DEPARTMENT OF BANKING & FINANCE,: THE IMPACT OF BANK SECURITY IN BANK LENDING WITH EMPHASIS ON GUARANTEE (A Case Studies of Guaranty Trust Bank Plc)

THE IMPACT OF BANK SECURITY IN BANK LENDING

WITH EMPHASIS ON GUARANTEE

(A Case Studies of Guaranty Trust Bank Plc)

RESEARCH PROPOSAL

This impact of bank security in Bank lending with emphasis on Guarantee.

The Terms permit to this work will be defined secondary all this are presented and discussed, conceptual issue on Bank security, procedure for talking guarantee as security, also principle governing the contract of guarantee and Right of guarantor and Determination of guarantor will be showing, also merit and demerit of taking guarantee as security and problems for taking guarantee as security. thirdly the case study and methodology will be shown and discussed. Fourthy the analysis and presentation of data instrument will be presented and discussed. Finally the summary conclusion and recommendation will also be present and discussed.

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgement

Table of content

CHAPTER ONE

1.1 Introduction

1.2 Statement of the problem

1.3 Aims and objectives

1.4 Significance of the study

1.5 Scope of the Study

1.6 Research Methodology

1.7 Definition of key Terms and Concept

1.8 Plan and Organization

CHAPTER TWO

2.1 Conceptual Issue on Bank Security

2.2 Procedure for Taking Guarantee as Security

2.3 Principle Governing the contract of Guarantee

2.4 Right of Guarantor

2.5 Determination of Guarantor

2.6 Merit and Demerit of Taking Guarantee as Security

2.7 Problem for Taking Guarantee as security

CHAPTER THREE

CASE STUDY AND METHODOLOGY

3.1 Historical Background of Guarantee Trust bank

3.2 Method of Data Collection Instrument

3.3 Sources of Data Collection

3.4 Population Size of the Study

3.5 Administration of Data Collection Instrument

3.6 Procedure for processing Collected Data

3.7 Limitation of Methodology

CHAPTER FOUR

ANALYSIS AND PRESENTATION OF DATA INSTRUMENT

4.1 Introduction 48

4.2 Data presentation and Analysis 48

4.3 Data Analysis According to Research Question 49

4.4 Analysis of Data According to Description Analysis 55

4.5 Data Analysis from the Case Study or Annual Report 64

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Finding 68

5.2 Summary and Conclusion 69

5.3 Recommendation 72

5.4 Suggestion for Further Study 74

References

Biography

CHAPTER ONE

1. 1INTRODUCTION

Though a banker is expected to exercises considerable skill, use his experience and a number of qualities in analyzing credit proposal and accessing the risk it has been established from experience that unforeseen imponderable sometime affect the borrowers ability to pay. The like hood of poor operation results from project which may originally have been well conceived have rationally led bankers to insure themselves incase the unexpected happen by demanding some form of securities.

Securities could be defined as some rights or interest on properties giving to a creditor, so that in the event of the debtor failing to pay his debts as and when dues, the creditor will reimburse himself for the debts out of the property charged. Both real and personal properties may be charged with the repayment of a debit in this way.

Securities are particularly relevant to our situation in Nigeria where banking education and are relatively low. There have been instance of customers showing financial low morality in business affair, conflict of objectives in corporate planning, and lack of proper accountability in financial management.

Despite the importance of security however, and in fact taking the guarantee as security must be mentioned because it is a guide if the debtor fails to honour his obligation.

Section 4 of the statute of frauds Acts 1677 defined a guarantee as a written promise made by one person to be collaterally answerable for the debt. Default or miscarriage of another person. Section 4 of the Act provides, that no action shall be brought to charge a person upon any special promise to answer for the debt, default or miscarriage of another person unless the agreement upon which such action is to be brought is evidenced by a note signed by him or more sufficient memorandum or note there in sighed by the party to be charged there with or his agent There are three parties to a branch Guarantee. The principal debtor- who assumes primary liability. The creditor-The lender —the bank

The guarantor-The third party who accepts secondary responsibility

12 STATEMENT OF THE PROBLEM

The focus point of the research work is to highlight the impact of security in Bank lending with emphasis on guarantee on Nigeria Banking Services. Therefore, in the research study answer will be provided to the following research questions

Ø What are the step in taking a personal guarantee as a security for lending.

Ø What are the characteristic of good Bank security.

Ø What are the rules and regulations which banks must adhere to when processing application for bank advance.

Ø What are the causes in guarantee form.

Ø What are the rights and determine of a guarantee.

Ø What are the problem of using guarantee as a security.

13 AIM AND THE OBJECTIVES OF THE STUDY

The research work main focus is to highlight the impact of security in bank lending with emphasis on guarantee.

One of the function of commercial bank is to provide short and medium term loan and advance to various sector of the economy. It is therefore obvious that commercial banks increasingly looked upon to ensure that the credit does not constitutes any obstacle towards the realization of the national objective in lending to all sector of the economy. In view of the above, the objectives of the study includes the following.

-        To point out the step in taking a personal guarantee as a security for lending.

-        To discuss the purpose of security for bank lending.

-        To discus the characteristic of good bank security

-        To enumerate the lending policies and objectives.

-        To enumerate the rules and regulations which the bank must adhere to where processing application for bank advance.

-        To examine the right and determination of a guarantee.

-        To examine the problem of using guarantee as security.

14 SIGNIFICANCE OF THE STUDY

The significance of the study is to help the reader to see vividly the impact of security in bank lending with emphasis on guarantee in Nigeria commercial banks. It also help to educate an organization wishing to use a guarantee as security for bank advance. Guarantee are especially useful where the borrower is unable to provide direct security of the directors guarantee a limited company’s borrowing since it gives them a personal commitment to the company success. It also beneficial to the co-researcher to have independent knowledge on impact of security in bank lending.

