1.0 INTRODUCTION Financial institutions are always willing to lend to the economy
but there are policies in place for such lending to materialize. This note,
therefore, examines bank lending policies
and conditions of international
financial institutions.
2.0 OBJECTIVES By the end of this note, you should be able to:
·
explain principles of bank lending policies
·
discuss lending conditions of international financial
institutions.
3.0 MAIN CONTENT
3.1 Principles of Bank Lending Policies
The main aim of a Commercial Bank is to seek profit like any other
profit-oriented institution. Its capacity to earn profit depends on its investment
policy. Its investment policy in turn, depends on the manner in which it
manages its investment portfolio.
Thus, Commercial Bank investment policy emerges from a
straightforward application of the theory of portfolio management to the
particular circumstance of commercial banks. Portfolio management refers to the
product management of a banks assets and liabilities in order to seek some optimum
combination of income or profit, liquidity and safety. In line with the
aforementioned, banks follows the following lending principles:
Liquidity A bank chooses such securities in its investment portfolio which
posses sufficient liquidity. It is essential because if the bank needs cash to
meet the urgent requirement of its customers, it should be in a position to
sell some of the securities at a very short notice with disturbing their market
prices much. Safety Safety means that the borrower should be able to
repay the loan and interest in time at regular intervals without difficulty.
Safety depends on the technical feasibility and economic viability of the
project for which the loan is advanced.
Diversity This principle ensures that a bank should not invest its surplus
funds in a particular type of security but in different types of securities. Diversification
aims at minimising risk of the investment portfolio of the bank.
Stability The bank cannot afford any loss on the value of its securities. It
should therefore invest its funds in the shares of reputed companies where the possibility
of decline in prices is remote.
Profitability This policy states that bank must earn sufficient profits and
therefore, should invest in securities, which assure a fair, and stable returns
on the funds invested.
3.2 Lending Condition of International Financial Institutions
The idea of international liquidity is vital for interaction
between countries hence the need for international financial institutions such
as the International Monetary Fund (IMF). Among its objectives are the promotions
of international monetary co-operation, promotion of exchange rate stability,
exchange purposes, expansion of balance growth of international trade,
establishment of multilateral system of payment, etc.
When Nigeria approached IMF for loan, the following conditions
were given:
1. Reduction of public expenditure
2. Removal of subsidies on petroleum products and fertilizers
3. Devaluation of the Naira
4. Trade liberalisation
5. Privatisation of public enterprises
6. Export promotion
7. Rationalisation of credit guidelines
8. Reduction of grants, subventions and loans to parastatals
9. Review of industrial incentives and policy
10. Classification of projects into core and non-core projects
11. Rationalisation of tariff structure
12. Control of external borrowing
13. Reorganization or abrogation of commodity board and river
basin development authorities.
4.0 CONCLUSION
This note has shed
light on the credit policies of the Nigerian banking system. It also
highlighted the IMF lending conditions.
5.0 SUMMARY
This note has explained the lending policies of banks. The note
also looked at the lending conditions of the international finance.
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