CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

               In a modern economy,there is distinction between the surplus economic units and the deficit economic units and inconsequence a separation of the savings investment mechanism.This has necessitated the existence of financial institution whose jobs include the transfer of  funds from savers to investors.one of such institution is the money deposits banks,the intermediating roles of the money-deposit banks places them in a position of ``trustees´´ of  the saving of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development.The techniques employed by bankers in this intermediary function should provide them with perfect knowledge  of the outcomes of lending such that funds will be allocated to investments  in which the probability  of full payment is certain.However,in practise no such tool can be found in the decision of the lending banker.Virtually all lending decisions are made under creditors on uncertainty.The risk and uncertainty associated with lending decision, situation are so great that the concepts of risk and risk analysis need to  be employed by lending bankers in order to facilitate sound decision-making and judgement.This statement implies that if risks are to be objectively assessed,lending decisions by the money-deposit banks should be based less on quantitative data and more on principles too subjective to provide sound and unbiased judgement.Furthermore,the banks depend heavily on historical information as a basis for decision making.

         Apparently aware of the inadequacies of his decisions base,the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such securities is an insurance against bad debts.this makes the banker complacent with  his loan portfolio.The increasing trend of provisions for bad and doubtful debts in most money-deposit banks is a major source of concern not only to management but also to the shareholders who are becoming more aware of the dangers posed by these debts.Bad debts destroy part  of the earning assets of banks such as loans and advances which  have  been described as the main source of earning and also determines the liquidity  and solvency which generate two major  problems, That is profitability and liquidity, has to earn sufficient income  to meet its operating costs and to have adequate return on its investments.