1.5 SCOPEOFTHESTUDY

Although taking guarantee as a security for bank lending is done by all banking institution, this study is going to be limited to the

guaranty trust bank.

1.7 DEFINITION OF TERMS AND CONCEPT

-        Securities: - Is something that provides safety freedom from danger or anxiety.

-        Lending: - Is the process of giving somebody the use of money for a period of time.

-        Guarantee: - Is a written memorandum to be collaterally answerable for the debt of default or miscarriage of another person.

-        Guarantor or surety: - Is the third part who accepts secondary liability on the debt.

-        Principal debtor: - Who assumed primary liability.

-        G.T.B: - Guarantee Trust Bank

1.8 PLAN AND ORGANIZATION OF THE STUDY

In the course of this project, the project work is divided into five (5) chapters contains the following.

Chapter One

It contain the introduction, statement of the problem, aims and objective of the study, scope of the study, significance of the study the research methodology definition of terms and concept, plan and organization of the study.

Chapter Two

It contains the literature review conceptual issue on bank security purpose of security, meaning of lending, lending policies and objective common of lending, procedure for taking guarantee as security, clauses in guarantee forms, principles governing the contract of guarantee, right of a guarantor, Right against principal debtor, merit and demerit of taking guarantee as security for lending, problems of taking guarantee as security, References.

Chapter Three

It contains case study and methodology, historical background of Guarantee Trust Bank, method of data collection instrument, sources of data collection, population size of the study, limitation to methodology, administration of data Instrument, procedure for processing collection data.

Chapter Four

It contains the introduction, data presentation and analysis, data analysis according to research question, data analysis from the case study or annual report, References.

Chapter Five

It contains findings, summary and conclusion recommendation, suggestion for further study.

CHAPTER TWO

2.1 DEFINITION OF BANK SECURITY

Security in its literary form is something that provides safety, freedom danger or anxiety. A banker comes across numerous demand for one form of financial assistances or the other. These financial request would be in the form of loan or overdraft. Whatever the form of advance which contextually, a polite euphemism for loans would be readily granted provided the customer is able to meet certain basis requirement. One of these requirements is the credit worthiness and the ability of the loan applicant the customer to produce the necessary security.

Security in this context is a form of insurance against unforeseen development, which can culminate into non-payment of the bank loan. In order to reduce the risk of non prepayment of loan, bank naturally would demand for securities which it would have recourse to in order to reimburse itself incase of non-payment form of the major things commonly accepted as securities are land :properties, insurance policies, stock and share and personal securities We guarantees and indemnity.

(a)     An analysis of the raison deter for bankers acceptance of securities is that they provide safety from non-payment of money lent to customers.

(b)     At the same time properties or documents of titles pledged as securities could at best sold or realized and the proceeds could be used to offset indebtedness of the borrower.

2.1.1 PURPOSE OF SECURITY

The general belief among bankers is that willingness and the ability of the loans granted to him as and when due is the most paramount consideration when an applicant for a loan is being evaluated.

The purposes of security for bank lending are as follows:

1.      The fact that a customer has deposited his property or document of title to the bank as security for loan and advances is a demonstration of the fact that whatever loan given to him would be judiciously administered.

2.      To the above is the fact that an unsecured borrower may decided to spend loan granted him on unprofitable venture or divert the loan to other non profit yielding venture quite distinct form the original purpose for which the loan was approved.

3.      On the part of the banker, it gives him some degree of succeed when the duration of the loan lapses and the borrower refuse to pay or can not pay.

4.      Bad debt is reduced to the barest minimum customer is avoided because the securities pledged could easily be realized. There are some securities whose realization would normally involve some degree of publicity especially building properties.

2.1.2 CHARACTERISITC OF GOOD BANKING SECURITIES

ADEQUACY :- These should be considerable margin between the realizable value of the assets pledge and the amount loaned out the

customer. Where a bank fail to secure loan by assets and the customer become bankrupt, the bank would rank as a secured creditor and would only be entitled to divide which would in most case be much lower than the original debt.

STABILITY OF VALUES:- The value of security must be such that its value over a period of time is stable. A good example landed property. The value of shares of a company depends largely on the performance of the company.

OBJECTIVE EVALUATION:- A good security should capable of I being value objectively. The valuation of landed properties is highly

subjective and depends upon so many variables like the location, state of repair, structure and the designs. However, securities like quoted and life policies could be valued in a more objective way. The surrender value of a policy is easily obtained and the stock exchange. REALIZATION:- The general motive for demanding for a security is to get something of fall upon if the customer fail if the securities pledged for loans is not capable of being realized, the essence of the entire security arrangement is defeated. A good security should therefore be capable of being realized without many hazards.

TITLE TO SECURITY MUST BE UNQUESTIONABLE:- Ownership or title to security must be good. Registered, land, share certificate and life policies are securities the ownership of which is not controversial. Before bank commits itself into loan disbursement it must ensure proper investigation. Ownership or title to security must be good. Registered, land, chare certificate and life policies are securities the ownership of which is not controversial. Before bank commits itself into loan disbursement it must ensure proper investigation of title.

SHOULD NOT BE CUMBERSOME:- Security items should not be items that are bulky in nature because of storage problem. As a result of this, banks are interested in documents of title of asset pledge as securities and not the actual items.

SHOULD NOT BE PERISHABLE ITEMS:- Items deposited as

security should not be those that are capable of decaying or perishing within a short time. Basket of tomatoes would for instance become worthless within the shortest time.

21.3 MEANING OF LENDING

One of the major functions of banks from the immemorial lending. Apart from the income arising from bank charge i.e. cot and other incomes from funds transfer either locally or across the international frontier a substantial part of the income according to banks is from lending.

What is lending?

Lending is the process of giving somebody the use of money for a period of time on the understanding that the amount lent out in addition to the accrued interest will be return at the agreed place and time.

