution of the borrower and the term of repayment of the facility. While on the average a borrower would be expected to contribute 20 percent on a new vehicle, 33per cent on second hand vehicle, the lender may consider 10 percent as adequate contribution for capital assets such as furniture, fittings, household repairs and electrical equipment. The Facility for a second hand vehicle will be expected to be repaid within a period of three years while in other cases a period of years or more is not unusual.

Working capital Finance: a sole trader like a corporate organization may require financial assistance from his banker because greater proportion of a sole trader’s financial resources may have been used in acquiring fixed assets for his business. The trade needs funds to purchase stock and meet expenses such as transportation, Stationery, electricity, rent and rate. Even if the stock is obtained on credit, cash has to be paid for the expenses and there is bound to be an interval between the acquisition and sale of stock. If stocks are sold on credit the need for cash from external sources becomes more obvious.

The customer may not be able to provide good financial Information, but the banker will assess the borrowing proposition using the canons of lending. A lot of reliance will have to be placed on the character and capacity of the customer who should have had a track record with the banker.

Farm Advance or Agricultural Credits

Farming is one of the oldest professions in Nigeria. Despite this, the banking community has not been favorably disposed to the provision of credit to farmers until the advent of Agricultural Credit Guarantee Scheme operated by the Federal Government through the Central Bank of Nigeria. Lately agriculture is classified as priority sector for credit purposes. Despite the specialized nature of the business, agricultural propositions are basically not different from any other banking proposition. The same general principles will apply in their assessment.

The viability of the farm and the experience of the fanner are vital ingredients in the commercial success of a farm business. Consequently the banker must have a detailed knowledge of both the farm and the farmer before starting the assessment of any proposition.

Illustration

Mr. Agbeloba, a farmer maintains a good banking relationship with you for about 10 years. He observed that he is becoming out of date in his methods of farming and decided that he must invest in more modern equipment in order to improve the efficiency of his arable farming. He is also to increase and improve his poultry equipment In order to obtain a higher return. His account has for many years shown a reasonable swing in the borrowing but virtually no reduction has been seen in the seasonal peak borrowing for few years back. Profits have been reasonable for the type of farm but outgoings including provision for a good standard of living have absorbed them. What considerations would you have in mind when examining his request?

Solution

In assessing the facility the following will be considered:

·         There Should be formal applications showing the amount required, duration of the advance and method and source of repayment,

·         Establish whether the customer has the ability to make success of the new scheme and thereby repay the bank advance within a reasonable period. This can be achieved easily as a result of the long relationship between the customer and the bank.

·         The reasonable seasonal swing is an encouraging sign but absence of reduction in the seasonal peak borrowing will certainly require investigation.

·         If the profits realized from the farm is being eroded by an extravagant standard of living rather than being ploughed back for replacement of old equipment and stock and investment in new ones in the farm, the bank will not be encouraged to increase his lending.

·         Consider the proposed borrowing in relation to the capital resources of the customer. There is no hard and fast rule but the borrowing is to be more than the farmers resources, the banker will definitely not be encouraged to lend in view oft¹ hard core developed in the past

·         The farmer would be asked to provide full details of equipment and livestock to be purchased and an estimate of the increased production and economies he expects to achieve in future.

·         Security taken may be charge over the farmland if he is not a security. If a tenant farmer, an agricultural charged and charged on quoted investments or life policy, if any, would be desirable.

CREDITS TO PARTNERSHIP AND UNINCORPORATED ASSOCIATIONS

Partnership is a relationship between two or more person carrying on a business in common with a view of profit. A partnership is not a legal entity although partners can sue and be sued in the firm’s names or in their own names. Every partner is an agent of the firm for the purpose of the business of the partnership. Every general partner has authority to use the firm’s name and bind the firm. The implied power of a partner does not include the power to borrow except it’s a trading partnership. A partner in a non-trading partnership should receive specific authority to borrow on behalf of the firm. No partner can bind the firm by giving a guarantee unless the giving of guarantee is part of the ordinary business of the partnership.

A deed of partnership usually specifies the rules and regulation* of dealings of partners with each other and with third parties. A partnership may be orally constituted. When a partnership applies for credit facility the bank should obtain a copy of the deed, if any, for it* own records. Partnership is very common among professionals like Lawyers, Accountants, Surveyors (both land and estate), Doctors and Architects.

Partners are jointly liable for the firms debts. A banks mandate, will however incorporate joint and several liability. When a partner acts as an agent of the firm he is liable to the full extent of his private resources. Where there is a limited partnership there should be at least one general partner who will be liable for all the partnership debt* while the liabilities of the limited partners will be limited to the amounts stated in the agreement. In view of this credit facilities to partnership deserve special care that will be enunciated in this chapter.

Partnership could benefit from all forms of credit already discussed in the earlier chapter provided the proposition satisfies the cannons of lending. The only exception to the rules that the banker is dealing with more than one individual and usually not more than twenty persons who have come together as partners for the purpose of managing a common business. It is worthy of note as earlier stated that it is only a trading partnership (i.e. one whose principal operation is manufacturing or buying and selling) that confers implied power on a partner to bind the firm in any of the following transactions:

(I) contracting debts and paying debts on the partnership account.

(ii) Borrowing money on behalf of the Firm.

(iii) Pledging partnership assets as securities for the purpose of its business

In non-trading partnership e.g. one of medical doctors, solicitors or accountants or auctioneers, power would be given to a partner by express agreement before such partner can bind the firm in respect of the above listed transactions. The authority of a partner in a partnership whether trading or non-trading does not extend to the following acts or transactions:

(a)    The execution of deeds on behalf of the partnership unless suet partnership had been formed by deed or the partner-dealing is appointed by deed.

(b)   The giving of a guarantee in the name of the firm by a partner

(c)     Acceptance of property in lieu of money or in satisfaction of partnership debt.

In view of the foregoing a banker must be sure that a partner who intends to pledge partnership property in favour of the bank for credit granted to the firm is properly empowered to do so otherwise such execution will be null and void. However, upon the death of a partner a surviving partner has power to mortgage the partnership property both real and personal to secure a debt (e.g. a bank overdraft) in the name of the firm in so far as it is necessary, for the purpose of winding up the partnership.

SECURITY: Security obtainable includes the partnership property i.e. property bought with money belonging to the firm unless contrary intention is proved. Property belonging to any of the partners, may be use to guarantee the partnership debt.

Note - A partner may not execute a deed on behalf of the partnership unless he has been authorized to do so by deed.

Illustration

VOTE ENTERPRISES

Balance sheet as at 31st December 2010

Capital Account                N                             N                                                                            N                             N

Jide                                        300,000                                            Goodwill                                                                   35,000

Olu                                         300,000                                            Fixed Assets:

Bola                                       300,000                 900,000           Fixtures &                                 400,000

            Fittings

             Less depreciation                40,000 360,000

Current Account

Jide                                        6,800                                     Motor vehicles                  340,000

Olu                                         6,800                                    DepredatIon:                     136.000

Bola                                       6.800     20,400                                                                   204.000

599,000

Current Liabilities                                                           Current Assets

Trade Creditors                    128,500                                              Stock                                                     325,000

Expenses Creditors  98,600          227,100                 Debtors                210,000

Provision             11,000                   199,000

Cash at Bank                                      18,500

Cash at hand                                      6,000

1,147,500                                                                                             1,147,500

Sales                                                        1,800.00

Net profit                                              185,000

Before the company’s request is approved or rejected the following factors will be considered.

Ø  As a trading partnership, a partner has implied power to borrow and bind the firm. Despite this, the deed of partnership if any would be obtained for necessary clarifications on partners’ dealings with third parties.

Ø  The balance sheet for the current year will be analyzed as follows:

Ø  Net working capital of N321, 400 or working & capital ratio of 2:4:1. This as a single variable appears to be in good state.

s

v  Liquidity ratio of 0.98:1 is normal, as the margin below 100% is quite negligible. It implies that the company has the ability to meet its short-term obligations.

v  A net profit margin of 10.28% confirms good management abilities of the directors.

v  A cash flow of N361, 000 at the end of the trading period shows a very good repayment ability of the company.

v  A breakdown of trade and expenses creditors should be obtained to determine the age of the debts. It should be confirmed that there is no pressure from any creditor

v  The amount required for working capital is not out of tune with the volume of the partnership business. A turnover of about N1.5m is quite commendable. Given the fanatical assistance the partnership could do better.

v  Bank should obtain balance sheets and profit and loss accounts for at least the three previous years in order to compare the trend of the partnership business performances. From the balance sheets, obtained the gross profit to see how much of this is eaten up by expenses. Compare activity ratios with those of other companies in the same trade.

v  The partnership should be asked to draw a cash budget covering the period of the overdraft facility to determine the need, the peak and lowest period of need and the earliest time of repayment.

v  The partnership mandate will incorporate joint and several liabilities.

v  In view of the age of the account and that the directors are well experienced to manage the business, as they are qualified pharmacists, we recommend as follows.

The bank may be prepared to lend if the partners can provide guarantee backed by collateral security such as land and buildings.

CREDIT TO INCORPORATED COMPANIES

The banker in the ordinary course of business deals with various types of customers whose accounts lie has the responsibility of managing properly. Perhaps the most important group is the corporate customers. This category of customers is further subdivided into two types, i.e. those with private limited status and those with public limited status. Both types constitute the most important group of customers to the banker for lending purposes.

Without any gainsaying the volume of banking business between the incorporated companies and their bankers constitute the largest share of the banking business in aggregate terms?

Important consideration when appraising incorporated company’s financial request is the use of financial statements to analyze and determine the financial position (past and present) and to project its future position. This although not fool proof, can assist in no small measure in guiding a credit analyst determine the suitability of a credit proposal In dealing with corporate organizations distinctions could be drawn between a small corporate borrower (Private Limited Company) and large corporate borrower (Public Limited Company). It is to be noted however that so private limited companies may have achieved the size of a public limited company in course of time.

Small Corporate lending

In determining small business, it is usual to define them in terms of size of turnover (sales) or size of capital etc. A credit analyst may consider these factors for administrative purposes as he may be constrained to define them using the feet that small business would hardly, if ever, be able to produce up-to-date and good quality financial information or projections which will be available from the large corporate borrowers. The expertise to produce them may be visibly absent in small business which in most cases will be managed by an individual who is the alpha and omega. In dealing with either of them the bank has to use different approaches. More often than not the managers of small businesses lack the education in financial matters to which the managers of large corporate organizations would be exposed.

Financial Records: Usually, small businesses owned by few Individuals e.g. husband and wife have none or little financial information that may guide, a financial analyst hence the banker, if willing to lend, may have to draw a financial statement with the Information given by the owners of the business or ask the business to employ the service of an accountant to prepare the information in a way usably to the bank. This no doubt will be subject to faults but all other things considered, maybe useful for decision purposes. On request they may be able to provide formal budgets and cash flow forecasts, and in situations where they cannot provide them by themselves they would have no difficulty in getting assistance of an external accountant to help them. Information provided will be accepted with a pinch of salt because the accountant will be working for the customer and not for the bank, hence the customer’s inter become paramount before the bank’s. The bank’s analyst considering the information should have it behind his mind that financial.

Forecasts might have been prepared to suite the purpose the analyst e.g. profit and cash flow forecast might be too optimistic, sales forecast may suffer from the same defect. The credit analyst should not expect hired accountants to curb the optimism of clients, although this does not imply that some good accountants\high reputation will not try to represent the company’s true position. In some situations forecast produced are significantly different from the most recent financial records, hence customers may need to adjust such wide improvement, and failure of which the banker may constrained to view the projections with a negative attitude.

