The Appraising of Lending Policies of Commercial Banks to the Private Sector

BACKGROUND OF STUDY

Commercial banks are in the services industry, in safe keeping of money and valuables, remitting foreign and domestic exchanges, collecting cheques, draft, notes and other obligations and behalf of other customer. According to Christian Ammer, Deans Ammer in their books dictionary of business and economics, defined commercial bank as “bank whose principal functions are to accept demand deposit and to make short medium and long term loans chiefly to business firms.

Before going into the origin of credit disbursement by commercial bank in Nigeria, it is important to trace the historical development of commercial bank in Nigeria. Commercial banking started in 1892 with the establishment of Africa Banking Corporation in Lagos in 1894, that is two year later British bank for West African was established to take over the operation of the Africa Banking Corporation (ABC) which ceased to operates, this was followed by the established of several other banks.

The origin of credit creation by commercial bank can be traced back to surplus and deficit sector in Nigeria economy, the surplus sectors are those with excess money and have the need to deposit in the bank. While the deficit sector are those that do not have enough and looking for a place to borrow. The surplus is caused by income being greater than expenditure, while deficit is caused by expenditure being greater than the income. In this credit disbursement commercial bank act as financial intermediary between the economic agents that have surplus money to lend and those with shortage of funds and therefore need to borrow. When the bank reserve sector deposit there money with the bank, the bank reserve will increase. These reserves are earning interest to the bank. Bearing in mind that the bank need profit, what they do is to lend out the money after keeping certain amount required by the reserve requirement. In making credit available to the borrower, commercial banks are rendering a great social service’s which leads to increase production, expansion of capital investment and higher standard of living is obtained.

Credit disbursement by commercial bank is through creation, credit creation involves a situation where all commercial banks are expected to lend out some percentage of their daily deposit after returning their legal reserve requirement as prescribed by law. The proportion so lent out would go into a new bank which will in turn region the legal reserved and give out the rest as loans to customers who will utilized the money in away that is ultimate collector process it into other bank which takes it turn recirculation to sum collected.

The commercial banks have over the years proved be the most important financial intermediary. They have facilities for the rapid transformation of an economy for an away. They are the largest single group in financial sector. Out weighing by share volume of transaction all the non-bank financial institution put together.

In Nigeria, although the government has substantial share-holding in the equity capital of the banks, they are still regarded as part of the private sector. The commercial banks have contributed importantly to the economic development through their deposit holding and credit to the Nigeria economy.