Lending is particularly of great important to the, government and general citizenry. Apart from profit making, they also enable entrepreneurs who are in due need of moneys to embank on viable project access to the needed financial for either working capital or for the acquisition of plants and machinery for production.

By making funds available to investor, they are directly creating room for employment opportunities. To be entrepreneurs, lending by banks enable investors to have access to funds for the smooth running of their business. On the part of the government, bank ‘ending for manufacturers and other business is a welcome development. It makes it easier for the government to make use of the available funds at its deposal to embank on projects that would be off great benefit to her citizens. Times, the government even channels it assistance to some targeted groups through the banking system i.e. loan to farmer

2.1.4 LENDING POLICIES AND OBJECTIVES

The objectives of banks viewed from its commercial goal are to maximize her profits. Be that as it may, there are other social responsibilities, which lend to whittle down the profit maximization objective. The bank should therefore ensure that its lending proposal contribute to the overall objectives, vision and mission of the bank.

GROWTH:- Before any bank would attempt to lend, it must be continue to exist and grow, it has to be making profit. The bank management would therefore asses all proposals to ensure that it is going to contribute to the overall profitability of the business.

The bank would be interested in the ability of the borrower to repay both the interest charges and the principal at the agreed period.

LIQUIDITY:- The stock in trade of banks is money. It has been discovered over the year that not all customers of the bank would demand for their deposited simultaneously and as a result banks lend part of their deposited to the needy customers. However, bank have to make adequate provision for the depositors that would want to withdraw their funds hence the need for liquidity, that is physical cash or more liquid assets that could be easily converted into cash. Another important thing to be considered here are the duration of the loans gives to customers.

Because the sources of finance of most bank are short, the terms of repayment should be equally short.

2.1.5 CANNONS OF LENDING

These are rules and regulations in which banks must adhere to I when processing application for loans, and advances. These laws have no sanction wherever they are breached but the consequence of the breach would certainly have a negative impact on the profitability of the banks. This is so because these are the rules that can guide the banker into a sound lending decision.

The LEGALITY OF THE PROJECT: - No matter the profitability and the financial viability of the project, no banker would be prepared to finance a project that is illegal. A loan for the establishment of a hotel is allowed where as a loan proposal for the establishment of brothel is illegal

PROFITABILITY OF THE PROJECT:- The business must show dear signs that the business would yield enough profit and enough cash flows such that the principal sum, interest and the desired profit would be achieved.

PERSONAL VIRTUES: - A character question concerning the personal character of the customer must be asked. Is he honest, responsible and credit worthy? Is he a customer whose integrity could be vouched for? Does he respect his name and words or statement?

AMOUNT: - The bank should endeavors to ascertain this so that too much money in excess of the required amount is not lent. The same time, loan grossly, inadequate for the operation of the business too would not help matters. A cash budget should therefore be demanded from the customer. This would enable the banks to know when the customer would be in need of need of money and how much.

CAPITAL:- The capital contributed by the borrower to the business mould be substantial compared with the loan request where the proportion of the customer contribution is low, any loan given to him is likely to be misused.

CAPACITY:- The banker must be find if he has prior experience on the line of business the customer is venturing into. At best he should be prepared to employ experienced hands to manage the business on behalf of the customer.

DURATION:- The deposit liabilities of banks are short in nature as a result of this loan given by banks are short terms in nature. A demand for a long term by a customer should be turned down. He could be advised to raise long term loans on the stock exchange. However, if it is discovered that is highly profitable, the bank may consider it.

TERM OF PAYMENT: - Banks are not Father Christmas and so the term of payment should be clearly spelt out right from the onset. Is the customer paying monthly or quarterly? A side, the sources of the money for the repayment should be clear and unambiguous from the cash budget prepared, the bank would be able to know precisely the cash flow position the bank would be able to determine when the loan repayment would commerce from the cash budget.

PURPOSE OF LOAN: - This refers to the standing of the customer, he well connected can he also bring in some other profitable account where the bank can generate more fund. If the answers to these questions are positive, then the bank can give out the loan.

SECURITY:, - The modern day lending activity of bank does not lay emphasis on security. Rather the emphasis is on the financial viability of the proposed project and the integrity of the customer. However, no matter how shrewd a banker is, these might be some problem of bad debts hence the issue of security to reduce the impact of huge bad debt.

2.2 GUARANTEES AS SECURITY FOR LENDING

The first step is to establish the credit worthiness or financial standing of the guarantor. If he is a customer of the branch, then it will be easy to ascertain but where he banks with another bank, then would be needed to obtain a status report on him.

Provisions should be made that the bank could determine or increase the credit facility to the borrower without rescue to the guarantor but that his liability is limited to the guaranteed amount. Otherwise if the bank grants an excess facility above the amount guaranteed, the guarantor may on that ground deny liability as was illustrated in the case of A.C.B Ltd V Mohammed Khali and Abdel Salesman (1971) where it was held that he second defendant (i.e. the guarantors) had been discharge from the guarantee by the increase in the overdraft facility granted to the first defendant which had altered the second defendant’s position without his consent. As such the action was dismissed against the second defendant.

The guarantor is not liable for debts incurred before the execution of the guarantee (i.e. past consideration).

The next step is to ensure that the guarantor understands the forms. The bank’s standard guarantee form must be explained carefully and be executed. That is dated, signed and stamped the stamping and signing must be witnessed by an official of the bank. In those cases where this is not possible the document may be witnessed by an official of the guarantor own bank or at a solicitor’s office. It is of vital importance for a guarantee agreement to be dully signed and sealed.

In Arab bank Nigeria V Alhaji Daminu Dantala 1962. The court held without much difficult that a person, who have not signed on the deed of guarantee is not tenable in court.

