ABSTRACT
The
study investigated into the impact of accounting information on lending
decision of commercial banks in Nigeria. The specific objectives include; To what
extent do Nigerian commercial banks rely on accounting information in their
lending decision; How can a lending officer assess the credit worthiness
of a firm seeking a loan; Should a bank lend on the basis of pro-positions or
on the basis of collateral securities. The investors, commercial banks and
regulatory authorities would benefit from the study.
The study
entails the conceptual framework of accounting information, the importance of
accounting information towards making decision and factors that influence
accounting information.
The
study employed the descriptive survey design. The study used the questionnaire
to source the data from two department in the five commercial banks selected in
Ado-Odo Ota local government.
The
commercial banks should have a good internal control system so has to enable
the banks to make use of the accounting information in the control of the staff
and credit. The credit appraisal mechanism should be based on collateral basis,
because this will put the borrower and commercial banks good terms of credit conditions.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
In mobilizing savings and allocating scarce resources between competing ends, commercial banks and other
financial institutions occupy a very important position in the Nigerian
economy: In contemporary Nigeria, banking is one industry which has witnessed
unprecedented upsurge in activities as a result of reforms in the economy
by the federal government. In the past years, there were about 89 banks with
3,389 branches located in both rural and urban centres nationwide. These
banks were characterized by structural and operational weaknesses such as:
– Low
capital base; Dominance of a few banks
– Insolvency
and illiquidity
– Over
dependency on public sector deposits and foreign exchange trading.
– Weak
corporate governance; A system with low depositor confidence
– Banks
that could not effectively support the real sector of the company at 24% of
GDP, compared to Africa average of 78% and 272% for developed countries, Morgan
(2010; 10).
The recapitalization and consolidation exercise in the
banking industries by the former Central Bank
of Nigeria Governor Professor Charles Soludo has
necessitated the need
for different organization to engage in corporate
consolidation (Mergers and acquisition).The concept of recapitalization refers
to the current trend of compelling all commercial banks to raise
their capital base from 2billion to 25 billion naira by the Central Bank of
Nigeria on or before 31st December, 2005. The
effect of the recapitalization exercises are to Facilitate evolution of a
strong and safe banking system; Improve transparency and accountability in the
sector; Drive down the cost structure of banks and make them more competitive
and development oriented; A new banking system that depositors can trust and
investors can rely upon usher in a new economy.
The ability of the commercial banking system to
perform its tasks efficiently and in harmony with our needs and economic goals depends in large measure an efficient
management. There is too much at stake to do otherwise. However, the efficiency
of a commercial bank as well as its overall success depends to a great extent
on the quality of information available to its management in its decision
making process. Effective planning and control of an organization requires good
information system. Logical decision making requires an understanding of the
circumstances surrounding on issue and knowledge of the alternatives available.
The more pertinent and timely the information the better the resulting
decision.
The accounting function helps in the accumulation of
accounting data, which help management in the planning process. Benjamin C.
[199: 6] define “accounting as process of measurement and communication in
which the major responsibilities are recording, analyzing, reporting and
interpreting financial information of an economic entity” Accounting is more
than this; however, it permits informed judgements and decisions to be made by
the users of the information. Perry, F.E (1973: 2) describe the users of
accounting information as “Owners and prospective owners of a business
enterprise, bankers and supplies of credit and government agencies”.
Other users are employees who requires information
about the financial results of the enterprise activities on which their remuneration
will be based and the management which has responsibility for the survival of
the enterprise on behalf of the owners.
It must be noted that lending is probably the most
important service provided by commercial banks, advances are the most important
assets held by banks, and bank lending provides the bulk of bank income. Over
the years, commercial banks loan to the private sector have increased
significantly.
Obviously, inflationary presumes had much to do with
this phenomenal increase, but the gain are very large, even when aptitude for
the rise in prices.
Although, the Structural Adjustment Program led to
stiff competition in the banking industry, it equally made new opportunities
manifest in all sectors of the Nigerian economy.
In order to maximize available lending opportunities
in the economy, commercial banks requires adequate accounting information to
evaluate the probability of loan repayment, estimate the potential loss if the
borrower does not pay, and decide on, the terms of the financing if a loan is
to be made Konter, O’Donnell (1989: 12) The information often required are
those that deal with solvency, liquidity and profitability of the firm seeking
credit. Gohen Gerald (1998: 4) states that, the evaluation procedures involve
three related steps:
(i)
Obtaining information on the applicant,
(ii) Analysing this information
to determine the applicants credit-worthiness and
(iii) Making the credit
decision.
