CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

It is an accepted fact in Economic discourse that intermediaries such as Banks and Non-Bank financial institutions exist to ensure the transfer of financial surplus units to financial deficit units in any economy. Financial intermediaries make these funds available to deficit units or more broadly borrowers. In the process of inter-mediation, the financial intermediaries incur costs and even losses. Hence the need to sustain investor confidence in the system through the provision of adequate controls.

The need for an effective and efficient system of debt administration, control and recovery is today of central importance to institutional lend-ers. We have come a long way from the days of easy and cheap money supply of the 1970’s. People will recall the halcyon era of the Udoji awards and oil boom when absorptive capacity was low and economic activity was essentially cash and carry. That was the era of “arm chair” banking.

Not so in the Shagari era of the early 1980’s when the bubble burst and economic stabilization measures were introduced. Money became tight and defaults in loan obligations started. Today institutional lenders are groaning under the weight of massive volumes of non-performing assets. Total bank credit to the domestic economy rose by 83.5% from 18.47 billion in December 1989 to 33.0 billion in September 1990. Outstanding non-performing loans stood at about 7.6 billion in 1990. Up until mid-1989, it was still relatively easy to source funds in the desired volumes but tight monetary policy has since changed all that. The introduction of the prudential guidelines on loan loss provisions and the big bang of March 5, 1992 when the Naira went into free fall has put pressure on the cost of funds and reduced lending. There has been a lot of talk about bank defaults and the time has certainly arrived for these institutional lenders to take a fresh look at debt management.

In a modern economy,there is distinction between the surplus economic units and the deficit economic units and inconsequence a separation of the savings investment mechanism.This has necessitated the existence of financial institution whose jobs include the transfer of  funds from savers to investors. One of such institution is the money deposits banks, the intermediating roles of the money-deposit banks places them in a position of “trustees´´ of  the saving of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development.The techniques employed by bankers in this intermediary function should provide them with perfect knowledge  of the outcomes of lending such that funds will be allocated to investments  in which the probability  of full payment is certain.However,in practise no such tool can be found in the decision of the lending banker.

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