The position in the above case was further realifirmed in the se of National Bank of Nigeria Ltd V Awolesi 1964. where it was held that no person is liable on a guarantee unless he actually signed the document what a bank must avoid doing is to send a guarantee form direct to a guarantor or to a customer in order to minimize the risk of forge signature and to prevent the guarantor form 9.ibsequently refusing liability on the ground that he has opportunity d asking question as the banker was not there when he signed so no body told him it was a guarantee form.

2.2.1 CLAUSES IN GUARANTEE FORM

Under the general law, the guarantor is in a strong position and has several rights against the creditor. Bank forms therefore include several clauses designed to Limit these right, some of these clauses

Whole debt clauses: - The whole of the customer’s indebtedness is guaranteed, but with a unit on the guarantor’s liability. The reason for this is to prevent the guarantors from having a proportionate are of any security held on the repayment of part of the debt and also to prevent the guarantor from proving against the customer’s estate in completion with the bank where the customer is adjudicated bankrupt.

-        The guarantee is expressed to a containing security covering

any amount owing on the debtor’s account at any time subject to a limit. This is to exclude the rules in claytion’s case (1816) operating against the bank.

-        The guarantor’s liability arises on a written demand for repayment being made. By this it means the six year limitation does not commence until a proper demand has been made.

-        The consideration is always expressed in such terms as opening or continuing an account with (the principal).

-        Co-guaran.tors undertaker joint and several liability, and the bank is allowed to release any of them without affecting its right against the others

-        The guarantor in form or constitution of the parties.

-        The guarantor agrees to accept the banks statement of the customers account as conclusive evidence of the amount owing by him to the bank.

-        That the guarantee is to be additional to any other guarantee or security and not given in substitution to earlier guarantor security.

-        On determination of the guarantee the bank is allowed to open a new account for credit paid in so that the guarantors is demand to hold this as trustee for the bank.

-        The bank is given right to keep the guarantee form unconcealed for a period of at least six months after the money has been repaid in case the customer’s repayment is hold to be fraudulent preference.

-        The guarantor undertakes not to withdraw any cash deposit made in suppose of his guarantee or in reduction.

2.3 PRINCIPLES GOVERNMENT THE CONTRANT OF GUARANTEE

The Basic Rule: - The basic rule is that neither the creditor nor the debtor is under any legal duty to disclose material fact to the prospective guarantor which right influences him against entering to the contract. This the bank needs not disclose to the prospective guarantor that is customer’s account is already overdraw or

information regarding the running of the account. In cooper V  National Provincial  bank in respect of Mrs. RoIf, the bank did not disclose to the plaintiff that.

Mrs. Rolfs husband was an undercharged bankrupt with authority to draw cheque on Mrs. Rolfs account and the account has been operated in an irregular secure the over draft of her husband is the major problem under undue influence. Though there is no presumption ‘of undue influence between husband and wife rather it must be proved as a fact as was in the case of bank of Montreal V L 2uart and another (1986).

2.3.3 MISTAKE (NON EST FACTUM)

The doctrine of non est Factum (it is not my act) can render a written contract void. A guarantor tries to avoid liability by asserting that I was mistake over the guarantee which I signed such a defense unlikely to succeed.

In Carlisle and Cumberland banking co. v. Bragg (1988) the defendant avoided liability on a guarantee because when the signed it he was told that it was an insurance document. However where a       guarantor is careless and negligent he will be liable.

In Saunders V. Angelia Building society (1991) a lady was persuaded to sign a document at time when her glasses were broken and she could not read it she thought the transfer of the property was to her nephew as she was lead to believe. Manner to the extend that certain Cheques has been issued and countermanded by the drawer. The plaintiff argued that non — disclosed of these fact entitled him to repudiate the guarantee it was held that the bank had no duty to disclose any of these matters.

Vote: In the following instance the guarantor may be able to avoid his obligation and the guarantee is treated as void able at his option.

2.5. 2PRESSURE OR UNDUE INFLUENCE

Undue influence arise from a special relationship between parties where by the will of the person is not as freely exercise sable as the will of another. In other words undue influence to execute a guarantee on behalf of the principle debtor.

The guarantor may treat the contract as void able and set it aside within a reasonable time after the influence cease to operate. The simplex example is the influence of parent upon their children, but undue influence is also presume between doctor and parent, solicitor and client, beneficiary and trustee, guardian and wards, and many arise in special circumstance between husband and wife.

In practice, guarantee by a life to the transference mortgage the property to a building society which he could only do if the transfer to him was valid.

The lady died and her executor denied that the transfer was valid. The case went to the House of Lords which overruled Bragg case.

It was held that the defense of non est Factum is restricted to cases where:

(a)     There is a mistake as to the nature of the transaction to which the documents relate. In this case there was no such mistake as the lady knew she was signing a transfer of her house.

(b)     The mistake must not be due to want of reasonable case. On the fact there was a lack of reasonable care. It follows a practice that a guarantee should never be executed outside the banks premises but should always be signed in the presence of officials of the lending bank or one of its branches or authorized agent who can ensure that the guarantor fully understands the nature of the contract. If the guarantee can not be signed in the presence of the lending bankers, it can be sent to the guarantor’s bank with suitable explanation, so the guarantor may then call to complete it in the presence of his banker. This practice also removes any risk of forgery of the guarantor’s signature.

2.3.5 SIGNATURES

          A guarantee must be a document signed by the guarantors statute of fraud. Act 1887 a guarantor will not be hold liable on a guarantee unless he had actually signed the guarantee’s form. If there many guarantors under joint liability, the liability of each guarantor is dependent on the other parties accepting liability. All guarantors must sign before the bank can treat it as a guarantee binding on any of them.

2.3.6 MISREPRESENTATION

Misrepresentation occurs where a party to a contract makes a material statement of fact concerning.

The contract which entrance. An innocent misrepresent is an untrue statement of fact likely to influence the decision for the guarantor who if he is mislead and so induced to sign the guarantee relying upon the statement may avoid liability. A fraudulent misrepresentation is an untrue statement made by a person who knew it to be false or who did not believe it to be true, or who made the statement recklessly, no caring.