Decision making as to whether to assist small businesses against the background of inadequate information is a task which then experience analysts find to be quite demanding. In view of this lending guides and checklist provided below for different type; proposition should be found useful in this situation,

Big Corporate Lending

Big corporate organizations trading in multiples of naira are often quoted on the capital market, where the access to funds from the members of the public through their shares. They are referred to as public limited company this unique opportunity big corporate organizations still approach their banks: for one financial assistance or the other during temporary liquidity problem. It is always much more c deal with their requests because of the level of skilled responsible for the management of these public limited the amount of financial information disclosures the stock requires from them. As a matter of legal requirement expected to prepare at the end of each trading period report, published for the consumption of the member’s of national newspapers. Further, the performances of those companies are monitored by the nation’s stock exchange and records of their performances are reflected in the share price quotation: the financial papers on daily/weekly basis. In respect of corporate companies not quoted, the personnel position would not be significantly different from those quoted. It is expected that the caliber of personnel managing the company would be and knowledgeable. ‘In view of this, au necessary, information needed by the banker for assessing the suitability of their request will not be difficult to obtain. In dealing with this class of customers the following steps may be desirable:

The norm usually is to have a liquidity position of 1:1, the current assets of cash and debtors can fully repay the current liabilities maturing within one year. The trend of improving over time above 1:1 indicates a healthy liquidity and if declining below 1: 1, it is a warning signal to the lender.

(c) Current Position: The current position is determined by expressing a relationship between the current assets and current liabilities. This unlike liquidity test includes the stock of the current assets. The norm is 2:1. Ideally looking through the trend the position should show an improving trend, but whatever result is obtained, the lenders opinion as to what is peculiar sector will come to play a major role in accepting or rejecting the position e.g., a retailer of liquor with rapid turnover will show a lower ratio than a manufacturer of liquor with large stock constrained by production process, e.g. time lag of production, and generous credit policy to his distributors. If the ratio is higher than 2:1 e.g. 3:1 it may imply inefficient use of resources by the management of the company, and a ratio below 2:1 indicates inability to meet short-term debtor. The two situations are danger signals to the lender.

Profitability Position: A loss making business would soon exhaust the capital contribution into the company. If the trend is not -checked the creditors’ position would also be impaired by losses. A lender will wish to see an improvement in the level of profit from one year to another, as this will, among other things confirm that the management of the company is progressing. Assessment of profitability should begin from the gross margin of profit to turnover (sales). A good gross margin return will be able to absolve much over heads and still leave a reasonable profit, called the net profit margin. The net profit margin is the position after payment of all over head expense including bank interest and charges. If such position is positive the bank is sure that the lender would be capable of meeting the repayment obligations if similar position is maintained in the nature. In analyzing the trend, profit made due to extra-ordinary transactions such as profit on revaluation or sale of fixed asset should be eliminated so as not to use such result for future projections. The lender would expect the company to plough back some of the profit made in good years into the business. This will be seen in the accounts as retained profit. If all profit are spent or distributed to shareholders, it may be an indication that the company is extravagant, not providing for rainy days and not thinking of internal funds for future development. This is also an unacceptable method of management, in the lender’s viewpoint. The company would be advised to ensure that a proportion of profit is retained in future.

Having considered the operational returns i.e. profit made from trading, it may be wise to look at the level of return generated, relating it to the capital employed for such trading operations. The estimation of return on capital employed can be done in all businesses. Low return in the short run e.g. less than 5% may be critical but if the situation continues, the owners of the business may be advised to put their funds elsewhere, where they would be able to earn a better return while the bank in the meantime would reject their propositions due to their inability to earn a good return on the existing capital.

Non - Financial Appraisal: This appraisal does not look into financial statements of the lender but as to how the human material resources of the company are used for the optimal benefit the business. Three-major areas shall be explored in this context:       

— Markets and Products

__Material Resources

__Management Team

(1) Markets and Products: In making a profit projection, the level of sales would be a primary factor as such level is an external factor which depends on the consumer actions and reaction to the company products. It is expected that the level of sales would be good if the company’s product is of good quality and is offered to customers at reasonable price. In the absence of a good product enjoying a wide market, the business may not be able to sell its products. The lender’s appraisal of future sales must be based on the quality of the company’s product and existence of suitable markets for quick sale. The lender should also consider the level of competition the company will be facing in the market locally, nationally and internationally and therefore advice as appropriate on effective promotion and Packaging.

(2) Material Resources: A business without adequate premises, poor machinery and equipments and facilities for distribution of its products is poised to fail even with the best brains. To execute plans and take actions, a business must have good resources at its disposal. Confirmation would he sought in respect of.

Premises - Registered office and present location of the business.

 Machinery - type of machines being used, the age, conditions, availability of spare parts and maintenance. What is the effect of technology on the business?

Vehicles - Type of vehicles, age, condition, servicing contract, etc.

Labour - The category of labour, classify into skilled and unskilled labour.  Any problem on labour/employer, financial and operational relationship?  Any strike in the past or not? How are labour relations being handled by management?

(3) Management Team: A group of individual would be responsible for the management of the business. Each of the departments would be in charge of an expert e.g. production, sales, finance, administration, personnel, marketing and others. They all come together as an arm of the system to direct the business under the leadership of the Managing Director. A banker must know customer in case of corporate organization, it is imperative for the banker to know the team so as to appraise the potential and capabilities of the team based on the following information.

© Educational background and experience of each of the members of the team within and outside the business being assessed -Academic, professional qualifications and working experience.

© Personal records of each of their directors, i.e. age, health records, personal insurance, residence etc.

© Track Record of the Team: What have been their successes and failures over time? Are past performances relevant to future plan or the company is thinking of diversification due to failures experienced in the former line?

© Share holdings/Control: Are employees¹ part owners of the business or they are fully on employment? How is the business controlled? What is the structure of the business? Does it enhance good management control processes?

Conclusion: Non- financial assessment requires the banker to visit the business to see things for himself and confirm the position as claimed by the managers of the business. A monthly or quarterly visit to a large corporate customer would he desirable.

CHAPTER FOUR

CREDIT ADMINISTRATION

INTRODUCTION

The lending of money is one of essential functions of a bank. One that does not lend is not a bank in its true sense of the word. All progressive banks seek earning through interest on sound loan. However, the fact that loans sometimes fail need not be overemphasized, leaving bitter pills in the mouth of not only the borrower and the lender but also the economy as a whole.

Non performing loans have killed many banks and there is no denying their obvious presence in the books of Nigeria’s mega banks. To tame this monster, effective credit administration is the way out and to effectively administer credit, a written credit policy, parameters for reaching lending decisions, proper documentation, Relationship management strategies, managing problem loans and recoveries must be predetermined in a well designed bank specific framework.

No doubt, effective and efficient credit administration will finally bring the banking sector and Nigeria’s economy at large, out of the woods. Until credit administration is set straight, the bank survival remains doubtful.

LENDING POLICES AND PROCEDURES

Principles of Lending

Despite, the present aggressive nature of the Nigerian banking scene, which has seen banks becoming generally anxious to tend money to very sound projects, only credits that are fully repaid with interest are successful, hence credits must be extended only when the probability of repayment is high. Such a probability will be derived based on certain parameters, which includes age-long principles of lending. These principles are not foolproof, unbreakable or incapable of wirier interpretation to meet given circumstance.

From the foregoing it is generally agreed that the most crucial considerations in credit analysis are the twin elements of trust and confidence - trust in the credibility information and ability of the borrower to run an enviable and profitable business, and confidence in the character and willingness of the borrower to pay his debts.

Written Policies

In the light of the above, banks conventionally evolve policy guidelines, which provide the framework for dealing with the task of lending. Credit policy refers to operational guideline and procedures, which clearly set out the bank’s lending philosophy. Simply put, a bank’s credit policy is a broad statement of its basic philosophy and concept of lending.

Policies are simply habits and customs that have prevailed over a period of years without anyone taking cognizance of the fact that such customs have become policies. The argument, however, is whether these policies should be written or not. Since all banks have credit policies, there seems to be no plausible argument against reducing the policies to writing.

Credit policy should be the first signpost to guide the lending decision process. They contend that it must be written in form of a manual as this allows for consistency, definite direction and clarity. Sure, the bank has nothing to lose and everything to gain.

The benefit of written lending policies include the uniform treatment allowed all customers from all representatives of the bank, irrespective of the branch, and the fact that it establishes clear policies and procedures.  Best practices call for written policies dealing all relevant procedures in the lending process.

Components of written lending policy must include the following:

(1)    Credit risk diversification goals:  Stated goals for diversification of asset portfolio by economic sector or geographical region.

(2)    Currency and maturity:  Instructions by economic sector or geographical region.

(3)    Types of credit offered:  Explicit explanation of forms of credit such as short-term, working capital, investment, consumer etc Prohibited/restricted areas of lending need be mentioned.

(4)    Interest rates and fees: Explanation of require/expected rate of return, interest charges and additional fees relevant to each category of loan.

(5)    Size Limits: Mention of limits on the size of individual loans or exposures to individual borrowers.

(6)     Documentation required: Clear description of documentation required to obtained loan.

(7)    Collateral: Statement of types of collateral accepted for particular loans: determination of collateral to loan ratios; statement of other requirements such as insurance of collateral, court registration of collateral.

(8)    Decision criteria and authority: Basis on which loan decision is made’ statement of who authorizes lending, which includes maximum limits that various officers may lend.

(9)    Contract contents, termination: Clear elaboration of elements under which contract may be terminated.

(10) Follow-up: Description of relationship management strategies which involves how and who monitors client’s performance and repayment.

(11) Repayment and prolongation procedure: Description of procedures in case of non-repayment, handing of non-performing loans and procedures for prolongation.

(12) Exception, related parties: Description of circumstances under which exceptional treatment may be granted and requirements for loans to related parties.

(13) Insider’s loan policy: How loans, advances or any credit request by bank directors, management staff, officers of the bank and their related interests will be treated.

However, when elements of a lending proposition do not fit strictly within the policy, it does automatically reduce but does not annul the possibility of the borrower receiving the requested facility, in this instance; covenants such as increasing equity could be included in the loan agreement.

There is a great need for each bank to develop, write and maintain a clear cut, explicit policy, which must he reviewed regularly. This is best industry practice. It will engender reasonably uniformity in the lending decision amongst the lending officers as they will be disciplined to go through the exercise of committing the loan proposal to general outlines of a credit policy. Consensus in lending decisions may be attain, leading to a high degree of judgment accuracy. Such consensus judgment, albeit not compulsory.

CREDIT RISK ASSESSMENT

Credit risk is the most obvious risk in banking. It is defined as potential losses from the refusal or inability of credit customers to pay what is owed in full and on time, it is a risk that a borrower won’t pay back the lender as agreed. The probable occurrence of default (either partial or total) makes conducting a thorough risk assessment of risk profile of the customer/transaction.

The concept involves observing critical factors that could engender default. These factors, must impact the lending decision greatly; they are depicted below:

Management Risk

The importance of management capability of the borrowing client company is great. The following perspesctives are inspected.

Ø  Experience: The more experienced the management, the more favourably disposed the bank will be to its loan proposal. Hence, a young Inexperienced management potentially presents a relative greater risk when compared to an older, more experienced management team.

