Appraisal of the Perception of Real Estate Investors’ on the Lending Requirements of Financial Institutions

Chapter One of Appraisal of the Perception of Real Estate Investors’ on the Lending Requirements of Financial Institutions

INTRODUCTION

BACKGROUND TO THE STUDY

An investment in real estate development requires a huge sum of money, most at times exceeding six (6) figures as such only a hand full of individuals could venture into this form of investment.

This financial insufficiency naturally turns investors to financial institution for possible credit advancement. Mbanefo (2002) observed that the importance of banks in our economy lies in their monopoly of the resources to provide loans for industrial and commercial developments. The provision of this loan however, carries the risk of default in repayment hence the need to take adequate, reliable and appropriate security for the purpose of insulating default risk associated with credit transactions in banks. According to CBN (1995) out of every N1.00 loan granted by Nigerian Banks only 57 kobo were capable of being realized representing 57%.

Lending which may be on short, medium or long-term basis is one of the services that commercial banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general. Commercial banks are the most important savings, mobilization and financial resource allocation institutions.

Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. Therefore, no matter the sources of the generation of income or the economic Policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency. However, commercial banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition to mention a few.

Chodechai(2004) while investigating factors that affect interest rates, degree of lending volume and collateral setting in the loan decision of banks, says:“Banks have to be careful with their pricing decisions as regards to lending as banks cannot charge loan rates that are too low because the revenue from the interest income will not be enough to cover the cost of deposits, general expenses and the loss of revenue from some borrowers that do not pay. Moreover, charging too high loan rates may also create an adverse selection situation and moral hazard problems for the borrowers.”

Therefore it is not an easy task for real estate investors’ to secure loan from either commercial bank or mortgage institution to finance their development, according to Agbola(1986) the procurement of necessary finance is sine-qua-non to the acquisition of adequate housing and the most probable source open to investor is through mortgage financing.

This research work is set to appraise the perception of real estate investors’ on the lending requirement of commercial banks and mortgage institutions in Abuja metropolis

STATEMENT OF THE PROBLEM

The huge capital that is been require to kick start most real estate development and the high interest rate which is being use by commercial banks as lending criteria tends to leave most real estate investors’ flat footed.

Chodechai(2004) asserted that “banks’ lending decisions are also influenced by the past relationship with the borrowers”. Past relationship according to him can help banks to obtain more private information, leading to a more accurate understanding of the borrower’s business and financial situation. Load demanded by financial institution in recent times is another major source of constraints in real estate development where the rate of inflation has a direct impact on interest rate.

However, with respect to this research work, they are various challenges which are been faced by both parties involve, that is the financial institutions involve in real estate financing and the real estate investors, as the real estate investors depends on the financial institution for funds and most of them find it difficult to meet the requirement which is use by this financial institutions.

JUSTIFICATION OF THE STUDY

With regards to this research work which would appraise the perceptions of real estate investors towards the lending requirements use by commercial banks and mortgage institutions, this research would analyze particularly the several lending requirements use by the above mentioned financial institutions and determine how they affect real estate investors. As the use of financial leverage by real estate investors can significantly increase the rate of return investors earn on their invested equity.

This expected magnification of return often induces investors to partially debt finance even if they have the accumulated wealth to pay all cash for the property.

AIM AND OBJECTIVES

The aim of this study is to APPRAISAL OF THE PERCEPTION OF REAL ESTATE INVESTORS’ ON THE LENDING REQUIREMENTS OF FINANCIAL INSTITUTIONS IN ABUJA, NIGERIA.

OBJECTIVES

To ascertain the lending requirements of financial institutions.
To examine the views of real estate investors on meeting-up with the lending requirements of financial institutions.
To identify the problems being encountered by real estate investors’ when securing loan from financial institutions and recommend probable solutions.

RESEARCH QUESTIONS

What are the lending requirementsof financial institutions?
What are the views of real estate investors in meeting the lending requirements of financial institutions?
What are the problems being encountered by real estate investors’ when securing loan from financial institutions?