Whether it was false or true and will likewise enable guarantor to repudiate liability.

The banker when dealing with a guarantor is unlikely to the guilty of fraudulent misrepresentation but case may be necessary to avoid innocent misrepresentation by falling per harps to correct an obviously wrong impression in the mind of the guarantor concerning the nature of the advance which is to be granted. This raise the borrowing and the nature of the advances has to be disclose by the bank to the guarantor when he intends to sign the guarantee.

The banker has a duty of secrecy to it customer, banks can not allow this duty to override the risks of mistake of misrepresentation d where it is evident that guarantor is laboring under [representation concerning the guarantee liability the bank must correct it much depends upon what happened at he interview with the guarantor bearing in mind the words of sir Edward fry in Davies London and provincial (1977). Very little said which ought not to have been said and very little omitted ought to gave been said     have been said and very little omitted which ought to have been said will suffice to avoid the contract.

2.4 RIGHT OF GUARANTOR

A guarantor has every common law and equitable right against the creditor, principal debtor and co-guarantor. However, in practice a standard band guarantee from removes from him all his right.

2.4.1RIGHT AGAINST THE CREDITOR

A guarantor is entitled as anytime during the currency of the guarantee to all upon  the creditor and asks him of the amount for which he is liable under the terms of the guarantee. However, the bank should not supply the guarantor with a copy of debtor statement of account. If the debt exceeds the amount of guarantee. If the debts are less than the amount of the guarantee, the guarantor should be told the actual amount of the debt including bank change but that the maximum guaranteed is being relied upon. At any time after the debt has become due, the guarantor has a right apply to the creditor, pay him off and then sue the principal debtor in the creditor name or in his own name if he has obtained an assignment of the debt.

Right of set off and counter claims if sued by the creditor the guarantor can avail himself of any set-ott or counter claim, which the debtor has against the creditor.

Delivery of securities held by the creditor if the guarantor pays off his debt, he is entitled to equitable doctrine of subrogation to step into the shoe of the creditor, to secure the debtors account

Whether or not knows of the security whether not they have been deposited by the debtor or third party if the debt is greater than the amount of the guarantee, only a proportionate share of the security may be taken over. Usually, this may not be possible at time.

2.4.2GUARANTORS RIGHT AGAINST PRINCIPAL DEBTOR

The guarantor is entitled to call the principal debtor to pay the amount of the debt guaranteed so as to relieve him from his obligation even though he has not paid anything under the guarantee and even thought the creditor has not demanded for any payment yet from him or from the principal debtor.

The guarantor may ask the court for a declaration that he has a night in equity to require the principal debtor to exonerate him from his liability under the guarantee by paying off the debt.

As soon as the guarantor pays anything under his guarantee, he has an immediate right of action against the principal debtor. But the guarantor can not accelerate his remedy by paying the guaranteed debt before it become legally due.

If the principal debtor is bankrupt, the guarantor has a tight to proof r his bankrupt for the amount which he has paid up under the guarantee. The right however is subject to the creditor both proving at the same time.

2.4.3 GUARANTORS RIGHT AGAINSST HIS CO-GUARANORS

Contribution from co-guarantor:- if one guarantor pays whole the debt he is entitled to compensation from co-guarantors even if;

(i)      There guarantee are contained in different instrument.

(ii)      He is unaware of the existence of the co-guarantors when he signed his own guarantees.

However, the amount which the guarantors are bound to contribute depend upon the proportion in which they are respectively liable. A guarantor is entitled to any security given to the creditor by his co-guarantors.

— Right of Hotochpot:- A guarantor who has received security from the principal debtor or creditor, must share the benefit with other co-guarantors even though they may have been unaware of the of their existence when they became guarantors.

2.5       DETERMINATION OF GUARANTEE

A guarantee is determined if the principal debtor pays off the

debt fully. The guarantor would be discharged completely in the

absence of a charge for fraud went preference. Also, if the guarantor

himself liquidates the loan in full, his liability terminates immediately.

Other happening that will crystallize a contract of guarantee includes.

-        Death of the principal debtor.

-        Death of the guarantor.

-        Debtor or guarantors’ mental incapacity.

In the event of any of the above happening, the account of the customer should be stopped. Rules in Claxton’s case (1916) on the death of the debtor, the guarantor remains liable whether or not of notice of default had been given this was illustrated in ACB Ltd V. kembi and Talabi (1984) the bank sued the dependant who were guarantors of a loan which become a judgment debt after which the borrower died. Thereafter the bank claimed repayment of the loan from the guarantors who refused to pay mainly on the ground. That the bank did not demand payment from the personal representatives from the estate of the debtor judgment was given in favour of the bank. The court held that the liability of a guarantor crystallizes when the debtor defaults and that he remains liable even when demand had not been made on him to pay and where the debtor dies after the fault.

2.6 MERIT AND DEMERIT OF TAKING GUARANTEE AS SECURITY FOR LENDING

Guarantees are very simple to take as security. These is no underlying asset title to which the bank needs to except unlimited guarantee.

-        The various clauses stated there in given adequate powers and protection to the bank.

-        Guarantees are especially useful where the borrower is unable to provide direct security or the director. Guarantee a limited company borrowing since it given them a personal commitment to the company’s success.

DEMERIT

-        This can be expensive and time consuming.

-        It creates a feeling or resentment the part of the guarantors.

-        There is always a sight risk that the guarantor may escape liability because of a technical defect in the security e.g. undue influence, misrepresentation may have arisen when the guarantor was taken.

