Credit Rationing in the Nigeria's Commercial Loan Market

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Fajingbesi, A.A
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In this thesis, the concern has been to examine the structure, function and effects of Nigeria's commercial loan market. The main focus has been to empirically test for the incidence of credit rationing in the loan market, explain the rationale, identify the form and magnitude of rationing and examine the effects in the Nigerian economy. With respect to the structure and functions of the loan market, concentration ratio and market share indices were defined and derived as key measures of structure while loan maturity pattern and credit policy compliance are used to measure performance. Examining the reasons for high concentration in the market, the study finds that the two most significant factors with positive impact are capital intensity of banking operation and the rate of growth of the four dominant banks. The most significant factor which explains rivalry (absence of stability in market shares) among the dominant banks is growth in the demand for the services of the banking industry. Market share, the study finds, tends to stabilize as banks grow bigger. These measures present a clearer picture of the structure and the conduct of the market. Thus, by examining the conduct of the loan market, the study incorporates elements of structure-conduct-performance analysis. This study attempts to develop, based on the assumptions of equilibrium and disequilibrium, a "dynamic credit rationing model" following the logic of the market clearing and minimization conditions, and provides a framework for directly establishing the existence of credit rationing and determine the mode and magnitude. Two novel concepts are introduced, defined and tested empirically for their significance in explaining behaviours of the supply of commercial loans in Nigeria. These concepts are bank-customer relationship and loanable fund flow. The maximization of the likelihood functions of the disequilibrium market model are tested and verified by using two types of unconstrained nonlinear maximization algorithms; namely, the quadratic hill-climbing developed by Goldfeld and Quandt (1974) and the pattern-search method of Hooke and Jeeves (1961). This thesis reports the results obtained using the quadratic hill-climbing method since the method provides in addition, estimates of the asymptotic standard errors. The results obtained from the maximization and regression exercise are very impressive and consistent with what we captured using historical and descriptive analysis. For the period 1970-96, the results show that the Nigeria's commercial loan market witnessed more periods of excess demand for loans than it has excess supply, indicating, a preponderance of credit rationing. It is also evident by the relatively high significance of the non-market variables that rationing in the Nigeria's loan market is essentially non-price type. In addition, the results of this study indicate that during periods of tight money, credit rationing tends to speed the effect of monetary policy thus providing qualitative support to the qualitative conclusions of Tucker (1968). The empirical evidence here shows that the effect of dynamic rationing could be asymmetric with respect to tight versus easy money periods. Also, as part of the empirical work carried out in this thesis, the results suggest that models of commercial loan market which do not explicitly include the effects of disequilibrium are likely to yield inconsistent parameter estimate. Finally, the models in this thesis show that the specification and estimation of disequilibrium models is practical and should provide a powerful tool in analysing the behaviour of certain financial markets since such markets are particularly prone to non-price adjustments. On the basis of these findings, this study recommends, among other things, that it is important first that the loan market should be recognised as having important role to play in assisting the growth of the economy. It is vital to the whole economy that the banks in the market have a satisfactory earning capacity in order that they may take greater risks needed in a changing economy. The performance of these banks can be improved by insisting on sound banking principles in their lending policy. Attempt should therefore be geared towards improving the quality of their staff through training. A greater reliance should be placed on assessing the potential productiveness of loans rather than being content with the offer of collateral securities and sound past trading records, although, the latter are also important. Greater efforts should also be devoted to making loans more productive to the recipients - loans granted in time, of adequate amounts and on suitable terms together with the offer of necessary financial guidance and advice. To ensure efficient utilization of credits granted and reduce the risks of defaults often associated with borrowers financial distress, loan officers from banks should visit their customers on a very regular basis while the bank customers on the other hands should keep banks informed about their investment plans. One of the reasons for loan market failure is the presence of serious imperfect information resulting from moral hazard and adverse selection which tend to undermine the operation of the loan market. Moral hazard and adverse selection cause investors to raise the price of borrowing which worsen the quality of the pool of borrowers thereby discouraging the provision of funds.
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Credit Rationale , Lending policy , Structure-conduct-performance analysis , Commercial loan market
Fajingbesi, A.A (1998). Credit Rationing in the Nigeria's Commercial Loan Market. A Thesis Submitted to University of Lagos School of Postgraduate Studies Phd Thesis and Dissertation, 337pp.