Ø  Continuity: In relation to key person risk, a bank will be interested to know that the existing management will continue throughout the duration of the loan tenure (though this can be stipulated in the covenants in the loan agreement). An owner/manager approaching retirement age may be of concern, if no succession planning has been undertaken to ensure that the business will continue as a going concern subsequent to the retirement.

Geographical Risk

Ø  Location: These are risks associated with a geographical area (such as civil unrest in Niger Delta or low population bases) are taken into account if such risks may possibly impact the entity applying for the loan.

Business Risks

Supply Risk: Adequate supply of inputs at reasonable prices may not always be within reach.

Possible factors: are:

• Liquidation or non-existence of major stock suppliers

• Fluctuating price of inputs

•Possibility of substitutes for stocks

• Delivery capabilities of suppliers

• Possible environmental/economic barriers to stock supply.

Production Risk

This is the possibility of the inability to complete production of finished goods and services. The possible factors are:

Ø  Labour relations

Ø  Quality of plant and equipment

Ø  Management and employee’s expertise

Other business risks are demand risk, marketing risk and collection risk

Financial Risks

These arise out of the possibility of outright or partial default on the part of the borrowing client company as a result of unfavourable financial circumstances such as illiquidity, solvency and leverage.

Industry Risks

The risk profile of the credit proposal is impacted by the specific risks inherent in the borrowing- client’s Industry. High risk sectors should be identified and indicated in bank’s credit policy manuals to guide the lending officers; loan terms and conditions should be more stringent and/or hurdles for approving a facility in these sectors should be increased.

Individual Characteristics

Ø  Credit/Account History: this reviews the past dealings the intending lender has had with the bank or its own banker. How has he managed its account with his banker? Has he been consistent?

Ø  Key Person Risk: How important is (are) the Individual(s) obviously those in managerial positions) to the organization? This is another potent consideration. Key person risk tends to be more of an issue where the Individual has specialist skills or is critical to the relations with clients.

Performance History

The borrowing-client company must have a good record of accomplishment, and strong financial performance. Has the company been able to carve a niche for itself In the industry and among Its peers? Size of the company has no impact on the level of credit risk except where the small size of a company reflects a lack of record of accomplishments, inexperience or lack of capital. These may not mean annulment of lending but could affect the price and volume of loan.

Identifying the relevant behavioral economic, political and social factors that may affect the ability to repay will enhance the degree of objectivity of the lending decision process. The result of this assessment should be presented in a credit application that originates from the relationship manager/credit manager and is approved by the credit department.

Credit rating

This is an innovation the lending decision process and is even not yet used extensively in the western world. Banks should develop and utilize an internal rating system which should lend credence to the credit assessment. It is a very important tool in determining and monitoring the quality of individual credits, especially small business.

The credit framework of bank should be designed to serve as a tool for monitoring and controlling risk inherent in individual credit (CBN, 2005).  This concept, which has been referred to as credit scoring in some arenas, is a new phenomenon to Nigeria banks, hence not yet yell enshrined, (Alabi 2000)

Credit scoring is a statistical method used to predict the probability that a loan application or an existing borrowing will default or become delinquent (Moretta, 1997). This medoel assign scores for potential borrower by estimating the probability of default of their loans based on borrower and loan characteristic data (Myr , 2000).

Mechanical and personal judgment to play a key role in calculating the score but the advent of information technology has greatly enhanced the importance and use of this mechanism.

Information of borrowers to be used include applicant’s monthly income, outstanding debt, financial assets, duration the job, lending history of the customer, collateral owned, type of bank account. These are all potential factors that may relate to loan performance and may end up being used in the scorecard (Loretta, 1997).

This risk rating system categories credit into various classes designed to take into account the level of risk. In general, a good credit score indicates that the loan meets the bank’s profitability requirements, while a bad credit score standard (Feldman, 1997).The account management, with the risk involved. There must be a cut-off score (grade) below which any proposition will not be approved. Risk reviewed at least half-yearly and when adverse events occur (CBN, 2005) where

Loan Agreement

This is designed by the bank after the borrower has accepted the offer. As stated by Christopher

(1991) the elements included are as follows, (although the order may vary from Institution to

Institution):

Ø  Definitions

Ø  Amount

Ø  Purpose

Ø  Availability

Ø  Repayment

Ø  Terms

Ø  Security

Ø  Covenants

Ø  Negative Covenants

Ø  Default

Ø  Preconditions

Ø  Warrants

Ø  Acceptance

It is not always reckless to lend clean, but it is outright recklessness bordering on criminal negligence on the part of a banker not to ensure that his rights as a creditor are properly taken care of and incorporated into the loan agreement (Nafiu 1995).

Loan Authorization Form

This form should contain the following Information

Ø  Date of issuance of the credit authorization

Ø  Name and address of the client company

Ø  Industrial classification

Ø  Parent company/affiliated companies (where existing)

Ø  Other fees and commission charged or chargeable

Ø  Type of facility e.g. overdraft, term loan guarantee, etc

Ø  Other bank creditors and size of facility granted

Ø  Purpose of facility

Ø  Amount of facility granted

Ø  Interest rates applied

Ø  Facility review dates

Ø  Repayment dates

The need to employ the services of experienced solicitors to handle the documentation is highly paramount in order to ensure that scenarios like anticipatory default situations are taken care of by incorporating cross-default provisions.

CHAPTER FIVE

DEBT RECOVERY STRATEGIES

INTRODUCTION

It is a cliché that prevention is better than cure; but it is essential that we exercise post-lending control once a facility has been granted by management as a loan can still go bad despite going through a thorough lending decision process. When credit has been granted, should we go to sleep and expect money on repayment dates? No, it is essential that early identification and prompt reporting of deteriorating credit signs be watched to ensure swift action to protect the bank’s interest

Nonetheless, the options left open to a banker in a post-lending situation depends largely on the care with which conditions and security have been perfected beforehand. Obviously, it is frustrating to open a credit file when a loan is in considerable difficult, only to find out that a document is lacking or has not been registered with the appropriate authorities,

Having said the above, banks must develop and implement comprehensive procedures and information systems to monitor the condition of individual credits and single obligors across the bank’s various portfolios (BISS, 2000). These procedures need to define criteria for identifying and reporting potential problem credits and other transactions to ensure that they are subject to more frequent monitoring as well as possible corrective action, classification and/or provision.

An effective loan monitoring system will include measures to:

-          Monitor compliance with established covenants;

-          Asses, where applicable, collateral coverage, relative to the creditors current condition

-          identity contractual payment delinquencies and classify potential credits on a timely basis

-          Direct actions at problems promptly for remedial management.

The relationship manager should be responsible for monitoring credit quality and ensuring that relevant information is passed to the responsible for assigning inter risk ratings to the credit. Internal credit risk rating as earlier described as an important not in monitoring loans. In order to facilitate early identification of changes in risk profiles the banks internal risk rating system should be responsive to indictors of potential or actual deterioration in credit risk. The number of credit customers that could be assigned to a relationship manager can range from 25 (for big medium size companies) 300 (for small business).

The monitoring responsibilities of the relationship manager include:

1.       Maintain close contact with the customer through periodic site inspections, visits or daily customer calls with a view to monitoring changes in risk profiles. He should ascertain that the loan is being used for its stated purposes(s) and inspect the level of inventory, conditions of fixed assets and collateral. Findings should be recorded in credit file and reported to the credit department for required course of action where necessary.

2.       Obtaining periodic financial statements of the borrower, including management accounts, every three to six months and annual audited financial statement and account.

3.       Reviewing borrowing-client Company’s compliance with loan agreement/covenants. Should there be need to waive violations, if they are not significant, appropriate authorities must be informed so that the facility can remain

4.       Carrying out annual credit reviews and recording all incomes, charges, fees commission regarding the loan and repayment notices when they fall due.

Loan monitoring through focused relationship management is not a choice, but an imperative for effective and efficient credit administration in the banking sector. It helps management to spot problem loans head-on more frequently, giving hope that the loan may yet perform. Your experience as a banker, your knowledge of your customer’s business and, above all, your faith in your customer, can guide you in your decision as to how far you can support your customer before declaring the loan as bad.

Where the customer is in need of more support, one or more of the following strategies could be adopted

        I.            Alteration or waiver of some of the terms of conditions loan covenant in a manner that does not jeopardize the bank’s interest. This must be communicated to the credit department.

      II.            Issue of additional collateral, if available

    III.            Granting additional funds, if borrower’s circumstances and analysis so dictate

    IV.            Extension of loan repayment period support by fresh cash flow statement.

Despite genuine efforts by either party to a loan contract, default can still occur. The recovery of loans in default should be the exclusive preserve of the Recovery Unit to ensure that appropriate recovery strategies are implemented, assistance from corporate Banking/ Relationship Management may be sought.

The functions of a standard Recovery Unit must include:

-          Determination of account action plan/recovery strategy

-          Pursuance of all options to maximize recovery, including playing customer into receivership or liquidation as appropriate

-          Ensuring that adequate and timely loan loss provisions are made based on asset and expected losses

-          Regular review of deteriorating loan

After a loan has been classified as substandard, it should be assigned to a specific Account Manager within the Recovery unit who should serve as the primary customer contact during the recovery process. A number of methods exist for recovering debts owed to banks. Some if these are (Ademu 1998):

v  Appeals to debtors

v  Threats and blackmail

v  Legal action

v  Use of debt factoring companies

v  Invoice discounting

v  Seizure and sale of collaterals

v  Use of NDICs services.

Bank should attempt to identify the types of situations, such as economic downturns is in the whole economy or in specific sectors, higher than expected levels of delinquencies and defaults, or the combinations of credit and market events that could produce substantial loses liquidity problems.

Limit system should ensure that granting of credit exceeding predetermined levels receive prompt management attention. An appropriate limit system should assist management in controlling credit risk exposure.

INTERNAL CAUSES OF BAD CREDIT

The internal weaknesses that could lead to poor credits in a bank’s books could be summarized as follows:

v  The absence of written Credit policies

v  The absence of policies concentration limits.

v  Excessive centralization or decentralization of lending authority

v  Poor industry Analysis.

v  Cursory financial analysis of borrowers.

v  Excessive reliance on collateral.

v  Infrequent customer contact.

v  Inadequate checks and balances in the credit process.

v  The absence of loan supervision.

v  Failure to improve collateral position as credits deteriorates.

v  Poor controls on loan documentation.

v  Excessive overdraft lending.

v  Incomplete credit files.

v  The absence of asset classification and loan loss provisioning standards.

v  Failure to control and audit the credit process effectively.

v  Over concentration industry or sector

A good credit Department of a bank should therefore, at all times, put structures in place, as already highlighted above, to hedge the institution against falling into any or some of the above listed poor credit traps.

SOME OF THE EARLY WARNING SIGNALS FOR IDENTIFYING PROBLEM LOANS ARE

AS FOLLOWS:

§  Unnecessary rollover of maturing credits at the instance of the bank.

§  Repeated defaults on agreed payments

§  Dwindling or declining sales and Turnover on account

§  Regularity exceeding borrowing limits signifies that facility may be inadequate.

§  Overdrafts, which become hardcore and are not cleared up at intervals.

§  Requesting waivers on agreed credit conditions.

§  Mounting inventories and receivables

§  Unavailability of key Managers for regular consultations.

§  Frequent disagreements on minor issues.

§  Breakdown in communication.

§  Non-rendition of periodic accounts.

§  Frequent labour unrest/High labour lu mover.

§  Frequent machine breakdowns,

§  Unplanned Management and Board changes.

§  Willingness to accept difficult conditions.