2.7    PROBLEMS FOR TAKING GUARANTEE AS SECURITY

Unless the guarantee is supported by the deposit of security by 9iarantor, the guarantor’s value depends wholly on the financial standing of the guarantors (if financial starts go down, the value goes down). If the bank needs to rely on the guarantee and the guarantor refuses to pay, the bank will have to take legal action to compel payment. This can be expensive and time consuming. Where the bank needs to rely on the guarantee, the defend for payment often creates a feeling or resentment and hostility towards the bank, on the part of the guarantors.

There is always a sight risk that the guarantor may escape ability because & a technical defect In the security e.g. undue arisen then the guarantee was taken.

CHAPTER THREE

3.1 HISTORICAL BACKGROUND OF GUANRANTY TRUST BANK

Guaranty trust bank was incorporated in jolly 1990, as a private

United Liability Company wholly owned by Nigeria individual and institution. The bank was licensed as a commercial bank in august 1990 and commenced operation in February 1990

OPERATING ENVIRONMENT

The federal government of Nigeria recorded several achievement both locally and abroad in 2005, which positively impacted the natural economy. The reforms enumerated in the national economic empowerment development strategy (NEEDS) continue to shape development in critical sectors of the economy.

FINANCIAL RIESULT

The bank’s result for the financial period under review affects to the ct that the board and management of the bank continue to steer it on the right path of growth and profitability.

Gross earnings at #34billion grew by 36% over the #25billion reported for the lending rates in the course of the year the bank manages its cost of funds efficiently, resulting on a 55% growth in the Net interest margin from #7.6billion to #11.8billion.Theoperating expenses increased as result of the bank’s aggressive branch expansion, witch grow from 57 at the beginning of the financial you to79 as at February 2006. Profit before taxation rose from#7billion for the year ended 28, February 2005, to #10.5 billion for the year under review. Profit after taxation rose from #5billion to #9billion, representing an increase of 80% total assets including contingent stood at #383billion. As at February 2006. In addition, shareholders funds also witnessed a 7% growth from #33.6billion

FUTURE OUTLOOK

The national Assembly approved a 2006 fiscal budget of #1.9trillion in February 2006. Out of this, #568billion has been earmarked for capital projects which provision are made for the key national priorities such as the population census, the elections as well as the reform and restructuring of the civil service. The budget focuses on using debt relief saving of about #100 billion to boost the allocation for education healthcare environment youth and gender initiative which care all centrals to the attainment of the millennium development goals of the United Nations

As part of the ongoing economic reforms 17 licensed pension fund administrators and custodian have already commenced operations and their activities are expected to improve employment and economic growth through the creation of long term investment opportunities required to boost the growth of the financial and real sectors of the economy. In the foreseeable future, the bank’s ongoing plans to grow small and medium scale enterprises into bigger business will bear fruit as our commitments in this their sector continue to grow will be a big player in the retail and consumer banking market whilst retaining the excellent banking relationship in the corporate and multinational business segments. The new contact center which is designed to assist the customer do their banking    outside the walls of our branches will commerce fill operations during the 2006 financial year

The banking will continue to explore the strategic opportunities even our domestic franchise becomes a major driving force in the Nigeria economic landscape.

3.2 METHOD OF DATA COLLECTION INSTRUMENT

There are various types of techniques available for analyzing a data generally. The techniques to be employed however will depend on the types of analysis to be made the following discrete statistic measure of central tendency (mean, median, and mode) involves uses of chart (pie chart, bar chart, histogram and also use of simple percentage.)

However for the purpose of this study due to the nature of the question asked in question administered simple percentage would be used for data analysis.

3.3 SOURCE OF DATA COLLECTION

There are two source of data collection in the course of the project work, primary and secondary source of collection but as limited to is project work primary sources of data was used and also extracted from text book which the impact of bank security in bank lending with emphasis on guarantee are well quoted discuss in it.

3.4 POPULATION SIZE OF THE STUDY

The target po5ulation of this project work is 21 which is divided into various group like sex, age, marital status, position in the organization e.t.c.

The research is aimed at covering all the people that are involved in the processing of credit to be granted to various customers.

These people included the branch operation manager, the management department foreign and exchange department, personnel department, credit risk management department, marketing department, in guaranty trust bank in order word it means that the population would cover supervisor, officer, managers senior manager, principal manager, and assistant general manager of the bank, sample size is also used to give a true representative of population, especially where the population is very large is so and the whole it shall be used for the study.

It is the population size that determined the characteristic of the information required from the study and of cause time and cost involve.

3.5 ADMINISTRATION OF DATA COLLECTION

This refers to how many questions were administered and the relevant respondent. And a total number of 8Oquestionniare were distributed but only 65were duty filled and returned. The remaining 15 respondent were neither available nor ready due to the limit.

3.6 PPPPROCEDURE FOR PROCESSING COLLECTION DATA

Structured questionnaires, interviews, and questions, were prepared for collection for relevant materials. And for an extensive review of related literature questionnaires made distributed to all staff of Guaranty trust bank plc. And their response is used for proper interpretation and analyze of data in the chapter. It was made clear them that the study was mean for public consumption and therefore their response should been measure with truth.

3.7 LIMITATION OF METHODOLOGY

One major limitation was the inability to cover all the branches of Guaranty Trust Bank. This was due to financial problem as well as logistic difficulties such as exercise, couple with others academic work going on vigorously on the campus. The bank also refused to give out some vital document which are considerable irrelevant and useful to the impact of bank security in bank lending with emphasis on guarantee.

Finally considerable difficulties were equally encountered with members of management in returning the questionnaire given them.

CHAPTER FOUR

ANALYSIS AND PRESENTATION OF DATA INSTRUMENT

4.1 INTRODUCTION

This chapter shows the analysis of data collection during the field survey and presents the findings. It is necessary to analysis the data collected since data were collected through the use of questionnaire, because the analysis of this data would give meaning to the data and hence it would be more useful to the user.

