The most important sources of bank loans in Nigeria include: paid-up capital, reserve fund, accumulated profit, and deposits. The word deposit represents the money in the funds of a bank’s various deposit schemes. They include saving deposit, fixed deposit, and demand deposit. The name quickly reminds one that money in a bank’s deposits fund is one that the bank is bound to pay back to the depositor, his agent, or his creditor.
The depositor Liabilities of a bank is not a permanent fund, nor is it fixed. It Fluctuates according to the flow of deposits and withdrawals made in the various deposits accounts. Banks lends money all the year round from their deposit liabilities fund. One needs to understand the behavior of the various deposit accounts in order to appreciate this very important source of bank lending.
Money received in a savings deposit account is money not immediately needed for use by the depositor. In places where people understand the use of current account and make good use of its facility, only money meant to be saved against a rainy day is deposited in a savings account. This being so, money in a savings account is allowed to rest for a long time in the account. In the Nigerian context, owing to the high level of illiteracy and the low level of chequeing habit, much money that could have better been paid into a current account are lodged in savings deposit accounts.
A random survey, in seven branches of five big banks in Lagos for three years revealed that about 20% of total savings deposits was not drawn upon, during the year in which the money was deposited. This means that about 20% of the total savings deposit received in a given year is at the bank’s disposal for investment the whole year round. The type of investment that readily comes to mind while on this topic is bank loans and overdrafts.
A similar survey showed that about 85% of all sum fixed for less than one year in fixed deposit accounts was always fixed again for a second term. This, in effect, means that at least 85% of total fixed deposit fund is free for the bank’s use for the whole year round.
If the above statistics are any useful guide in present day Nigerian banking scene, it means that a bank in Nigeria can afford to lend about 20% of its total savings deposit and about 85% of its total fixed deposit fund for one full year, without anxiety that the depositors will demand them during the one year period.
Demand Deposit/Current Account
Money in demand (current) deposit account is money that is not fixed for any given period of time. It is money the depositor is free to be paid just on demand. But banks do not always have to meet their current account customers’ drawings in cash.
The survey carried out in some branches of banks in Lagos showed that about 54.55% of total drawings from current accounts during the period of survey was taken in cash. The remaining 45.45% of the year’s total current account drawings was paid through accounts within and outside the very banks in which the accounts were held. This shows that banks need not hold all the undrawn balances in demand deposit accounts in cash, as all will not be paid in cash.
So far, we have established that certain proportions of customers’ funds, in the three types of deposit accounts operated with commercial banks, can be lent to borrowing customers for up to a period of one year, in each case. As a matter of fact, banks can and do lend for more than the above proportions. In practice, banks lend very well above their total deposit liabilities to their customers. This has been made possible by the power of banks to create bank deposits, popularly known as generation of credit or creation of money.