THE IMPACT OF QUALITY LENDING ON BANKS PROFITABILITY
ABSTRACT
This research presents the investigation into the impact of quality lending
on banks profitabilty, GT
bank in Otta Ogun state was used as the
location for the study and a total of 40 staff was sampled. Data was gathered using a self -constructed
questionnaire and the result gotten was analyzed using the simple percentage method, chi square was also used
for the testing of the hypothesis. The validity and reliability of instrument were ascertained. The result of the study
reveals that there is positive impact of quality lending on bank profitability, the study however recommend that
monetary authorities should monitor the bank lending rates and make appropriate interventions. Specifically, in
the event of poor performance of commercial banks, the authorities should facilitate the enhancement of the
banks’ profitability with a monetary policy that would lead to a rise in interest rates.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Realizing a good quality product in the market (whether it is a physical or service product) gives benefits to both
organization as well as their customers. “Quality means a process through which a business seeks to ensure that
product or service quality is maintained or improved and errors are reduced or eliminated. Quality requires the
business to create an environment in which both management and employees strive for perfection. This is
done by training personnel, creating benchmarks for quality, and testing products or services to check
for statistically significant variations (Adewale 2013)
Bank is a financial institution that undertakes the banking activity i.e., it accepts deposits and then lends the same
to earn profit. Lending or extending credit to needy persons is a major bank product.
Quality lending’ and ‘Credit Risk’ is interrelated. Credit Risk is inversely proportionate to Quality lending. Credit
Risk will decrease, if Quality lending increases and vice versa. Due to poor quality lending, banking industry is
suffering with huge Non-performing Assets (NPAs). Thereby higher provisions for NPAs, lower profits, additional
capital to maintain CRAR and decrease in rating of the bank etc are the side effects of poor quality of credit or
lending.
Agier and Assuncao (2009) contend that financial relations all over the world, have been deeply transformed in
the last two decades. This has been characterized by new products, new markets and new regulatory systems
which have radically altered the environment in which financial institutions operate, opening new profit
opportunities but also creating new risks. Today’s modern and competitive financial atmosphere influence banks
to improve their service quality and follow new technologies all over the world. Nigeria is no exception to these
effects and almost all industries including the banking sector. Commercial banks private are providing varied
services to attract the customers’ community since it is treated as assets of banks (Moya 2009). Shatto & Singer
(1996) points out that for retail bankers to meet the changing preferences of the customers and to stay ahead of
competitors they are bound to provide quality and efficient services. In the lending business banking has to be
distinguished from transaction based on lending in particular? Both variants are reflected in the underlying credit
processes. The distinguishing feature of banks with a relationship approach is the ability to gain and to use
qualitative information for customer evaluations. In contrast, the granting of credit in transaction-based lending
occurs based only on “hard,” quantitative information (Berger, 2002). The theory of financial intermediation
suggests that lending has a bright side and a dark side (Boot 2000). Strong bank-borrower relationships help
reduces asymmetric information between lenders and borrowers, the bright side. But, at the same time, these
relationships can create hold-up problems whereby the lender captures the borrower to extract rents, the dark
side. Hence, the overall effect of quality banking relationships is a trade-off in costs and benefits between lenders
and borrowers through interactions across time, space, and financial products.
Different empirical evidences suggested that profitability of financial institutions specifically banks are affected by
internal and external factors. Andreas and Gabrielle (2009) stated that Bank profitability is usually measured by
the return on average assets and is expressed as a function of internal and external determinants. The internal
determinants include bank-specific variables. The external variables reflect environmental variables that are
expect to affect the profitability of banks. Internal factors such as capital adequacy ratio, asset size, asset quality,
net-worth, liquidity, earnings quality, loan performance, business risk, management quality, people, technology
and operating environment are major determinant that are used to analyzed the determinants of bank profitability.
An external macroeconomic and industry-specific factor includes Effective tax rate, Real GDP growth, inflation,
and regulation and Bank concentration. Banks profitability is given due attention after the great economic
depression is experienced in the United States of America in 1940s. Due to United State sub-prime mortgage
crisis that happened recently in 2007-2009, the banking sectors of many countries suffer huge losses, especially
United State of America and European Union countries. The poor performance of the banking industry has slowed
down the United State of America economy and also the growth of global economy until current period. In Asia,
although the losses in banking sectors are not as serious as U.S., it is also hurting the economy. If the banking
industry does not perform well, the effect to the economy could be huge and broad. Because, banks are the
critical part of financial system, play a pivotal role in contributing to a country`s economic development (Rasidah
and Mohd 2011).
1.2 STATEMENT OF THE PROBLEM
Increased competition among financial institutions coupled with financial distress and unpredictable economic
conditions there is need for these firms to understand how well they can use the concept of quality lending to
increase their profits. Petersen and Rajan (1994) find that lending affects the quantity of credit more than the
price, while other studies find that customers get either lower future contract prices. Also due to poor quality
lending, banking industry is suffering with huge Non-performing Assets (NPAs). Thereby higher provisions for
NPAs, lower profits, additional capital to maintain CRAR and decrease in rating of the bank etc are the side
effects of poor quality of credit or lending, therefor this study is aimed at investigating the impact of quality lending
on banks profitability using GT Bank as a case study.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to find out the impact of quality lending on bank profitability, therefore
specifically the study intends to:
Find out the impact of quality lending on bank profitability
Find out the factors that impede quality lending in commercial banks’
Investigate other factors that impact profitability of banks
1.4 RESEARCH QUESTIONS
The following research questions were formulated from the objectives to guide this study.
What is the impact of quality lending on bank profitability
What are the factors that impede quality lending in commercial banks’
Are there other factors that impact profitability of banks
1.5 SIGNIFICANCE OF THE STUDY
It is hoped that the findings of the study would be significant in various ways like; Banks would be able to have
information that would guide it to improve on their profitability through quality lending. The findings would enable
banks to champion its quality lending to all the stakeholders so that they can improve on their profits as a result of
this concept. Other banking institutions would be able to understand the concept of quality lending from this study
so that they can use the same to improve on the profits. The findings of this study would help institutions to be
able to make relevant decisions based on the concept of quality lending. The regulators and the policy makers
can use the finding as reference for policy guidelines on management and control of such organizations. They
would be able to use the findings of the study to formulate viable policy documents that effectively address
problems faced by the banking sector. These may relate to regulating those aspects that threaten to adversely
impact on the operations and development of such organizations. This study would be important to the present
theory because it would furnish those who are interested in this study area with relevant information.
1.6 SCOPE OF THE STUDY
This study will cover impact of quality control and bank profitability, the research will vividly discuss different factor
that determine bank profitability like quality lending and some other factors, a theoretical framework will also be
used to back up the research. Also the research will be conducted in GT bank.
THE IMPACT OF QUALITY LENDING ON BANKS PROFITABILITY