CAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The commercial banks the change (as collateral security) on the most easily marketable securities of their client, e.g. stock of rawmaterials, finished goods and credit to customers. The collateral securities may equally include fixed assets in the form of landed propertywith good tithe documents and financial assets in the form of ordinary share, insurance policies.Experiences in banking industry have shown that most bank borrowers, especially those that fall within the category of small andmedium scale entrepreneurs, do not know the purpose for which they are obtaining the loan. Therefore, they are ignorant of the fact thatthe purpose of securing the loan must synchronize with the amount and types of the loan. This factor increases the banks exposure to riskof default.Also on the part of government, concretionary monetary policies and the stringent control through the central bank of Nigeria, makeit extremely difficult for banks to lend for the purpose of investments. This results in discretionary bank lending and slow practices in thebanking industry.Stressing more on the above problems, the following questions need to be resolved;i. How much does the borrower want?ii. What is it for (purpose)?iii. For how long does he want to borrow?iv. What is the source of repayment?It is these and other similar problems that this research studies is designed to resolve.1.2 PURPOSE OF THE STUDYDuring the 1960s and early 1970s most commercial banks had traditionally been favorably disposed towards the extension of short term loans. This in the main is due to the liquidity it confers on the banks coupled with the fact that by the very nature of the loan it must berepaid within one year.However, this preference for short-term loan by banks have long been over-taken by events hence banks have moved into long-termlending some of these factors included here are not restricted to the following;i. Increased lending capacity of banks: The resources of banks have witnessed an upsurge in the recent past. Since banks arebulging with excess liquidity there is the need to seek for profitable investment outlets for their fund so as to improve their earnings.ii. The establishment of Nigerian Deposit Insurance Corporation (NDIC):- This Corporation is established to protect depositorsby insuring depositor’s fund for a maximum of N50, 000 in the event of bank running into difficulties. Since the liquidity problems of banksare fairly reduced by the establishment of the NDIC, banks felt that they cannot extend loans of longer maturities as a way of boosting theirearnings.

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