CHAPTER
ONE
INTRODUCTION
Background
of the study
A
bank is a financial institution that deals with money. Bank draw surplus or
idle fund from customers and lend them to those who would invest them into
productive business or investment. Therefore bank have been defined by
different school of taught arising from the multifarious function and services,
they perform in recent years in most cases either the term banker have been
defined in negative sense or in a ways which lay itself to different
interpretation for example, section 41 of the Nigerian banking Act of 1969
defined a bank as any institution, person, company who carries out banking
business and which a commercial bank,
and the same section of the Act went further to define Banking business as the
business of recurring moneys from outside sources as deposit irrespective of
the payment of interest or the granting of money loans and acceptance of credit
of the purchase of bills and cheques or the purchase and sale of securities.
Section 61 of the Banks and other financial institutions decree No 25 of 1991
(BOHIO) deposits on current accounts savings account or other similar account
paying or collecting cheques drawn by or paid in by customers, provision of
finance or such other business as the governor may by order published in the
Gazette, designate as banking business. Section 3 of the negotiable instrument
Act 1881 states that the term banker includes a person or persons corporate or
a company acting as a banker. This is mere cantology and has not succeeded in
defining whoa banker is. In America the term banker is often used in a broad
sense to include capitalist, the financers, the stockbrokers and even the high
bank official.
Banks have also been defined as nay
institution that is dealing on shares and stock. The first successful
definition of a bank was made by law maker (legislators) in the United State of
America. They define banking as dealing in credits, according to them a bank
include a firm, person or companies having a place of business where credit is
operated through deposits and collection of money or currency subject to be
paid or remitted on drafts, cheques or money in advance or loaned or stock
bonds, billion bills of exchange or promissory notes are received for discount.
In Japan, the Japanese Act of 1927 defines a bank as an institution which
carries on the operation of giving as well as receiving credits. Inspite of the
absence of an acceptable definition of the term, some writers have attempted to
give a sound definition of banker. According to Hart H, G. (1991) a banker is
one who in his ordinary course of his business honours cheques drawn upon him
by person from and for whom he receive money as current account. Another was
given by Sir John Paget. According to him no other person, body, corporate or
others can be a banker who does not take deposits account take current account
issue and pay cheques and collect crossed or uncrossed. This is a more
compressive definition of banking business, but does not include most of the
present day banking operation like agency and general utility business.
Also banking in Nigeria has gone
through very dramatic change within this decade, the industry has grown beyond
optimistic expectation. Over the year and period, the number of bank expanded,
the variety of bank increased. Banking operation were substantially
deregulated, competition increased and bank were forced to be more innovative
and services oriented.
From
the above definition, the functions of commercial bank or development bank
could be visualized. There function include
- Receiving
deposit
- Advancing
loan
RECEIVING DEPOSIT
This
is an important business in banking operation because bank depend merely on
these funds for it’s day to day operation. These are the three types of
deposit:
- Current
demand deposits
- Fixed
and time deposits
- Savings
deposits
Current and Demand Deposit: These
are deposit made by customers which are virtually interest free. Such deposit
can be withdrawn in part of full at anytime by the customers through the use of
cheques.
Fixed and time: These
deposits attract higher interest rates and can only be withdrawn after a given
period.
Saving Deposits: These
are deposit that can be withdrawn subject to certain limitation, regarding
frequency and amount to be withdrawn. This aspect of banking business requires
the bank to keep enough fund or money available for transactionary and
operation purpose so as to be able to meet withdrawals or demand by customers.
According to IIjere (1986) the bank should keep enough cash sufficient to meet
any demand made by customer.
ADVANCING LOANS
The
bank makes profit by advancing loan to customers. Because banks deal with other
people money as such while advancing, these loan, bank try to strike a balance
between profitability, liquidity and security. This is done in order to meet
the customer obligation and at the same time to ensure the liquidity and
survival of the banks.
After
the bank has satisfied itself that the purpose for which a loan is required is
economically sound, the bank gives the customer right to draw cheques. The loan
thus becomes a deposit through issuance and drawing of cheque such as loan than
creates credit.
Advance
constituted the most important asset of the bank. It is said to be income sterile
until invested (Okoafor 1987). Amongst the major types of bank asset loan and
advances are the most dependable and highest yielding sources of income Lot
(1983)
Bank
as a result of their nature don’t seek to maximize its profit simply by
maximizing its advances according to Ijere (1986) certain prudent policies are
followed by bank before granting loan and advances. These include
a. The
sources of Repayment: the probability that the business will generate enough funds
to enable the entrepreneur to honour his business obligation as and when due to
maintain himself and repay the bank advances.
b. The
personal character of the borrower: No banker would like to lend to a dishonest
person who does not intend to pay back.
c. The
period of the advances: the bank would prefer this period to be as short as
possible so that he doe not suffer risk for losing.
d. The
purpose of advances:- Banker request for clear and very well articulated
purpose or use of loan before grating such request. They insist on this since
very high risk ventures bothering on gambling and betting are usually not
considered.
e. The
personal worth of the borrower: banker are always weary of lending to men of
straw who could not even raise the base minimum amount required for the
advance.
f.
The security offered: Banker would like to
lend only against security sot that if the borrower defaults in repayment he
can exercise his right against the borrower asset.
AGRICULTURAL LENDING
Agricultural and agro-based industries fall
within the high risk zone. The risk in agricultural business sin Nigeria is not
only a function of the vagaries of the climate condition of a place on which
farming depend, other factors such as the small and scattered nature of most
agricultural holding which together with the relative lack of sophistication of
the bulk of the small scales farmer make the bank cost of servicing them high.
Because banks are risk aversive they are therefore reluctant to operate in
rural areas or community where they are left with only the farmers and have no
alternative other than to develop the rural environment. As a result of the
role of agriculture as a major sources of the food for teaming populations and
the need to diversify export based resources, the federal government decided to emback on rural banking
programmes and also established some specialized lending institution to take
care of agricultural sector of the economy.
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