§  Over optimism and false representation,

§  Political credits

§  Rising debt-to-net-worth (leverage) ratio.

§  Missing documentation (especially missing customer’s financial statements).

§  Poor quality collateral,

§  Absence of cash flow projections.

§  Customer’s reliance on non-recurring sources of funds to meet credit payments (e.g. selling of buildings or equipments)

MANAGEMENT OF PROBLEM CREDITS

When the Credit of a bank goes bad, what should an effective Credit Department/Officer do? When the

Credit Officer identifies a deteriorating Credit; he/she should take the following steps:

§  Analyze the borrower’s problem.

§  Consult with the bank’s Management and the unit that specializes in Credit recovery.

§  Recommend adverse classification and suspension of interest accrual if warranted.

§  Gather information on total institutional exposure to the borrower.

§  Monitor account activity daily for overdrafts.

§  Review Credit documentation, guarantees, notes, collateral, and hypothecation agreements,

§  Study the utility or taking security if unsecured.

§  Establish a workout plan for corrective action.

Finally, to further strengthen the effective performance of the Credit Department, a bank should put in a place an Asset and liability Committee (ALCG).  The committee should meet on regular basis to examine the assets, procedures and regulations that appear inimical or portend danger to the bank and promptly reviewed, fine-tuned or replaced altogether as may be appropriate. The Credit Department must therefore act as the agent at all times, in ensuring that the above highlighted issues are adequately addressed; and used as a prelude to evaluating its effectiveness or otherwise-. This is the way I would like the Bank Credit Department to be evaluated.

CHAPTER SIX

BANK FRAUD AND THE MIRTIGANTS

Definitions of Bank fraud

Fraud is defined as the crime of deceiving somebody in order to get money or goods illegally, or a conscious premeditated action of a person or group of persons with the intention of altering the truth or fact for selfish monetary gains, or any activity that amounts to dishonest and/or unfair dealing. In legal terms, fraud has been defined as the act of depriving a person dishonestly of something to which he is or would or might be entitled if not for the perpetration of fraud.

Fraud is an action which involves the use of deceit and trick to alter the truth so as to deprive a person of something which is his or something to which he might have been entitled. That is, fraud occurs when a person in a position of trust and responsibility, in defiance of prescribed norms, breaks the rules to advance his personal selfish interests at the expense of the bank, bank customer or public interest he has been entrusted to guard and promote. It also occurs when a person through deceit, dishonesty, trick or highly intelligent cunning and know-how gains an advantage he could not otherwise have gained through lawful, just or normal processes. Fraud is a matter of individual choice and opportunity. Being human, the individual usually takes advantage if he sees the opportunity and is reasonably convinced he can get away with it.

Fraud is irregularity involving the use of criminal deception to obtain an unjust or illegal advantage to the detriment of another. Thus, fraud borders on act or course which is dishonest and deceit designed by the perpetrator to unlawfully or unfairly profit from the arrangement(s). International Auditing Guidelines refer to frauds as irregularities involving the use of deception to obtain an illegal or unjust advantage. Fraud is the intentional perversion of truth in order to induce one party to part with something of value or to surrender the legal right of a particular tide.

Fraud has been variously defined but each definition has two main ingredients namely, dishonest intention and unlawful benefit to the perpetrator to the detriment of the defrauded person. From the above comments, fraud can be defined as the act of getting something from another person through dishonest means, abuse of office or betrayal of confidence to benefit the perpetrator but to the detriment of the genuine owner of that thing.

Fraud perpetrated by member(s) of bank staff with or without the assistance of persons not employed by the bank is referred to as internal fraud. Fraud perpetrated by non-employee, with or without the assistance of bank staff is called external fraud. In internal Fraud, a fraudulent person therefore is someone who uses tricks or deceit to acquire property or secure benefits to the detriment of his employer (the bank). Many bank employees who engage in frauds find all means possible to conceal their acts by either destroying the relevant documents or ensuring that they remain in the same position for several years.

On the other hand, an act of negligence is committed where an employee through ignorance or lack of commitment to duties failed to follow a prescribed procedure or failed to do what he ordinarily ought to do in order to safeguard the interest of his employer. For such acts to he deemed negligent, it must be done in good faith and in the ordinary course of business. In practice, it may be difficult sometimes to distinguish between mere negligence of duty and a criminal act of the bank employee unless proper investigations are conducted.

CLASSIFICATION OF FRAUD

For the purpose of bank lending, fraud can be classify into two viz a viz

§  Bank fraud

§  Financial statements fraud

Types of Bank Fraud

There are several types of bank frauds as there are different sizes of banks. Frauds in banks vary widely in nature, character and method of perpetration. The list of bank fraud is in exhaustive as new methods are devised with time. However, most types of bank fraud include the following.

1. Mail Fraud

This is a process hereby the content of a duly authorized mail originated in a bank is converted to the benefit of illegitimate recipient. Once the mail is altered, the benefit there

cheques drawn on a customer’s account when the customer has no sufficient funds to accommodate such drawings. The rectification is done with subsequent lodgment either from the same customer or from another customer. Another type of suppression is a customer’s surplus deposit which the receiving cashier or note-counter deliberately refused to declare. The objective of the fraudster is to convert the fund which belongs to a customer or lodger to his or her own use.

5.       Cheque Kiting and Cross Firing

Cheque kiting is the use of illegal/dud cheque to obtain money. It could be the use of a dud cheque drawn on one branch of a bank and lodged in another branch of the same bank to obtain unauthorized credit. Due to the immediate credit usually accorded such in-house cheques, a quick withdrawal could be made before the funds are credited. Another one is a situation where bank customer issued a cheque from his account with a bank to another bank where he has an account but without sufficient funds in the account with the drawee bank to carry the cheque but hopes to utilize the time required for a cheque to clear to obtain unauthorized credit interest charge time from the bank he deposited the cheque. Then, the bank manager gives him funds based on the understanding that funds will soon be made available into his account from the drawee bank. The goal of the kiter may be to use these uncollected funds, interest-free, for a short time to overcome a temporary cash shortage or to withdraw the funds permanently for personal use. It is usually practiced by a customer having two bank accounts with the same bank at different branches or different banks.

Cross-firing on the other hand is a method used by customers to create fictitious/inflated account turnover.

It is the process whereby a cheque is drawn on one branch of a bank and lodged in another branch of the same bank, just to beef-up turnover. Cheque fielding also is the use of stolen cheque to obtain cash or goods from a supplier.

Cheque kitting and Cross firing is being controlled by the prevailing installation of on-line-real-time data processing computer equipment in banks. In addition to computer, communication facilities have improved to a level that quick confirmation of claims across branches could be made before payments.

6.       Advanced Fee Fraud (419)

This may involve an agent approaching a bank or staff of a bank with an offer to access large funds at a very favourable term. The purported or actual source of such funds is not specifically disclosed or identified but mention will be made of oil—rich Sheikhs, funds based on South Africa Gold or other influential names. The only way to have access to these funds is through the agent who must receive a fee or commission in advance. As soon as the agent collects the lee, he disappears into thin air and the money is never made available. When the agent did not disappear, he tends to justify the delay and this might result in further charging of the victim to facilitate the release of the fund. Any bank, especially the distressed banks and banks that need huge funds to bid for foreign exchange can easily fall victim of this type of fraud. In this era of money laundering, independent money laundering experts are increasingly conducting sophisticated and specialized business for a fee or percentage of the fund laundered. Many of them are simply “4l9ers”. They take to money laundering fraud to conceal the existence, source or use of illegally obtained money by converting the cash into untraceable transactions in banks. The cash is disguised to make the income appear legitimate.

7.       Payment Against Uncleared Effects

The act of giving direct credit to bank customers against an instrument that is yet to crystallize into cash is called payment against uncleared effect. This type of fraud is common with branch managers and other credit officers. When such instruments, which have already been paid against by the presenting bank at the clearing house, are eventually dishonoured by the paying bank, and returned unpaid, the customer’s account will be debited with the sum already paid and the debt will crystallize.

8.       Unauthorized Lending

Any lending that does not agree with laid down rules and regulations of the bank or does not receive prior approval of line superior is fraudulent whether the lending is only for few hours or for a longer period. This type of fraud is common among branch managers and credit officers. In essence, granting of banking facilities without security and verifiable accounting information is also unauthorized lending and it is fraudulent.

9.       Lending to Ghost Borrowers

Experience in some banks in Nigeria has shown that some fraudulent bank managers grant banking facilities to themselves using fake names, signatures and non-customers as fronts. Granting of loans and overdrafts to non-existing customers is fraudulent whether such loans are being repaid by the Ghost borrowers or not.

10.   Unofficial Borrowing

This is the term used to express a situation where a staff of a bank takes away cash from bank vault or cashier’s till-box in exchange for the staff’s post-dated cheque or even without any backing with financial instrument. Experience has shown that these borrowings are more prevalent on weekends, that is, Fridays and end of the month when salaries have not been paid.

11.   Falsification of Accounts/Records

Through collusion accounts of customers, can be falsified or altered by the staff in a bank with outsiders. Signatures of the authentic owners will then be forged to steal from the account. Ultimately, it is the affected bank that usually bears the brunt of the loss sustained by such customers.

12.   Computer fraud

Computer fraud takes the form of corruption of program or application packages or even breaking into the system. Diskettes can also be tampered with to gain access to unauthorized areas. Knowledge of the controls and the processes on the computer systems usually helps the perpetrators of computer frauds. Most software now comes with sophisticated access code that helps to prevent unauthorized access. Expert computer fraudsters have proved that there is no access code that they cannot break. Some of the methods through which a computer fraud can be perpetrated include:

§  Unauthorized access into computer database

§  Careless handling of password, that is, careless authorization and usage by staff

§  Careless recruitment of computer staff

§  Inadequate controls on the computer at the installation stage will always make subsequent fraud attempt easy.

Computer fraud is more sophisticated than the manually processed fraudulent activities and can remain undetected for a long time.

13.   Account Opening Fraud

This type of Fraud can originate from outside or inside a bank. When it originates from outside, the fraudulent person will simply use a bank as a conduit pipe. It usually starts with a person not well-known to the bank opening a transaction account with false identification. The account so opened will be used to deposit and cash fraudulent cheques. When it originates from inside, the staff who are involved may use the account as a permanent avenue to steal from the bank’s assets or customers accounts. Cheques are cleared through such unauthorized accounts and cash can also be fraudulently passed through them for the use of the perpetrators. The diversion of customers’ fund or banks resources through illegal accounts like this can take a long time before it is detected.

14.    Clearing Fraud

Most clearing frauds hinge on suppression of an instrument so that at the expiration of the clearing period applicable to the instrument, the collecting bank will give value as though the paying bank had confirmed the instrument good for payment. Clearing cheques can also be substituted to enable the fraudulent person divert the proceeds to a wrong beneficiary. Clearing fraud is a collusion fraud in the sense that it is usually perpetrated through the clearing house using the clearing officers of two or more banks.

15.   Telex and Fax Fraud

This involves interception and switching of telex and fax messages for funds transfer. Transfer of funds from one location to another can be affected through telex and fax messages. Telex and fax messages though often coded can be altered to enable diversion of the funds to an account not originally intended.

16.    Over- Invoicing of Services or Products

Over-invoicing is the submission of fake and/or inflated bills to the bank by bank staff or bank suppliers colliding with bank staff. This type of fraud is more pronounced in banks because of the belief that banks have a lot of money. The fraud is common in banks where there is gross indiscipline and poor control over operating expenses.