4.2 DATA PRESENTATION AND ANALYSIS

This chapter deals with the analysis of the data collected in the course of this study. These were data collected by mean of questionnaire they were presented in tabular forms. Eighty (80) questionnaire here distributed and sixty five (65) of them were return by the respondent. The finding and data collected was analyzed by employing the use of percentage and explanation were given on basic of the result obtained.

Data collected here presented in percentage so as to bring gout easy understanding. Consencies of the respondent determined by the response that carried the highest percentage.

43 DATA ANALYSIS ACCORDING TO RESEARCH QUESTION

This section aimed at analysis the question of the questionnaire on section A, which are primarily biodata of the respondents the question focused on the sex, marital status, department, age of the respondents.

TABLE 4.3.1: Distribution of Sex

Source: Research survey (2011)

Fig 4.3.1: Bar-chart Sex Distribution

The table and the bar-chart above represent the figure of male and female, the male has 27 respondent with 41.5% and female has 38 respondent with 58.5% this indicate that, thee are more female staff in Guarantee Trust Bank Plc than the male.

4.2: Distribution of marital Status

Bar-chart: Marital Status

From the table of 4.3.2 and fig 4.3.2 above show marital status distribution, the total numbers of single are 36 respondent with 55.4%, the double has the lowest frequency.

Therefore, there are more married than singles in Guaranty Trust Bank Plc, this may be as a result of staff that constitute the highest percentage of the work force.

TABLE 4.3.3: Distribution of Department

Fig 4.3.3: Bar-chart of Distribution of Department

The table above and the bar-chart show the various department marketing has 16 respondent with 24.6% foreign exchange has 9 with 13.8%, personnel has 6 with 9.2, Risk Management has 14 with 21.5%, Administration has 12 with 18.5%, Technical has 8 with 12.3%. the study population involved more respondent in the marketing department than other department.

This shows that the questionnaire go round all the departments

of the bank.

TABLE 4.3.4: Age Distribution

Fig 4.3.4 Bar-Chart of Age Distribution

The table and graph 4.3.4 show above the age distribution of the respondents, age within 21-25 year has 15 respondents with 23.0%, 26-30 years has 34 years respondents with 52.3% Age range

31-35 years has 9 respondent with 13.8% No respondents between the age of 36-40, lastly age range 41 above has 7 with 10.8% this shows that the highest percentage of the staff fall under the age of

26-30 years staff under this age 1 unit constitute 65% of the total work- force of the bank. This shows why the staffs are more efficient and effective n carrying out their duties since they are young, able and eagerly aspiring to excel.

4.4. PRESENTATION AND ANALYSIS OF DATA ACCORDING TO DESCRIPTIVE ANALYSIS

this section aims at analyzing data gotten from section B-E of the questionnaire.

Section B,: - discussed the security fro lending,

Section C, : - discussed the features of guarantee,

Section D, : - discussed the rights of a guarantor,

Section E, : - discussed the problem of guarantee.

All the questions in each section were cross tabulated and the results

are show below.

SECTION B

DISTRIBUTION TO THE SECURITY FROM LENDING

Here, question 8, 9, 10, 11 and 12 were cross tabulated and the

results are shown below:

TABLE 4.4.1: Value of frequency observed on question

Figure 4.4.1 Bar-Chart Observed on questions

The table and graph 4.4.1 above show the security fro lending, the total number of yes are 175 respondents with 67.30%, No 85 respondents with 32.69%. The Yes are positive responses, No are

negative.

Conclusion: - This research shows that guarantee as a security fro Ending has contribute to the improvement of banking services in the country.

SECTION C

DISTRIBUTION ON FEATURES OF GUARANTEE

Here, Question 13, 14, were cross — tabulated and the results are show below.

TABLE 4.4.2: Value of frequency observed on question

Simple percentage

Number of Yes = 112 x 100          = 86.15%

    130

Number of No =  18 x 100    13.85%

   130   

Total = 100

Figure: 4.4.2: Bar-Chart observed on question

The table and graph 4.4.2 above show on features of

guarantee.

DISTRIBUTION: - The total number of yes 172 respondents with 86.15%, No 18 respondents with 13.85%. The Yes are positive response while No are negative conclusion security has a positive impact in lending services in the banking industry.

SECTION D

DISTRIBUTION ON RIGHT OF GUARANTOR

Here, Question 16, 17 were tabulated and the results are shown

below.

TABLE 4.4.3 Value of frequency observed on questions

Number of Yes = 113 x 100 = 86.92%

130

Number of No =  17 x 100 = 13.O8%

   130

Total = 100

Figure: 4.4.3:: Bar-Chart observed on question

The table and graph 4.4.3 above show on the rights of a guarantor. The total number of Yes are 113 respondents with 86.92%, No are 17 re4spondents with 13.08%. The Yes are positive despondence NC) are Negative.

Conclusion: This study shown that security for bank lending with emphasis on guarantee is capital intensive which dived some bank from providing these services to their customer.

SECTION E

DISTRIBUTION ON PROBLEM OF GUARANTEE

Here, Question 18, 19, 20, were cross-tabulated and the result are

shown below.

TABLE 4.4.4: Value of frequency observed on questions

Number of Yes = 124 x 100 = 63.59% 195

Number of No = 71 x 100 = 36.41%

 195

Total = 100

Figure: 4.4.4: Bar-Chart observed on question

The table and graph above show on problem of guarantee. The total number of Yes are 124 respondents with 63.59%, No are 71 respondents with 36.41%, the Yes are positive, No are Negative. Conclusion: - The service rendered through bank security in bank tending with emphasis on guarantee effective, this result is profitability to the bank.

4.5 DATA ANALYSIS FROM CASE STUDY OR ANNUAL REPORT

the analysis of the report is based on the bank five years financial summary. In view of this following item in the financial report are considered.

-        The Asset

-        The Deposit Liabilities

TABLE 4.5.1: Report on Asset

Figure 4.5.1: Report on Asset

The table and graph 4.5.1 above show the reports of the Asset

of the bank in year (2002) 8.06%, (2003) 11.33%, (2004) 16.28%, (2005) 22.83%, (2006) 4l.49%.

