Abstract
This
study intends to investigate the role of
commercial banks in financing building project in Nigeria with a view to marshal out
some modalities that will enhance the performance of commercial banks in real
estate development in Nigeria. Three banks were randomly selected from the
study area and examined to ascertain their opinion in the subject matter. An
interview recording schedule was designed and administered to obtain relevant
information from the following management personnel of the banks under study
who are involved in credit lending: manager – Risk/Portfolio management, Senior
Manager- Real Estate sector, Senior Manager Credit/Marketing and Manager –
Property department.
CHAPTER
ONE
INTRODUCTION
1.1
Background
of the study
The
Commercial banks are important financial intermediaries serving the general
public in any society. In most cases, commercial banks hold more assets than
any other financial institution. In some cases even more than central bank.
Apart from their many functions, commercial banks facilitate growth and
development. Banks lends in many areas or sectors of the economy. Viewed from
the building and construction sector, they contribute to investment, employment
creation, and by extension, the process of infrastructure and economic growth.
However, the researcher is examining the roles of the commercial banks in
Nigeria in financing building and construction projects in Nigeria (Farrel,
1985). According to Omuojine (2001) the major reasons militating against real
estate development and by extension housing the poor in Nigeria are low income
capacity, access to credit, land tenure system, high cost of building, low
employment capacity of the economy and lack of a National Housing Policy.
Badiru (2003) however opined that whereas availability of adequate finance in
the private and public sectors of any economy is the hallmark of a meaningful,
efficient and productive property development, more often than not it happens
that funds for prompt property development are not readily available. He
asserts further that factors like limited size of individual incomes especially
in the third world countries, banks’ paltry rates of interest on savings,
inflation and government fiscal policies which are sometimes unfavourable for easy
access to loanable funds from the financial institutions hinders access to
finance for real estate development. Bichi ( 1998) was however of the view that
“unaffordable levels of interest rates on housing loans and shortage of
long term finance as the main constraints to housing delivery and the promotion
of home-ownership.” He asserted further that “much of the housing
finance problems experienced are an unequivocal expression of cumulative
distortions from policy weaknesses in the past. Whilst a plethora of problems
have been identified as constraining development of real estate in Nigeria,
there seem to be an unequivocal and unanimous acceptance of inability to access
credit/inadequate finance as the problem that portends a more profound impact
on the development of real estate in Nigeria. Commercial banks as “those
institutions that create money in the form of demand deposits and holding
checking deposit ( Steiner and Shapiro, 1976 and Bichi, 1998). Steiner and
Shapiro (1976) stated further that the functions of Commercial banks could be
divided into two parts namely:
1.
Money creating function
2.
Service rendering function The service rendering functions of Commercial banks
are:
1.
Serving as paying and receiving stations for hand-to-hand currency, 2.
Providing facilities for domestic and foreign remittances, 3. Collecting
cheques, drafts, currencies, bills of exchange and other negotiable instruments
for their customers, 4. Credit lending-loans and overdrafts, 5. Offering
treasury/ finance advisory services, 6. Providing finance services that
facilitates international trade and 7. Providing facilities for safe keeping of
customers valuables Commercial banks as defined in the Banking Decree of 1969
as amended are “deposit taking banks that provide chequeing facilities as
well as providing short-term finances”. Commercial banking ushered in
institutional banking services and predate Merchant banking in Nigeria. It
constitutes the largest sector of the banking system in terms of number and
volume of deposits. The broad functions of Commercial banks includes:
ØCreation,
distribution and transfer of deposit as well as the provision of commercial
credit
ØSavings
function which comprise of savings mobilization for surplus units of the
economy and the channeling of such funds to deficit units for the funding of
investment in trade, commerce and capital projects.
Due
to the durability and fixity of location of real estate, it has since the
earliest days proven an ideal medium for mortgage investment financing. Britton
and Kenwood (1977) defined real estate financing as “the process of
creating a financial package for an income producing real estate investment
that satisfies the objectives of the lenders and equity investors
The
building and construction industry in both developed and developing countries
may be viewed as that sector of the economy which, through planning, design,
construction, maintenance and repair, and operation, transforms various
resources into constructed facilities. The types of public and private
facilities produced range from residential and non-residential buildings to
heavy construction, and these physical facilities play a critical and highly
visible role in the process of development (Kheni et al., 2008). The major
participants from the building industry include the architects, engineers,
management consultants, general contractors, heavy construction contractors,
special trade contractors or subcontractors, and construction workers, along
with the owners, operators, and users of the constructed facility. Olowo-okere
(1985), (cited in Eshofonie, 2008) asserted that most countries put over 55% of
their gross domestic investment into the creation of physical facilities,
including infrastructure that is necessary for development. The building sector
has various levels of manpower ranging from highly skilled professionals to
completely unskilled labourers. In developing countries, physical construction
activities alone provide between 2 and 6% of the employment demands of the
nation and the subsidiary activities provide an additional 2 to 4%, while in
the developed countries the figure rises to between 6 to 10% and 4 to 6 %
(Cockburn and Charles, 1970; Okeola, 2009). Ibironke (2004) and Shittu and
Shehu (2010) stated that the building industry plays a key role in satisfying a
wide range of physical, economic and social needs and contributes significantly
to the fulfillment of various major national goals.