17.   Web Spoofing-Website Forgery

This involves diverting the customers of a bank to an exactly duplicated forged website and impersonating those customers on real bank-site. The customers of the bank can be lured to log on to a fake website, which exactly looks and behaves as the original, at least till it captures the customers’ user-names and passwords. These forged website owners pose as the real customers of the bank and log on to the real site and do transactions with the already captured user-names and passwords. The bad part of the whole issue is that the original customers do not have any means of proving that it was not them who did those transactions but some unknown persons. This kind of fraud has been increasing on the internet, to steal user-names, passwords and credit card information etc. Users actually cannot understand how a Universal Resource Locator (URL) that everyone types in a browser should be interpreted.

They just see the first few strings of the URL and if it just includes the website name they want to access, they are satisfied.

For example, take these two URL

http: 11 secure. Banknameme.com/mtualfund/mutualfunds.Asp

http: 11secure.Bankname.com?@202154156/mutualfund/mutualfunds.asp

It would be very difficult for a normal user to understand the difference between these two URLs. While the first one takes him to the right bank site, the other takes him to a forged site, in which he can reveal his username and password.

18.               Denying Service to Bank’s Server

  The aim of this kind of fraud is to cause inconvenience to the bank, launch it into disrepute, and take away the banks customers as the customers cannot access the bank’s services.

19.               Impropriety

This is a process whereby a person who is placed in a position of trust betrays the trust reposed in him by using the position to make money for himself through bribery and corruption. Dishonest management can cook up fictitious contracts just to steal bank money. Advances/securities officers can deliberately over value or undervalue securities for credit facilities just to favour themselves. Also it involves false declaration of cash shortages by cashiers and note counters, making unworthy recommendation to bank customers by falsification of status report. Other manifestations of impropriety include:

§  Where an insider uses his authority to grand loans to oneself or a related business, at preferential terms and lower credit standards;

§  Putting friends and relatives on the bank’s payroll;

§  Unwarranted fringe benefits to insiders, payment for personal oversees trips;

§  Kickbacks from loan customers etc

BANK FRAUD: SOURCES, CAUSES AND CONTROLS

The following are the sources or origins of frauds in banks and the manner of perpetration.

Source:

1.       Account opening

§  Falsification of business registration documents

§  Presentation of false Personal identification

§  Impersonation

§  Falsification of business and residential addresses

§  Use of non-existent referees

§  Falsification of referees/references

§  Falsification of banker’s references

§  Supply of false mandate signature

§  Opening account with incomplete documentation

§  Opening account with photocopied documents

2.       Account operation

§  Frequent change of mandate

§  Frequent returned instruments

§  Falsification of cash deposits

§  Cheque cloning-parallel cheque

§  Cheque conversion

§  Cheque cross-firing and kite flying

§  Alternation of payment Instruments

§  Teaming and lading

§  Currency denomination swap

§  Cash pilfering or theft

§  Manager’s cheque forgery

§  Suppression of cheque on unfunded account

§  Unserial use of cheque leaves

§  Forgery of payment instruments

§  Simultaneous drawing on an account from various locations.

§  Telephone confirmation of cheque

§  Deposit of counterfeit currency

§  Uncounted late night deposit

3.       Funds Transfer

§  Transfer to third party account

§  Cross-firing and kite flying

§  Interception and switching of telex message

§  Payment of cash drafts

§  Third party credit/transfer Instructions

§  Forgery of transfer instruments

§  Non-confirmation of credit transfer instrument

§  Deliberate misplacement of clearing cheques

§  Divulging of text code

§  Money launching activities

§  Cash movement in unwrapped/united bundle

4.       Information technology

§  Unauthorized amendment of automated bank charges e.g. COT, interest charges

§  Fraudulent use of COT exempt transaction codes by processors.

§  Unauthorized access to/creation of user profits for fraudulent transaction

§  Installation of destructive program

§  Installation of secret program for illegal manipulation of accounting records.

§  Installation of new program without being duly authorized by management.

§  Removal or alteration of existing program without prior approval by management

§  Theft of source codes of a running program.

§  Breach of user privacy through use of unauthorized program.

5.       Treasury Operations

§  Inconsistent credit appraisal

§  Absence of approved credit line

§  Placement above approved credit line

§  Non-competitive placement / takings rate

§  Inconsistent documentation of placements

§  Placement with unapproved institution.

§  Non or incomplete recording of placements.

§  Non or incomplete recording of takings

§  Payment of higher interest rates on taking

§  Incomplete recording of customer bills.

§  Untimely verification of uncredited transfer.

§  Non-reporting of repayment default.

§  Non-segregation of placement transactions.

6.       Clearing operation

§  Substitution of clearing instrument.

§  Suppression of returned instrument

§  Posting of returned instrument into a wrong account

§  Interception of returning instrument

§  Conversion of clearing instrument

§  Deposit of forged clearing instrument

§  Clearing instrument drawn on unfunded account

§  Cloning of clearing instrument

§  Forgery of manager’s cheque

§  Deliberate misplacement of clearing cheque

§  Non-collection of returned cheque charges.

§  Special clearing of third party instruments

§  Suppression of caution letter on clearing cheques

§  Deliberate errors on clearing instrument.

7.       Fixed assets

§  Acquisition

§  Asset registration

§  Asset usage

§  Fixed asset depreciation

§  Asset disposal

§  Theft of company asset

8.       Staff Recruitment and Emoluments

§  Breach of staff engagement procedure

§  Existence of secret staff list.

§  Payment to non-existing staff

§  Short-payment of staff remunerations

§  Payee and other deductions related fraud

§  NSITF- Related fraud

§  Staff files maintenance fraud

9.       Credit frauds

§  Credit appraisal irregularities

§  Submission of deceptive financial statement

§  Submission of security documents for non-existing property

§  Use of stolen third-party title documents with third-party permission

§  Use of certified true copy of title documents with third-party permission

§  Use of third-party guarantee as security

§  Property/diversion of credit facility

§  Unauthorized customer financing

§  Payment on unfunded account

§  Debt recovery negotiation fraud

10.               Accounting Entries

Ø    Deliberate omission of entries

Ø    Entries into wrong accounts

Ø    Diversion of bank earnings

Ø    Creation of false credit balances

Ø    Costing without signed entry ticket

Ø    Regular/ambiguous entry narration

Ø    Debit to income accounts

Ø    Application of entries

Ø    Unauthorized reversal of entry

Ø    Deliberate entry of errors

Ø    Deliberate alteration of entry parameters

Ø    Substitution or forgery of entry ticket.

11.               Procurement

Ø    Disclosure of bids to a competing party

Ø    Multiple bids by same supplier

Ø    Deliberate breach of approved procurement procedure

Ø    Supply/acceptance of inferior product

Ø    Short supply of order full account

12.               Payments

Ø    Payment conversion Fraud

Ø    Payment for job not done/goods not supplied

Ø    Multiple payments

Ø    Payment on forged supply documents

Ø    Payments on recycled invoice

Ø    Unauthorized payment

Ø    Payment before due date

Ø    Payment for poorly performed job

Ø    Payment for uncompleted job

Ø    Overpayment

Ø    Cash  payment for invoice

13.               Cash advance

Ø    Direct expense of a cash advance

Ø    Advance for personal purpose through staff account

Ø    Write off of cash advance without due approval

Ø    Transfer of cash advance to expenditure without approved supporting documents

Ø    Long-holding of cash advance

Ø    Unauthorized cash advanced for major contract not yet performed.

14.               Foreign exchange

Ø    Exchange rate manipulation

Ø    Abuse of BTA facility

Ø    Forgery of import bill of lading

Ø    Use of forged document in BTA/TC processing

Ø    Transfer to wrong foreign account

Ø    Conversion of transfer

Ø    Operation of unauthorized foreign account

Ø    Irregular reconciliation of foreign account

Ø    Irregular coding of telex/transfer message

Ø    Improper/inadequate documentation of forex transaction

Ø    Incomplete recording of forex transaction

Ø    Money laundering operation.

15.               Account closure

Ø    Closure of dormant account without prior reactivation.

Ø    Closure without confirmed application from account holder.

Ø    Closure without due approval of the head of operations

Ø    Closure of account within same month/year of operating.

16.               Dormant account fraud

Ø    Making credit entries into dormant accounts

Ø    Withdrawal from account without property reactivation

Ø    Sudden disappearance/reappearance of mandate file of a dormant account

17.               Account reconciliation

Ø    Reconciliation of over/short credit items into wrong account

Ø    Reconciliation without regard to match parameters

Ø    Undue delay in reconciling transaction

Ø    Unbalanced reconciliation statement

18.               Suspense Account

Ø    Suspense account with stagnant balance

Ø    Suspense account with continuous growth in balance

Ø    Suspense account without authentic proof

19.               Close relationship

Ø    Conspicuous generosity

Ø    Free disclosure of classified information

Ø    Frequent disregard of normal procedure

Ø    Over confidence in assumed integrity

Ø     Complete without suspicion

Ø    Sympathetic with situation and protective

Causes of Bank Fraud

According to Adekanye (1986:31), frauds are usually perpetrated by the operator alone, the customer alone or even the non-customer alone or a combination of any of them. In other words, frauds are contrived from either within or outside the banking system. However the causes of banks include:

CAUSES	EFECTS
Absence of Detailed Operational manual	Unregulated limits of lending powers
Poor Internal control	Ineffective audit, Poor Supervision, failure to dually control cash, security documents, keys and other bank assets. Inadequate job rotation, non-segregation of duties; a single staff initiating and completing all stages of transaction from start to finish, absence of spot checks on staff areas of duty coverage, accumulation of annual  leave, inflated invoices, fake receipts, Ghost contracts, frivolous purchases, non-authentication of specimen signatures.
Bad Management	Incompetence, inadequate supervision, poor judgment, inadequate control, poor planning, lack of coordination.
Faulty Personnel Policies	Poor selection/recruitment, inadequate staff training; employing people without passion for the job. A dissatisfied staff may want to revenge and get at the organization through fraud. Poor job placement, promotion and staff welfare. Indiscipline, insubordination, lateness, Absenteeism and poor attitude to work
Poor Accountability Record	Inability to reconcile daily, weekly, monthly transactions as appropriate.
Societal Factors	Glorifying wealth irrespective of its source
Laxity on Law	Laxity of the Law enforcement agents to prosecute offenders.
Ignorance of banking ethics by bankers	Ethics means commitment to openness, truthfulness and transparency in business dealings. Ostentatious lifestyles with their huge financial demands and implications tend to whittle down professional ethics.

The statutory returns to the CBN on frauds and forgeries show on a monthly basis, how bank staff, sometimes with the active connivance of customers, steal from banks. Customer’s funds are stolen physically over the counter or through poor record keeping or through the manipulation of the computer systems or through funds transfer.

Fraud Prevention/Control

1.                   Enactment of fraud Related Laws

                Over-time, certain laws have been put in place to safeguard the society and the banking              institutions against fraud in Nigeria, such Laws include:

i.                     Criminal code Section 419

ii.                   Money laundering Act No. 3 of 1995 as amended;

iii.                  Failed Banks (recovery of Debts) and Financial Malpractices Act No. 18 of 1994

iv.                 Banks and Other Financial Institutions Act No. 25 of 1991 as amended.

v.                   Companies and Allied Matters Act 1990 as amended

2.                   Good Recruitment Policies

Apart from education qualifications and success in recruitment examination, applicants’ interest should be ascertained through psychological tests. Favouritism and nepotism should be harmonized to guard against disenchantment among staff. There should be proper posting, placement, job rotation and disengagement procedures. Training programme should be incorporated to improve staff know-how.

