THE ROLE OF
COMMERCIAL BANKS IN FINANCING BUILDING PROJECTS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
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).
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 unfavourable 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.
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