This study is specifically aimed at the relevance and predictive
power of accounting ratios in taking lending decision. This is based on the
assumption that financial statements are provided or made available by the
credit seeker.
1.2
STATEMENT OF THE PROBLEM
Credit management is the core of the entire operations
of the banking industry. However, “the numerous and varied risks in lending
system form many factors that can lead to the non-payment of obligations when
they are due”, Edward Lee (1976: 9). In fact the prompt repayment of loan and
interest thereon determine the profitability of a bank. Many problems are
encountered in commercial banks’ lending, some of these which this study is
concerned with are:
1. Because
of the high rate at which loans go bad.
2. Due
to ineffective regulations guiding against loan defaulters in Nigeria.
In the recent years, lending officers complain
bitterly about the rate at which loans go bad. Some bank chief executives do
give out loans to their clients and relatives on the ground of trust, which if
it goes bad boomerangs on the bank and its operations, e.g. Oceanic bank, Inter-continental
bank, Union bank and others.
Existing literature in banking recognize the
‘importance and relevance of accounting information in bank lending decision
making. The relationship between accounting information and bank lending system
form the fact that financial statements are among the most important sources of
credit information available to bank lending officers.
1.3 OBJECTIVES
OF THE STUDY
In a developing country like ours the role of banks is
more pronounced in the sense that apart from performing their traditional banking
functions, they also pay a developmental role of ensuring the overall growth of
the economy. The primary aim of this research is to investigate and evaluate
the accounting information in the decision of Nigerian commercial banks. It is
also aimed at empirically examining the extent to which accounting information
is utilized by lending officers. More specifically these work intends to
investigate the following issues:-
(i) Whether
Nigerian commercial banks request for accounting information from firms in
quest for loans
(ii) The extent to which they utilize accounting
ratios in amending credit applicants.
(iii) The quality and reliability of information
derived from computed ratios
iv) Whether Nigerian commercial banks lend
on the basis of accounting information or on the basis of collateral security
offered.
Further, this work will aim to
(i) Make recommendation in line with the findings and
(ii) Provide a spring board for further research on the
project topic.
1.4
RESEARCH QUESTIONS.
The research
questions are as follows;
To what extent do Nigerian commercial banks rely on accounting
information in their lending decision?
How can a lending officer assess the credit worthiness of a firm seeking
a loan?
Should a
bank lend on the basis of pro-positions or on the basis of collateral
securities?
1.5 HYPOTHESES
OF THE STUDY
In line with the problem statement and the objectives of the study, the
following hypotheses are formulated.
H1. Commercial banks’ lending depend on the
extent of reliability of accounting information.
Ho. Commercial banks’ lending does not depends on the
extent of reliability of accounting information.
H1. Accounting ratios are useful tools to a
lending officer on determining the credit worthiness of a prospective borrower.
Ho. Accounting ratios are not useful tools to a lending
officer on determining the credit worthiness of a prospective borrower.
1.6
SIGNIFICANCE OF THE STUDY
This findings of the study will be relevant to the investors, commercial
banks and the regulatory authorities.
The investors will benefit from the findings due to the fact that the
information the commercial banks project in their financial statement are result
from the credit creation and mobilization responsibility
The commercial banks will from the findings have the understanding of
the importance of accounting ratio on their financial reporting responsibility
to their personal and corporate clients.
The regulatory bodies will from the findings of the study know the
proportion of how the commercial bank lending influence the accuracy of their
accounting information.
1.7 SCOPE OF
THE STUDY
The study will employ the descriptive research design.
The study will distribute questionnaire to five commercial banks located in
Ado-Odo Ota local government area. The study will use the table, frequency and
simple percentage to illustrate the data collected from the credit department
respondent in the five commercial banks. The study will use the simple linear
regression model.
1.8
OPERATIONAL DEFINATION OF TERMS
Accounting; it is the
collection, analyzing and interpretation of financial transaction during a
period.
Information;
it is the
idea or context that is passed from the sender to the user of the idea
Commercial
banks; it is a financial institution that deals with the acceptance and
deposit of transaction of customers on a regular basis.