Fraud perpetrators

1.                   Employees

·      Embezzlement, Misappropriation, Misapplication of resources under their care for personal use.

·                     Making outrageous and false claim even on expenses not made.

·                     Use of bank’s name to enter into transactions that translate into personal gain.

Generally, bank fraud could be defined as an act of misappropriating a bank’s assets either in cash or kind by a bank staff, bank customer of third party in which the bank suffers loss arising from such acts.

Fraud is a wicked act that confers illegal possession of other people’s wealth on the fraudulent person thereby preventing the original owners from enjoying their wealth. It is a very comprehensive field of crime under which exists a range of different activities. The intention of the fraudulent person is to dishonestly benefit himself to the detriment of the bank, bank staff, bank customer or any other member of the public through banking operations.

Fraud can be committed by bank customers, bank staff, third parties, that is, non-bank customers and a combination of bank staff, customers and third parties.

Fraud is caused by the elements viz; Will, Opportunity and Exist coined in the acronym WOE.

That is, there must be will on the part of the intending fraudulent person to commit the fraud. There must be opportunity to execute the fraud and the Exit, which is the escape from sanctions against successful or attempted fraud or deviant behaviour. Thieves are not born but made out of opportunities. The fact that banks deal in money and instruments that can easily be converted to cash and since the ultimate ambition of the fraudulent person is to get rich quick, the banks have become persistent targets for fraudulent persons. Even frauds, which originate in other industries usually, pass through banks for conversion of the forged document into cash, lodgements of forged cheques for clearing and transfer of cash that is obtained through deception. All the major operational areas in banking represent a good opportunity for fraudulent persons. Majority of the fraud incidents being reported is under deposit, loan and inter-branch accounting transactions, including remittances. The advent of computerization in banks brought new technology-based frauds, which when committed successfully, would be difficult to track down and can multiply the financial losses of banks to unimaginable levels. New technologies always brought some more fraudulent criminal activities developed around these technologies. By the time the regulatory bodies and law enforcement agencies take preventive measures to cope with the present environment and get stabilized, either the environment Itself changes or some new development like new technology may emerge making the criminals find a new home and commit fraud the more.

CHAPTER SEVEN

BANK SERVICES TO CUSTOMER

INTRODUCTION

Nigerian Banks offer specialist services apart from the traditional services of accepting deposits, lending and transmission of funds. A glance at the services provided by commercial and merchant banks in recent times widely shows that there is virtually no financial service that cannot be provided by the banking group.

Financial supermarket, the name implies has not only come to stay, the scope and method of delivering the service is improving from time to time.

The adoption of the use of information technology to effectively discharge banks duties when providing these ranges of financial services cannot be over emphasized. The online, real time, Wide Area Network and several others improved computer technology has made home banking, extension of banking hours (even to weekends), cashless society (to mention a few) a reality in our present day banking life.

The merits of financial supermarket to the teeming customers of the bank are:

a) It contributes to the banks dynamism

b) It enhances greater customer satisfaction

c) It enforces the banks to adopt the use of information technology

d) Enlargement of banking products and service hours leads into a higher volume of bank earnings

e) Increment in banking activities may lead into increased employment

f) Provision of financial supermarket by banks enhances their strength while the non banking institutions strength becomes weakened.

The disadvantages of financial supermarket to the banking industry are:

a.                   It brings about discord between the bankers and other professions who feel that the banking industry is not only encroaching into their area of business but are seemingly taking over the entire business.

b.                  It may create unemployment because function otherwise performed by human beings may be taking over by machines.

c.                   More resources may be sourced when the existing one is over-stretched.

d.                  Re-capitalization maybe a frequent need as the financial supermarket expands.

These services cut across all categories of customer either personal or corporate customers. They are provided mainly to assist them achieve their business objectives and goals.

As a guide the under listed are non traditional services provided by commercial and merchant banks in Nigeria.

I.                        Investment Services

II.                        Insurance Services

III.                        Pension Services

IV.                        Trusteeship and Executorships Services

V.                        Leasing of Equipment Services

VI.                        Hire purchase services

VII.                        Factoring services and Bill discounting

VIII.                        Travel (Services)facilities

IX.                        Share Registrar’s Services.

X.                        Business advisory Service

XI.                        Personal Advisory Services

Investment Services

A saver is someone who accumulates a sum of money over time while an investor may be described as someone who has a large sum of money to invest e.g. an individual who inherited a large sum of money, won pools or received a retrenchment benefits.

Investment services provided by bank include the following:

i.                     Purchase and sale of Securities

a)                  Stock and Shares:-Banks engage in the purchase of stocks and shares. Treasury bills and other government securities on behalf of their customers. It is common to find banks, on customers request to purchase new issue of equities on customers’ behalf. In respect of sales of share on customers behalf, banks investment banking department employ stockbrokers to perform the sale of the equities on the floor of the stock exchange. This has made it possible for some banks to become directly involved in buying and selling shares without the need to employ the services of practicing stockbrokers.

b)                  Treasury Bills: Banks also engage in the purchase of treasury bills on behalf of their customers. It is usual for the Central Bank of Nigeria to advertise the sale of treasury bills in National newspapers, and willing members of the public may instruct their bankers to purchase a specified amount of the bills on their behalf. The account of the customer would be debited for the value of the Treasury bill purchased. It represents a growing business in the banks investment banking department in recent.

ii.                   Advice on Investment

Investment advice offered by banks, is not given by the branch managers, in other to avoid the decision in the case of Woods V Martins Bank (1958). The appropriate approach is for the manager to channel the customer’s request to the bank’s stockbroker, and the opinion of the stockbroker will be passed to the customer without any amendment e.g. the manager who is asked for his advice on the investment of a sum of money or on whether indeed certain investments should be bought or sold will obtain the commends of one of the stockbrokers of the bank and pass the information to the customer without addition or subtractions.

iii.                  Management of investment

The banks investment banking department would be of measurable assistance to both personal customers and institutional business like pension funds and charities in the area of investment management. A portfolio of investment belonging to a personal customer could be managed by the bank therefore the customer is relieved of the burden of following the day to day business of the stock market, visit to companies, continuing awareness of the political and economic situation in which the companies whose stock and shares he is holding operates. In the discharge of this duty the bank must ensure that, a desirable liquidity is maintained. The portfolio is banked among various market sectors and the designation of the customer’s individual investment for purchase or sales

In the management of investments for institutional organizations the guidelines are generally unambiguous and decisions are made according to customers wish. Traditionally most of work in this area goes to merchant banks, due to the low profile maintained by commercial banks in investment matters until lately when some of them created investment banking department.

iv.                 Bank Savings Schemes

A variety of savings schemes are available for bank customers either for small savers or medium scale investors. In its dealings with customers banks recommend one savings scheme in preference for the other. However, where a banker is confronted by its customer about possible saving avenues, issues like amount of savings, the period and the level of income required would be discussed before the bank will offer its advices like.

i.                     Special Savings scheme

ii.                   Special fixed deposit scheme

iii.                  Special Negotiable certificate of deposit scheme may be offered to the customer. Interest payable on either of them differs depending on the size of the amount, time of withdrawal and frequency of sources of income

If a medium sale investor or business customer, ask for the opinion of his banks about what to do with his excess short-term cash, advice may be given, for the cash to be placed in either a fixed deposit account or negotiable deposit account or investment in money market instrument like Treasury bill. These are fairly short-term investments which can be turned into cash whenever it is needed. These schemes must be specially designed aside from the usual savings and fixed.

Insurance Services

Assurance and Insurance are two common words in insurance industry. While the terms assurance and insurance are used interchangeably, they are not of the same meaning in strict sense.

Assurance policy is usually taken to provide for something (e.g. risk) that will inevitably occur at some time in future. It is common to say whole life assurance policy, which provided for payment of a sum of money after death.

Insurance policy is usually taken to provide compensation in the event that a risk does occur, although the occurrence of such risks is by no means certain. It is common to say car insurance policy which provides for compensation in case of theft or fire.

Banks are generally involved in providing insurance services though not to the extent of underwriting  general  insurance risks, their involvement has caused them to either set up insurance units (Department) in the bank or fund the incorporation of an insurance subsidiary company. As insurance brokers they are also involved in life and general insurance business across the board.

Insurance broking is the process of acting as an intermediary between the insurance company and the person insuring the risk in such a way that the broker does not provide the insurance policy but merely arranges the insurance.

Types of Life Assurance

The major types of life assurance include:

a)                  Whole life assurance: This is a type of policy whose assured sum of money becomes payable     on the death of the life assured.

b)                   Endowment assurance: Is a type of policy whose assured sum of money becomes payable         on the death of the assured person or at the end of an agreed period whichever comes first.

c)                   Term Assurance: it is a life assurance whereby the assured sum is only payable in the event        of death of the person assured within a specified period of time, e.g. an astronaut may take      out life assurance on his life for a period of time if he intends to travel into space. The sum                 assured becomes payable if he does not return from his trip.

d)                  Convertible term Assurance: It is similar to term assurance but carries the option to convert        to an endowment policy at any time during the term without further medical examination.

e)                  Mortgage Protection Assurance: It is a policy which covers the life of a mortgage loan, but           the sum assured would be sufficient to pay off the mortgage loan; if the mortgagor dies                 before the full repayment of the mortgage loan, e.g. If a customer buys a property which has            20 years repayment period and a mortgage of N200,000 (two hundred thousand naira only), the mortgage protection policy would assure a sum sufficient to pay off the outstanding                 mortgage within 20 years in case of death of the mortgagor.

f)                   Children Assurance Policy: It is a policy on the life of the parent or an endowment policy on         the life of the child. The sum assured in usually payable to the child in case of death of the   parents. In respect of the endowment, if the time matures the parent would collect the sum           assured having survived the endowment time and in the meantime the child would have              completed the education which the policy covers.

g)                  Personal Accident and Sickness Insurance: There is a great variety of this type of insurance          policy designed to suit individual need. It is a policy taken by the policy holder to cover        accidental losses or sickness cost, i.e. Hospital bills in case either occurs to the policy holder.

h)                  Annuity Contract: This is a policy that provides for regular payments by the insurance     company. Typical examples include the following:

i.                     Immediate Annuity: A regular annual or half yearly payments commencing forthwith in                 return for a capital sum payable to the insurance company by the annuitant.

ii.                   Deferred Annuity: An annuity contracted to commence at a date in future between the               annuitant and the insurance company.

iii.                  Annuity Certain: An annuity scheme which provides for a specific number of payments to be     made regardless of the death of the annuitant.

iv.                 Reversionary Annuity: It is an annuity payable to the survivor of two persons, e.g. Husband        and wife.

With Profits and Without Profits Assurance

A ‘’with profit’’ policy enjoys supplement share of the insurance company profits in addition to a predetermined sum. A without profit policy does not have any profits supplement and the benefits payable are simply those stated in the policy. Whole life and endowment assurance can be either with profits or without profits.

Linked life Assurance and Conventional Life Assurance

As discussed above a conventional without profit life assurance policy would only collect the “sum assured” at the maturity of the policy. A conventional with profit life assurance policy would entitle the policy holder to a payment of sum assured plus a share of the insurance company’s profits. A linked life assurance policy provides means of savings and investment.

The investment portfolio is linked to identifiable assets in the life fund. Thus an equity linked life policy would be related to a particular unit trust and property linked life policies would be related or linked to a particular portfolio of properties in the life fund.

