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FINANCIAL
STATEMENT ANALYSIS AS A BANK LENDING DECISION
(A CASE STUDY OF
FIRST BANK OF NIGERIA PLC)
ABSTRACT
Commercial banks perform numerous
functions. One of the most profitable investments of the commercial banks
is granting of loans and advances to those customers that need such including
business organization as loans are always needed to enhance profitability of
such organization and help them execute such projects, which their capital
cannot finance. These are factors, which banks do consider before
granting such loans.
The research work is
geared forward finding out the role which financial accounting information
plays in lending decision making of the banks. The objectives amongst
others include to know whether the banks do demand for financial statement from
their customers while making lending decision, the extent to which they are
influenced by such statements, the extent to which adequate use of accounting
information has led to reduction an incident of bad debt.
A work of this nature
will be of help to different groups including commercial banks, other lending
institution credit analysis the government etc.
TABLE OF CONTENT
CHAPTER ONE
1.0
Introduction
1.1
Background of the
study
1.2
Statement of
problems
1.3
Objective of the
study
1.4
Research
Question
1.5
Hypothesis
1.6
The Scope (Delimitation) of the Study
1.7
Significance of the
study
1.8
Delimitation of
Terms
CHAPTER TWO
2.1
Review of
Literature
2.2
Functions of commercial
banks
2.3
Acceptance of Deposits
2.4
Granting of Loans and Overdraft to Customers
2.5
Transferring of Funds on Customer
Instruction
2.6
Providing Foreign Exchange Facilities
2.7
Miscellaneous
Functions
2.8
Lending Principles and Practices
CHAPTER THREE
3.0
Research Methodology and Design
3.1 Research
Design
3.2
Area of
Study
3.3
Population of the
Study
3.4
Sample and Sampling Techniques
3.5
Instruments for Data Collection
3.6
Validation of Instruments
3.7
Reliability of Instrument
3.8
Method for Data Collection
(Administration of
Instrument)
3.9
Method of Data Analysis
CHAPTER FOUR
Data Presentation,
Analysis and
1Interpretation
CHAPTER FIVE
5.0 Finding, recommendations and
conclusion Summary and
findings
5.1 Summary of Findings
5.2 Conclusion of the Study
5.3
Recommendations
5.4 Implications of the
Findings
5.5 Suggestion for Further
Studies
5.1
Limitation of the
study
Reference
Appendix
CHAPTER ONE
1.1
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Every organisation
targets the attainment of its desired objectives. The organisation
therefore aims towards efficiency and proper effectiveness in conducting its
affairs. However, the level of the efficiency and effectiveness of any
organisation or the extent to which it is able to achieve its desired goals to
a large extent depend on the quality of available information and on how the
organisation utilize the available information. The organization always
makes use of information in allocating scarce resources to different
alternative uses.
For any business to
succeed in today’s rapidly changing environment, the management must update
itself with every relevant and current information that will be beneficial
towards achieving the predetermined objective. It can therefore be seen
that management must plan the course of action of the organisation, identifying
the medium and long term goals based on detailed analysis of feasibility,
bearing in mind the socio-economic and political situation around. Not
only will plans be formulated, the actual performance and the end result should
be compared with the plans to see whether the goals are being achieved or
not. This helps the management to report appropriately as well as
improving the entire process of development. A proper look at the
planning process will reveal that proper information as well as its utilization
is needed for the attainment of the organizational goals.
A great deal of
useful information comes from accounting functions as it provides data which
when processed, serves as useful information to the management in its planning
process. The information provided by the accounting functions serves as
important and effective tool in the budgeting or planning as well as operations
of the management.
There are three basic
types of accounting information which management needs in the information of
its policies and plans. They are score-keeping method of information,
attention directing information and problem solving information. The
score-keeping information involves the accumulation and allocation of data
collected for the purpose of performance appraisal and position
evaluation. Attention directing information deals with highlighting and
investigating the differences between plans and actual for proper corrective
action. Lastly the problem solving information focuses on analyzing and
recommending the best course of acting among competing alternatives. It
is therefore associated with the management decision making process and useful
in the implementation stage.
The commercial bank
as business organization that need to plan greatly need not just any
information but much of relevant, current and useful accounting information for
the purpose of operating their business effectively and efficiently towards the
attainment of their objectives. Much of the business of the commercial
banks revolves round grating of loans and advances to their customers. In
fact it should be realized that the most profitable business of banks is
lending. The profitability of the banks is therefore a function of how
prudent the banks are as well as how effective they utilize the accounting
information sourced from accounting data provided by the customers for the
purpose of borrowing.
The banks are
therefore interested in financial accounting information, which will enable
them research initial loan decisions, and also help to monitor progress after
advances have been made. The information so needed are those that deal
with solvency, liquidity and profitability, the firm’s financial stand and long
term viability.
The banks will
therefore assure themselves that the customers (companies or firms) are capable
of paying interest accruable as well as repaying the loans as and when
due. Some other factors are also considered concerning loan application
for instance, on the duration of the loan; if it is a short term loan, the
banks are interested in estimated net cash inflows over the relevant months,
for a long term loan the banker satisfies itself that the company is
financially stable. Such that adequate profit will be earned in the
foreseeable future. Similarly, the ability of the borrowing firm to repay
both the principal and the interest should be the prime consideration of the
bank. Where it cannot be guaranteed, the advance should not be granted.
