CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
Banks and non-bank financial institutions, supported by efficient money and capital markets ensure the successful operation of the financial system in an economy. The performance of the banking industry plays a crucial role in achieving sound and accelerated economic growth since it is a critical part of the financial system in every economy (Galbis, 2016). This implies that inefficiencies in the banking sector will impact negatively on the economy by slowing growth. The banking industry has a critical role to play in the economic development process, serving as the main inter-mediation channels between savings and investments in an economy. Banks as financial intermediation channels provide interest earning avenues for depositors and passing on their deposits to businesses and even government that will utilize them on their operations and developmental projects, leading to business expansions and economic development. Sokoto has a diverse financial system, made up of foreign and local major banks, rural and community banks, savings and loans companies, microfinance institutions, leasing companies, discounting houses and insurance companies. Financial statement analysis is a method used by interested parties such as investors (current and potential), creditors and management to evaluate the past, current and project conditions and performance of the firm and use to compare the strengths and weaknesses in various firms. Ratio analysis is the most common form of financial analysis .It provides relatives measures of firm’s conditions and performance.
Financial statement discloses the internal structure of the firm. It indicates the existing relationship between sales and cash income statement account. It shows the mix of assets that produce income and the mix of the source of capital, whether by current or long term debt or by equity funding. In countries where financial instability is rife and financial intuitions are becoming popular, when it comes to investing, the sound analysis of financial statements is one of the most important elements in the fundamental analysis process. At the same time, the massive amount of numbers in a company’s financial statement can be bewildering and intimidating to many investors, creditors and those who are concern with the financial statement. However, through financial ratio analysis, the study would be able to work with these numbers in an organized fashion and present them in a concise form for easily understandable to both the management and other stakeholders.”……… ratios constructed to judge comparative performance. The perceived relevance of financial information is to provide reliable information about the true and actual financial position, performance (profitability), and changes in financial position of a business investment opportunity that could be useful to a wide range of prospective investors, managers, directors, financial institutions, financial analysts, government, regulatory agencies, the media, vendors and the general public in making informed or rational investment decision. The content of financial information is often expected to be prepared according to national standards, corporate governance, professional ethics and the code of conducts as stipulated by the Companies and Allied Matters Act (CAMA) of 2011 as amended, the International Financial Reporting Standards (IFRSs), and the Nigerian Statement of Accounting Standards (SASs). This is to avoid financial reporting fraud and scandals that might hinder effective and informed investment decision making by investors and other users of these information. Another purpose of expected standards and ethics in financial reporting is to re-orientate professional accountants, financial experts, auditors and corporate organisations on the need to abide by the code of conducts that facilitate public confidence in their services (Okafor, 2006). This study identifies one key aspect of financial information, the effect on performance of an organization or institution, and the relationship subsisting between financial information and performance of the institution. This study seeks to examine the role of financial statement in assessing the performance of financial institutions in Nigeria.
1.2 STATEMENT OF PROBLEM
The measurement of bank performance is crucial because they play vital roles in the financial system of every economy, which contributes immensely to economic stability and development. Inefficiencies in the industry can impede economic growth, since they are the main financial intermediation channels between savings and investments in every economy. Losses in the banking sector could have significant negative effects on the whole economy. The poor performance of the United States (U.S) and European Union (E.U.) banking industries has slowed down their respective economies and growth of the global economy until recent period (Said and Tumin, 2011). Therefore, the study of the role of financial statement in assessing the performance of banks becomes a relevant issue which could help banks to well appreciate the current conditions of the industry they operate in and the necessary factors they should consider in making decision and formulating policies either for recovery or operational improvements.