Benefit of life Assurance: The benefits of life assurance are as follows:

a.       To provide for dependants after his or her death

b.       It is a means of savings

c.       It protects mortgage contracts e.g. Mortgage protection policy

Insurance Broking

Insurance brokers are persons, (individual or corporate) who acting with complete freedom as to their choice of undertaking, bring together, with a view to the insurance or reinsurance of risks, persons seeking insurance or re-insurance and insurance and re-insurance undertaking, carryout work preparatory to the conclusion of contract of insurance or reinsurance and, where appropriate, assist in the administration and performance of such contracts, in particular in the event of a claim.

Insurance broking service covers three major broad areas.

1.        International insurance broking like marine insurance and shipment insurance.

2.       Commercial insurance like insurance of properties and equipments in the manufacturing and service sectors.

3.       Personal insurance broking like life insurance, home insurance and personal assets insurance.

The broad areas covered by insurance broking are not mutually exclusive; they are covered simultaneously by the brokers depending on their clients’ needs.

The banks, since the beginning of the 90’s have been greatly involved In the business of insurance broking not only because of the financial gain from such venture but that, the bank would be able to advice and provide better insurance products for their customers in their various branches. With the banks wide branch network, insurance broking of banks stems for their relationship with their customers in their various branches. To achieve an effective functioning of the banks insurance broking, they have set up insurance broking subsidiaries or an insurance broking department within the banking structure as a major business unit of the bank.

The advantages of insurance broking business to the bank are as follows:

i.                      Profits are made from the commission paid to the banks.

ii.                   Provide the opportunity of introducing to the customer a reliable insurance company most suitable to offer the best insurance product.

iii.                  It provides the marketing advantage that enables bank to provide an increased range of financial services, apart from insurance broking to their customers.

As far as the customers are concerned, banks insurance backing is of benefits to them because;

i.                     The service is provided free of charge to the customer, because the commission for the services is paid by the insurance company.

ii.                   The need to research the market for the best product at the cheapest price has been taken over by the broker.

iii.                  The bank takes over the payment of the premium on behalf of the customer; hence, the customer is not saddled with the responsibility of having to ensure the payment of the premium to maintain its validity.

Executorships Services

An executor is the person who administers a deceased estate, having been named as the executor In the will. An administrator is the person appointed by the court to administer the estate of a deceased person if;

a.       There is no will

b.      The will is available but does not name an executor

c.       The executor named in the will died before the trustee or does not wish to act

A bank might be appointed as executor by a person making a will to wind up his or her affairs after death. If appointed, the role of executor is as follows:

a.       To obtain the formal grant of probate for the will from the probate registry in the state capital.

b.      Seeing that the funeral arrangements are dealt with

c.       To gather together and collate the assets of the deceased

d.       To pay the debt and expenses of the deceased

e.      To distribute the estate of the deceased among the beneficiaries in accordance with the terms of the will.

Reasons for Bank Choice

1)      The continuity in life is perpetual being a legal entity separate from the owners

2)      Banks maintain absolute impartiality in the management of the affairs of the deceased.

3)      Proper and adequate records are kept by the bank

4)      Banks are not subject to any personal or political motives

Despite these obvious advantages banks do not dominate the market, because it is only the very rich and customers of banks that can appoint banks as their executors. A reasonable number of Nigerians do not keep account with banks, secondly the bank’s charge for this service is comparatively high and finally banks are mostly impersonal in their dealings.

Trusteeship

An executor may become a trustee if a will provides for setting up a trust in favour of a certain beneficiary or beneficiaries.

A trust is the relationship which arises whenever a person called the trustee is compelled in equity hold properly whether real or personal and whether by legal or equitable title for the benefits of some persons or for some objects permitted by law in such a way that the real benefit of the property accrues not to the trustee but to the beneficiaries or other object of the trust.

Types of trust

I.            Private trusts, i.e. those created under wills or settled estates or discretionary trusts.

II.            Corporate Trusts, i.e. those provided by corporate units like debenture trusts, consortium trusts, etc.

Will trust or Settled Estates: A will trust or settled estate, arises when a testator wishes to provide for all or part of his or her estate for the benefit of successive generations. The overall benefit of this type trust is:

a.       Protection of the female children against the exploitation of treasure seeking male children.

b.      To  provide for future generations of the family

c.       To prevent the estate from being sold after the death of the testator

d.      To protect the interest of the widows after the death of their husband.

Discretionary Trusts:  A trust may either be ministered or discretionary. A ministerial trust is expected to exercise normal prudence and business judgment in carrying out the express terms of the trust. A discretionary trust, allows the trustee to exercise discretion i.e. gives the trust some flexibility in certain circumstances when discharging their duties. The trustee must be prepared to adapt to changing circumstances and exercise his discretion with wisdom and understanding.

It has three major advantages

I.            It makes for maximum flexibility because the trustees discretion will be exercised according to changing circumstances over the years.

II.            Discretionary trust allows the settler to have at least a moral say in the management of the trust

III.            The trustee can take advantage of any favourable changes in the tax law.

 Corporate Trusteeship: The following are the major types of corporate trust.

a.       Pension fund trusts

b.      debenture trust

c.       Consortium trust

d.      Custodian trusts

e.       Unit trusts

A)     Pension fund Trusts: Where the pension of any organization (i.e. occupational pension scheme) is collected into a pool of fund and the fund is held and invested by a fund manager. A trustee would be appointed, e.g. a bank, to offer a trustee ship service in perpetuity as opposed to an individual trustee who may die or retire.

B)      Debenture Trust: Is a situation where a company seeks to issue debenture stock, it is customary to appoint a trustee to look after the interest of the debenture holders. As usual the debenture will be secured by some assets under a fixed charge or floating charge. The duties of the trustee appointed would be set out in the debenture trust deed. Such duties normally include action to enforce security in case of default by the company.

C)      Consortium Trust: It arose where a major development or exploration is financed internationally by a consortium of leading organization, the consortium would then appoint a bank or trust company to run the day to day financial administration of the project. The trust would be responsible for stage payments under the contract and any seeing to the administrative aspect of the project.

D)     Custodian trusts: It is set up mainly to hold the property of the trust fund and any documents of title while the day to day affairs of the fund are left to management trustee who are usually the company or any other company. It is a useful arrangement where the organization concerned wishes to retain the managing function whilst the bank holds the trust assets.

E)       Units Trusts: Banks may be appointed to act as trustees of a unit trust owned by another organization. Also banks act as managers of unit trusts, but the duties of a unit trust trustee includes holding the investment of the trust, collecting and distributing the income from the trust assets, issue certificates to unit holders and maintain the register of unit holders. The unit trust managers of the fund are expected to make decisions about the content of the assets in the trust and on the size of the return on the trust investment assets.

Pension Services

Pension fund is a large source of fund in Nigeria. The market for the management of the fund is largely dominated by insurance companies, while such service is being shared by banks and insurance companies in United Kingdom. Pension actually is part of the total remunerative package of employees because it represents deferred payments meant to take care of after retirement’s expenditure. Persons working for the state (Civil Servants) and some companies are not allowed to take out a personal pension plans in addition to a personal pension scheme. Consequently personal pension plans would be most suitable for the following persons:

i) A person with an independent source of income, i.e. self employed persons

ii) Top officers of a company (e.g. Directors) who does not have occupational pension scheme of its own.

Other prominent features of personal pension plans are as follows.

                                I.            Provision may be made for the dependant of the contributor, e.g. the widow or the widower in case of death of the contributor.

                              II.            Contributor can borrow using the pension contribution as security

                            III.            Retirement pension may become payable at any time between the ages of 60 and 75 or in exceptional case of ill health at an early age.

Bank in Nigeria might be involved in pension service by assisting pension funds in the area of pension fund management and trusteeship.

Leasing Services

Leasing is contractual arrangement under which one party in return for an agreed rent uses a capital asset owned by another person. Leasing is based on the fundamental concept that one does not have to own assets in other to enjoy the perpetual benefit. It follows that to run an airline one does not need to own an aircraft. However the psychological barrier to leasing is that a successful business man likes to feel that he owns the plants and machineries around him.

Leasing is most suitable for, organizations using costly equipments to achieve their operational objectives e.g. manufacturing concerns, big time farmers and in the service industry airlines and shipping concerns may enter into leasing contracts for the purpose of renting their major operational equipments. Banks in most cases provide leasing facilities through their subsidiaries e.g. finance company subsidiary of the bank.

Items commonly leased are plant and machinery cars, commercial vehicles, computers, ships, aeroplanes, oil production equipment and office equipments.

Types: There are two basic forms of lease

i.                     Operating lease

ii.                   Financial lease

i.                     Operating Lease: - This entails a rental agreement between the lessor and lessee whereby the lessor is responsible for servicing and maintenance of the leased equipment; and the period of the lease is less than the economic life of the asset, so that at the end of one lease agreement, the lessor can lease the same equipment to someone else and obtain a good rental for it. Operating leases are usually agreements between the (lessee) user of the equipment and the (lessor) manufacturer or supplier of the equipment.

ii.                   Finance Lease:-This is a lease agreement between the user of the leased asset and a provider of finance. The provider of finance does not supply the leased asset to the user, rather the supplier sells the asset to the lessor who would in turn lease it to the lessee, e.g. if a company decided to obtain a company car and finance the acquisition by means of a finance lease. A car dealer will supply the car but the car would be paid for by a finance company. The car dealer would then deliver the car to the lessor who would make regular payments to the finance company who would have paid for the car.

Advantages of Leasing: To the lessor

i.                     It is a legitimate and good method of financing the purchase of capital assets, hence an additional means of finance in the lessors point of view.

ii.                   It enhances the working capital position of the company and thereby leaving the position improved or unimpaired.

iii.                  A leasing contract may be self liquidating if additional Income earned by the new asset outweigh the leasing rental

iv.                 A leasing contract is an independent transaction outside the asset and liability structure of the company, e.g. the leased asset belong to the leaser and are not available to the general creditors of the company in case of liquidation.

v.                   The benefit of capital allowance would be claimed by the leassor, and this will improve the cash flow position of the company.

Advantages of leasing: To the lessee

i.                     It is a means of deploying funds on better terms from the normal overdraft rates

ii.                   it is a safe credit with built in security and good rental flow

iii.                  It provides an opportunity for using funds which for one reason or the other cannot be lent through the conventional banking channels.

iv.                 The service can be provided for non-customers of the bank

v.                   It may create the beginning of a good banking relationship with the lessee.

Characteristics of Finance Lease: The lease agreement will include the following conditions:

1.                   It will contain the schedule of the equipment to be leased

2.                   It will contain an undertaking by the lessee to pay when due the rent provided for in the              lease agreement.

3.                   It will contain an undertaking by the leassee to keep the equipment in repair and insured for its full replacement value

4.                   It will contain an undertaking to allow the leassor access for inspection of the equipment and provision for termination of the agreement in the event of default.

5.                   It will contain the provision that the equipment shall remain movable property in the ownership of the lessor not withstanding that it may be fixed to any land or buildings in the office of the lessee.

6.                   The leasing agreement will contain the primary period and secondary period. The primary period of the lessor covers the whole or most of the useful economic life of the asset, the secondary period commences at the end of the primary period. In the secondary period, the lessor may renew the lease or take the possession of the asset and lease it to another at a low nominal rent sometime called the “peppercorn rent”

Hire Purchase

Hire purchase entails the provision of credit to be repaid by installment over a period of time in accordance with the contracted arrangement. The two forms of installment credit Includes:

I.                        Lender credit- it occur when the buyer borrows money from a lender (e.g. an overdraft from a bank or money lender) and uses the money to purchase goods

II.                        Vender Credit- it occurs the buyer obtains goods on credit from a seller (vendor) and agrees to pay the seller by installments.