The Nigerian economy
received a great blow, which was as a result of the financial distresses in the
banking sector. These distresses were as a result of lack of proper use
of accounting information by the lending banks.
It can be seen that
this research work is timely hence the interest and attention of the researcher
have been caught by it. The work therefore assesses extent to which
commercial banks in Nigeria do utilize accounting information presented to them
by the customers in affecting loans and advances proposal.
1.2
STATEMENT OF PROBLEMS
(1)
Bank managers allowed their personal interest to conflict with overall
objectives of the bank when loans are advanced. They consider personal
benefits derivable from customers than protecting the banks interest.
(2)
The managers did not emphasis on the collateral rather than on viability of the
project for which the loan was being sought as a result defaulters escaped
unapprehended.
(3)
The bank managers failed to consider the reliability of the customers with
regards to loan repayment schedule profile evidence.
(4)
The profit and loss account as well as balance sheet of the intended borrower
was not properly considered by the banks in lending decision.
1.3
OBJECTIVES OF THE STUDY
Banks are very
important financial institutions in the economy and in the expansion of
investments and credits. Unfortunately defaults in loan repayment
attributable to faulty lending decisions by the banks have brought about a
defeat in their future lending policies and profit performance. A
thorough analysis of the financial statements presented by the clients will
improve the situation. The objectives of this research work are therefore:
(1)
To determine the extent to which the financial accounting information presented
by prospective borrowers influence lending decisions.
(2)
To determine whether the banks always demand for financial statements from
their customers while making decisions.
(3)
To ascertain the extent to which adequate use of accounting information reduce
bad debts.
(4)
To ascertain the extent to which improve accounting records by borrowers have
contributed to non-repayment of loans.
(5)
To find out the extent to which poor financial positions of prospective
borrowers has led to non-approval of loan.
(6)
To make recommendation that will lead to efficiency in bank lending decisions.
1.4
RESEARCH QUESTIONS
1.
Do banks always demand for financial statement from their customers while
making lending decision?
2.
To what extent do financial accounting information presented by prospective
borrowers influence lending decisions?
3.
To what extent has adequate use of accounting information reduce incidence of
bad debts?
4.
To what extent has improper accounting records by borrowers contributed to
non-repayment of loans?
5.
To what extent has poor financial position of intending borrowers led to non
approval of loan application?
1.5
HYPOTHESIS
Hypotheses are intelligent guesses
regarding some pertinent variables.
Hypothesis One
H0: Financial
statement analysis does not and bank in
making lending
decisions.
H1: Financial
statement analysis and bank in
making lending
decisions.
Hypothesis Three
H0: Inadequate
analysis of accounting information does
not
bring about an increase in the incidence of bad debts.
H1:
Inadequate
analysis of accounting information bring about an increase in the incidence of
bad debts.
1.5
SCOPE
The aim of this research
is to find out the financial statement analysis as a bank lending decision.
A comprehensive study
of the topic as it concerns First Bank of Nigeria PLc Okpara Avenue, Enugu will
be carried out.
Any other reference
is just for a better understanding of the subject topic but not within the
scope.
1.7
SIGNIFICANCE OF THE STUDY
The significance of
the study lies in the benefit that will be derived from it by the underlisted
sectors of the economy.
Commercial Banks:
If the information so contained in this research work is appropriately
utilized, it will go a long way to improving the quality of lending decision of
the commercial banks. Other lending institutions; the non-bank financial
institution like finance houses, insurance companies and even development banks
will if properly utilize these information see the need for scrutinizing
accounting information from prospective borrowers before making lending
decisions. This goes to reduce incidence of loan default and improper
credit expansion.
Credit Analysis:
The work will be of help to them as they on daily basis analyse the proposals
made by prospective borrowers.
Prospective Borrowers:
The ignorance on the part of the loan applicants with regards to the requirement
of the banks will be removed by the knowledge of the information contained in
the work.
Researchers:
This work will also become of immense help to students and researchers on the
same or similar topics, as it will form a basis for review of related
literature.
The Government:
The government is always interested in the economy of the nation. This
measures to apply in order to curb the high incidents of default in repayment
of loan as well as distress in banking section.
Apart from these specifically mentioned above, this research will go to
enlighten the generality of the public (as many as will come across it).
This will go a long way to causing every hand to be on deck towards the overall
improvement of the economy of this nation. If properly used, there will
be increase in national output, national income as the high incident of bad
debt on the banks be drastically reduced.
1.8 DEFINITION
OF TERMS
There are some words
considered technical which if not defined might be an impediment to an ordinary
man’s understanding and appreciation of the research work.
They are:
Banks:
Unless otherwise stated, any reference to banks in this study is demand to mean
commercial banks.
Customers:
For the purpose of this study, this refers to current account holders that have
recourse to advances and loans. Some of them include sole proprietors,
partnership, joint stock companies, public corporation etc.
Final Accounts:
This is often used to mean collectively the trading, profit and loss account.
These account are generally presented in conjunction with the balance sheet
(through the balance sheet is not an account) but a statement drawn up at the
end of each financial peril showing the various assets and liabilities of the
business concern as at that date.
Null Hypothesis:
This is a hypothesis, which states that “no difference” or “no relationship”
exists between two or more variable. It is a hypothesis of “no effect” or
“no difference”.
Accounting
Information: These are information contained
in the published account of the company or firm. These includes, profit
and loss accounts items, balance sheet items. The information collected
through the daily transactions, sales and purchases daybooks, customer’s
advances ledgers are all accounting information.
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