Conclusion: - The use of guarantee as security fro bank lending in Guaranty Trust Bank Improved the Asset of the bank, that is lending

has a good impacts in the banking industry.

TABLE 4.5.2: Report on maturity profile

on deposit liabilities

Figure: 4.5.2 Report on maturity profile on deposit liabilities

The table and graph 4.5.2 above show the report on maturity profile on deposit liabilities of the bank in year (2002) 8.07%, (2003) 11.58%, (2004) 16.99%, (2005) 21.13%, (2006) 42.23%.

Conclusion: - The maturity profile of deposit liabilities shows that the use of guarantee as security fro lending in Guaranty Trust Bank has contributed to the increase in deposit drive.

GENERALIZATION

Base on the data analyzed above, it can be generalized that taking guarantee as a security fro lendin has really impacted positively on lending services in banking industry this nullify the negative impact of guarantee as a security for bank lending.

CHAPTER FIVE

5.1 FINDINGS

Based on the data analyzed, the researcher arrived at the following finding;

—      Where the bank need to rely on the guarantee, the demand for payment often create a feeling or resentment and hostility towards the bank on the part of the guarantor.

—      There is always a sight risk that the guarantor may escape liability because of the technical defect in the security e.g. undue influence, misrepresentation may have arisen when the guarantor taken.

—      If the banks needs to rely on the guarantee and the guarantor refuses to pay, the bank will have to take legal action to compel repayment. This can be expensive and time consuming.

—      Where the bank relies on the customer purposely or on the basis of his sound financial position without obtaining security, such customer may escape the liability.

5.2 SUMMARY

The discussion so far in this project work centers around the topic “IMPACT OF SECURITY IN BANK LENDING WITH EMPHASIS ON GUARANTEE”.

It is aimed ats examining commercial bank and their lending procedure and also services as an exposition to the procedure for perfecting guarantee as security for bank lending.

As an introduction chapter, chapter provides the foundation on which subsequent chapter were developed. It traced the impact of security in the lending in commercial banking operation. The chapter states the problem in which the bank often encounter in lending policies together with the aim and objectives, significance of the study, scope of the study. It also contained the methodology form of data used, Definition of terms and concept and lastly the plan and organization of the study.

Chapter tow represents an exposition of previous view and

opinions expressed by renew scholars on related areas of the subject matter. The chapter state the purpose of the bank security, meaning of lending, clause in guarantee form, principle governing the contact of guarantee, right of guarantee (against the creditor, debtor, his coguarantor) Determination of guarantee, merit and demerit of taking guarantee as security. Lastly, problem for taking guarantee as security for lending.

Chapter three, present the historical background of the case

study (Guaranty Trust Bank plc) which he highlights their operating environment, their financial result. And future outlook. Also, method

of data collection instrument because their various type of techniques available for analyzing the data generally, sources of data.

Chapter four contain the analysis and presentation of data

• instrument, Data analysis according to research question,

presentation and analysis of data according to descriptive analysis, Data analysis from case study, generalization. Lastly the brief run

down of the project contents in five in chapter five.

Conclusions were also made which if properly complied with shall improve the effectiveness of lending activities in Nigeria commercial banks.

CONCLUSION: On the final note, it is discovered that the interest in the administratfion of bankers in terms of accepting security for advances is the need to exercise great care and precautions in dealing with customers. Bank as business entities would like to maximize profit and one of the main sources of profit is their dealing with customer, bankers would not like to take rigid step for the fear of driving the customer away. Bankers in Nigeria are very diplomatic in dealing with their customers.

To encourage the customer who want to have the guarantee over the asset as security, such the customer will be given the guarantee form for the customer to sign when filling the form, the bank will insert clauses that would make it with full legal powers of recovery whist at the same time restricting or eliminating the

guarantor’s basic common law right Banks in dealing with their

customer are also been as taking greater greater precaution when granting advances.

This is because of the economic situation of the country and the unpredictability of Nigeria. All necessary things must be done while banks must not be negligent in their activities otherwise they will face the risk of writing off the huge debt as bad and doubtful debts which will consequently reduce their level of profit.

5.3 RIECOMMENDAYTON

As most credit analysis can testify, it is the lack of sufficient knowledge about the borrowers overall financial position and past performance or faulty projections of his or her future performance that accounts for many of the bad loan experience.

In view of the study and the various out come, it is though worth while to recommend as follow.

-      The bank should make sure that they take all necessary and legally acceptable precaution when advancing credit to their

customer so as the demand for payment will not create a feeling or resentment and hostility towards the bank.

- The bank should have credit examination department or inspection department that will be making the periodical evaluation of credit and the continuous monitoring of both credit quality and loan portfolio. This will prevent the bank in having risk when the guarantor will escape the liability because of the technical defect in the security.

- No matter how influential the customer is, banks should always be sure that securities are taken and be well perfected, this will not involve in taking any legal action when the customer refuses to pay, because it will lead to time consuming and expensively.

- Advance should not be granted to customer purposely or on the basis of his sound financial position without obtaining security.

- There is need for bank to evolve the system where information about customer could be more effectively stored and retrieved when needed. This will prevent defaulting from having access to credit facilities from other banks.

5.4 SUGGESTION FOR THE FURTHER STUDY

The researcher hereby suggests that further studies could be based on!

- The role of bank security in bank lending with emphasis on gurantee in Nigeria commercial bank.

- The effectiveness and efficiency of bank security.

- Perfection of good lending securities in bank

- Loan documentation in Nigeria commercial banks.

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E.P Doyle (1979) Practice of banking Macdonald and Euans.

Layi Afolabi (1990) Law and Practice of Banking top Golden (Nig) Ltd, Surulere Lagos.

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