The
commercial banks form an important source by which many investors get funds to
finance building and other real property projects. Commercial banks are money
creating financial institutions that perform three major functions, namely acceptance
of deposits, granting or loans and the operators of the payments and
settlements mechanism.
The
major issue in building, real estate development and investment is finance.
There is no iota of doubt that funding is an important factor in real estate
development and building projects. The complexity and to a large extent, its
capital intensive nature demands proper and adequate funding to make it
realizable. The terms and availability of the needed funds determine the trend
of building operation. Availability and easy accessibility of building finance
in sufficient quantity will definitely accelerate all forms of property
development. Building financing is concerned with the production of finance for
building houses and office complexes which are basic necessities in a growing
economy like Nigeria. The benefits to be derived from a rise in building
financing in Nigeria are many and include;
1.
Increased rural and urban houses for the teaming Nigerian population.
2.
The construction of industrial estate for the localization of industries and
commerce.
3.
An increase in employment for those in the construction industry.
The
sourcing of funds for investment in building development poses a great deal of
problem for the developer. This is largely due to economic instability and
stringent measures imposed by most financial institutions. This is compounded
by the fact that the interest rate structure has had an unfavorable impact on
funding the development of building sector. Since the financing of building
development is a long term project, it has necessitated the high interest rate
that is being charged on the funds provided for such development purposes.
Hines (1995) revealed that six major building financing methods are used across
the world namely; Joint Venture, Equity and Debt Financing, Sale-lease Back
Financing, Advance Payment of key money and Sale of Securities.
1.2
STATEMENT OF THE PROBLEM
Over
the years, the government had been the major player in the area of building and
housing development in Nigeria, by providing direct finance to the builders for
previous housing schemes. This was embedded in the housing policy of past
administrations but today, the dwindling nature of revenue accruing to the
government, coupled with gross mismanagement and misappropriation of public
funds and revenue has prohibited the ability of the government to continue to
play her role as before (Nubi, 2000). The mortgage finance institutions are
faced with certain problems of low level of awareness of the services rendered by
the institutions, bureaucracy in the granting and disbursement of mortgage
loans to the borrowers, misunderstanding of the banking terms by the depositors
and the public due to the used of technical and professional terms which are
not understood by a layman and problem of repayment of loans by the borrowers.
Commercial banks has the key player in the financial sector has contributed to
the development of various sectors of the Nigerian economy by funding. However,
the researcher will analyze the role of commercial banks in financing building
projects in Nigeria.
1.3
OBJECTIVES OF THE STUDY
The
general objective of this study is to analyze the role of commercial banks in
financing building projects in Nigeria and the following are the specific objectives:
1.
To examine the role of commercial banks in financing building projects in
Nigeria.
2. To identify the role of other
mortgage financial institutions in financing building projects in Nigeria.
3.
To identify the factors limiting financing of building projects in Nigeria.
1.4
RESEARCH QUESTIONS
1.
What are the role of commercial banks in financing building projects in
Nigeria?
2.
What are the roles of other mortgage financial institutions in financing
building projects in Nigeria?
3.
What are the factors limiting financing of building projects in Nigeria?
1.6
SIGNIFICANCE OF THE STUDY
This
study has the following significance:
1.
This study will educate the general public, stakeholder in real estate,
government and policy makers on the importance of building development and
housing and the need for adequate financing of the sector considering the roles
of commercial banks and other mortgage financial institutions.
2.
Findings from this study will be useful for future researches has it will
constitute part of the empirical literature making it a guide for future
researchers.
1.7
SCOPE/LIMITATIONS OF THE STUDY
This
study on the role of commercial banks in financing building projects in Nigeria
will cover all the financial investment in building and real estate in Nigeria
considering the contributions of the commercial banks to the sector. It will
also cover the activities of other mortgage financial institution in financing
building development in Nigeria.
LIMITATION
OF STUDY
Financial
constraint– Insufficient fund tends to impede the efficiency of
the researcher in sourcing for the relevant materials, literature or
information and in the process of data collection (internet, questionnaire and
interview).
Time
constraint– The researcher will simultaneously engage in this study with
other academic work. This consequently will cut down on the time devoted for
the research work.
1.8
DEFINITION OF TERMS
Building: a
structure with a roof and walls, such as a house or factory.
Financing:
provide funding for (a person or project)
Real estate:
property consisting of land or buildings.
Commercial banks: ‘
A financial institution that provides services, such as accepting deposits,
giving business loans and auto loans, mortgage lending, and basic investment
products like savings accounts and certificates of deposit.
ORGANIZATION OF THE STUDY
This
research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview,
of the study), statement of problem, objectives of the study, research
question, significance or the study, research methodology, definition of terms
and historical background of the study. Chapter two highlight the theoretical
framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the
study. Chapter four concentrate on the data collection and analysis and
presentation of finding. Chapter five
gives summary, conclusion, and recommendations made of the study.