Hire purchase is a good example of vendor credit. To obtain the benefit of hire purchase, it is usual these days to ask for the assistance of a finance company that would pay for the goods and then collect the money from the user on installment basis. In this kind of arrangement, the hire purchase contract is between the finance company and the user of the good. It is generally referred to as debtor/creditor supplier agreement if the supplier is providing the hire purchase credit without the involvement of finance company, it is referred to as debtor-creditor agreement.

A hire purchase agreement might be created in either of the following ways:

i.                     Goods are hired to the heir, who makes a number hire payment over a certain period of time and at the payment of the last installment the goods passes to the hirer.

ii.                   A credit sale agreement, whereby the customer bought the goods without making full payment, but is allowed to pay for the goods on installments, however the possession of the goods passes to the person, immediately while he is allowed to make deferred payment

iii.                  Conditional sale, whereby the vendor agrees to sell the goods to the customer but the title to the goods will only pass to the buyer on payment of the last installment.

Consumer Hire Purchase: Is provided for the acquisition of consumer durable goods like cars, trucks, household goods etc. It can be provided for both corporate and private persons. The benefits of the service to the hirer are as follows:

i.                     It enables the hirer to achieve good practical convenience in paying for the purchase for the       purchase of goods and services.

ii.                   It enables the hirer to bridge the gap between income and spending

iii.                  It enables the hirer to purchase goods and services for current consumption over a period longer than the normal interval between income and receipts.

iv.                 It enables the hirer to purchase real and financial assets in excess of the amount permitted by his own savings.

Industrial hire Purchase: An industrial hire purchase is in many ways similar to leasing except that the purchase would not become the legal owner of the good or equipment until the payment of the final installment.

The benefits of industrial hire purchaser to the hirer are as follows:

i.                     A company or manufacturer can obtain the assets now and pay for then over a period of time. This will enhance its cash flow and put less strain on the company’s cash flow.

ii.                   Payments for the equipments acquired can be planned with absolute accuracy

iii.                  Assets acquired on hire purchase, can have its costs estimated in each accounting year and the profit returns assessed more accurately.

iv.                 The hire purchaser, as the eventual owner of the equipment, can claim the capital allowances on the equipment to relieve its tax burden.

Factoring and Discounting Services

Factoring in its simplest form means purchase of business debts. It is another form of finance for the company whose debt is being factored, because the factor would pay cash in exchange for the book debts of the company. The three main aspects of factoring are:

i.                     Administrative services, under which the factor manages the trade debts of the client company. The factor will keep the sales ledger, issue the invoices, collect payment when due and generally relieve the client of the administrative burden of this side of his business.

ii.                   A system of credit protection, by which the factor assume responsibility for the trade debts due to the client company and thereby relieve the client of the risk of loss. This is the central but an essential aspect of factoring. In effect the factor purchases the debt from the client company so that in the client’s books one debt due from the factor takes care of all the svarious trade debts due from the company’s customers.

iii.                  Provision of credit is attained; In that the factor who takes over the client’s trade debt will           advance a proportion of their value immediately and the balance paid to the company at the           maturity of the debts. The client’s liquidity is improved because cash has been substituted for book debts.

Advantages of Factoring: To the customer of the bank (factor clients) the following benefits are derived:

i.                      The factor takes on a job of debt administration which saves him some costs in terms of staffing

ii.                   The factor performs the service economically and thus enable the client to obtain a reasonably cheaper services

iii.                  Factors are in a better position to assess, credit risks of a client and advise him accordingly

iv.                 If the factoring service is without recourse the client is fully protected against the risk of bad debts.

Without Recourse Factorings: It involves underwriting of trade debts of the clients and without recourse; if the debtor fails to pay the factor would not revert to the client for the recovery of the debt. Due to the fact that the factor now bears the entire credit risk he takes the following precautions:

i.                        The factor will approve the amount of credit allowed to individual customers by the client

ii.                        The factor will keep a continuous watch over the customer’s account in other to take timely action in case of ensuring bad debts.

Invoice Discounting

Invoice discounting involves the purchase of a selection of the client’s invoices at a discount by a factor or an invoice discounter. Unlike factoring an invoice discounter does not take over the administration of the client’s debtor ledger as the arrangement is purely for the advance of cash. Due to the fact that the invoices discounter does not control debt administration, he relies on the client to collect the debt for him at maturity. It is not a continues service as it tends to be a one off deal in most cases between the customer and the invoice discounter.

Share Registration Service

The share registration work entails the provision of registrar function to corporate organization by banks. This has assumed considerable proportion in recent years, because many of the big commercial banks In Nigeria now provide share registration service to most of the public limited companies. The duties of a corporate registrar include:

i.                     To register share transfers when shares are sold or given away by existing shareholders.

ii.                   To issue share certificates to shareholders

iii.                  To supervise the mailing list of shareholders

iv.                 To issue dividends

v.                   To process proxy votes for general meetings on behalf of shareholders who cannot attend

vi.                 To deal with enquires about shareholding and dividend payments from shareholders

vii.                To keep register of members

The service would be most suitable for companies who are publicly quoted, it is about to go public and a company listed on the second tier securities market might be interested in making use of a share registration service.

Travel Facilities (Foreign Exchange)

A customers travelling abroad either for holiday or on business trip may ask for his banks assistance in respect of the following

i.                     Provision of foreign currency notes and coins. This is quite easy and convenient to carry as it is in its final spendable form. This avoids the need to cash travelers cheques especially if the traveler arrives the country at the weekend, evening or during public holiday. In spite of the advantage of this method of obtaining foreign currency abroad, if lost or stolen it cannot be retrieved when compared to travelers cheque.

ii.                   Provision of Travelers Cheques- This is perhaps one of the most popular means of obtaining foreign currency from the banks when customers intend to make foreign trips. Depending on the country the traveler is visiting travelers cheques are available in pounds sterling, US dollars, Japanese Yen and a host of other developed nations currency.

Advantages of travelers cheque include the following:

a)       They are less bulky to carry when compared to foreign currency.

b)       If they are lost or stolen, the travelers can obtain refund, if the loss notification is given within twenty-four hours of its loss quoting the serial numbers.

c)       Travelers cheques can be exchanged for cash at banks in any country around the world.

d)      It contains facility for double signature, and this ensures good security in case of loss, i.e. Travelers must sign the cheque when they first receive them and again in front of the cashier during encashment.

e)      Unused travelers cheques can be reclaimed at the end of the travelers trip.

Automatic Teller Machines (ATM)

New technologies are emerging in the competitive market for banking in recent times and this has consider changes in the services provided in respect of money transfers. The most recent in Nigeria is the automated teller machines (ATMs) mainly for cash dispensing function. In other to use an ATM a customer inserts his or her card into the machine, keys into the system his personal identification number (PIN) and then keys in instructions using the visual display on the machine. Such instructions may be for the purpose of obtaining

a)      Cash withdrawal

b)      Find out the current balance on the customer account.

Currently the uses of ATMs are mainly for cash withdrawal. One of the main benefits of ATMs is that it is 24 hours per day and 7 days per week.

Advantages of ATMs- To the banks ATMs provides the following benefits

i.                     It improves the quality of services to customers, and is likely to retain the account of existing customers and also attract new customers.

ii.                   It will save costs of human tellers In banks

Advantages of ATM’s to customer are as follows:

i.                     It provides unrestricted service for withdrawals

ii.                   It will provide better accessibility of banking services

Disadvantage of ATM

In the banks view point ATM’s cost substantial capital expenditure to install, however major disadvantages of the machine affect the customers.

a.       Customer drawing cash from an ATM usually have his or her account debited instantaneously.

b.      An unauthorized person would have access if the Identification number is not properly kept by the account holder.

c.       Once cash is withdrawn from the machine, customers may be attacked by robbers.

Personal Advisory Service

It is common to be informed by customers who receive substantial Inheritances, or those who won pools to ask the bank for personal advisory service. In providing the service the bank would invariably consider the following areas.

I) Provision of investment services

ii) Provision of insurance and or insurance broking services

iii) Provision of personal financial planning

A personal financial planning includes the organization of one’s financial affairs to his best advantages and the bank must take into reckoning all aspects of the customer’s financial circumstances. It is suffice to mention that the service is a rich man’s service as it will include the following areas of financial services.

a)      Provision of savings and investment advice

b)      Provision of advice relating to contingencies, e.g. Insurance

c)       Provision for family education, e.g. settled trusts for children

d)      Provision for old age e.g. personal pension arrangements

e)      Testamentary arrangements, e.g. Executorships service depending on the age of the customer.

Business Advisory Service

One of the main functions of banks in recent times is to improve the prosperity of their business customers. To achieve this laudable objective banks are readily willing to provide on request advisory services that will improve the overall viability of the customer’s business.

Banks are ideally placed to advice small business where an overdraft facility will not solve a financial need; it should provide advice that would be appropriate for the customer. Further advisory services provided would to a large extent depend on the size of the business and the present financial facilities in use.

In respect of a public quoted company advice may be given in the following areas:

I.            Capital structure, including source of available capital like equity or long term debt.

II.            Dividend policy

III.            Investment appraisal and cost benefit analysis

IV.             Merger or takeover possibilities

V.            Development of overseas business, i.e. Import and Export financing.

In respect of small scale enterprises, range of advisory services that could be provided for them include the following:

I.            Philosophy and objectives of the business: The bank may assist the business to identify its corporate objectives and to design appropriate plan for the achievement of the objectives.

II.            Capital Investment Appraisal: Bank would be willing to provide advice and assistance about the evaluation of projects for capital spending using appropriate capital investment appraisal techniques.

III.            Financing: Advice on sources of credit, like overdraft loans, leasing, factoring and other financing methods would be provided by the bank.

IV.            Credit Control: Advice on terms of credit and assessment of credit worthiness of customer including efficiency of debt collection would be provided by bank on request.

V.             Cash Flow: Advice on management, planning and control of cash flow is essential for a smooth flow of cash in any business. Consequently the customer may be advised on the importance of cash flow forecast and monitoring of the cash flow forecast against the actual.

VI.            Book keeping and financial Accounting: In a situation where the business has good book-keeping system advice can be given about the installation of a suitable system and the office equipment needed to operate it, audit procedures and preparation of financial accounts. In case a good book-keeping system is not in place advice on the installation and use for preparation of accounting records can be given.

Budgeting: The need for advice on budgeting business operations need not be overemphasized. It is a useful aid for planning and it is useful for measuring actual performance against the budgets.

Pricing Policy: Advice may be given on ways of determining prices, in line with sensitivity and product demand generally.

Costing: Advice could he offered on costing techniques like: Marginal costing, absorption costing or/and standard costing.

Import Export: Methods of finding agents or distribution of goods abroad including methods of financing international trade, and international settlement methods could be offered to willing customers. Way and means of obtaining facilities provided by Nigeria Import and Export Bank (NEXIM) would also be passed in to customers who are involved in export business.

Benefits of Advisory Service’s: To the bank the under listed benefits accrue to the bank where business advisory service is offered to the customer.

i.                     It would enhance the success of their customers and consequently enhance the banker- customer relationship

ii.                   At the lowest level the bank lending risk will be reduced

iii.                  The advisory service can be a means of attracting new accounts