THE IMPACT OF ACCOUNTING INFORMATION ON BANK LENDING DECISION A CASE STUDY OF STANDARD TRUST BANK IN ENUGU

THE IMPACT OF ACCOUNTING INFORMATION ON BANK LENDING DECISION A CASE STUDY OF STANDARD TRUST BANK IN ENUGU

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ABSTRACT

Information is considered as a vital tool in any decision situation.  Since we are aware that commercial banks make decision regularly on application from clients for purpose of granting loans, it was conceivable that they would benefit from accounting information which clients are capable of providing.

The study was therefore an attempt to find out the extent to which commercial banks in Nigeria had used accounting information as a tool for decision making on loan application.  The researcher made use of interview and questionnaire method of data collection for the study.

The study concentrated on a sample of commercial banks located in Enugu because of time and financial constraints.  It was discovered that the commercial banks studies make appropriate use of accounting information.  However, the comprehensiveness of the use of the accounting information differed from one bank to the other.  I found out that they use the accounting information significant.  The level of comprehensiveness in the request for the accounting information in their consideration of loan application varied according to the type of clients.  It was discovered that decision on whether to loan or not to lend were modified by such factors as the personality and integrity of the borrower evidence of ability to repay and also the central bank of Nigeria credit guidelines.  Judging from the banks studied, I recommend that all commercial banks should make effective utilization of accounting information since it is one of the effective tools with which to assess both the viability of a project and the enterprise as a whole for commercial banks to utilize accounting information, I recommend that commercial banks should employ qualified financial analysts in the various loan division to carry out intensive examination of accounting information, provided by their clients.

It is also recommended that commercial banks should always insist on the provision of accounting information by the enterprise during the life of the loan so as to monitor the efficiency use of fund lent put.

CHAPTER ONE

1.1     INTRODUCTION

The efficiency and effectiveness of the operations as well as the overall success of an enterprise, depend to a large extent on the quality of information available to the management. Information helps management in making decision about the allocation of scarce resource between competing ends.  The business environment is a hanging one and for business to survive in such rapidly changing environment management must keep abreast with information that will enable it to plan for the attainment of pre-determined objectives.  A plan is generally regarded as a preparation for action.  Planning involves causing things to happen in a desired or particular way which otherwise would not have happened  the planning process includes:  the identification of medium and long term goals based on a   detailed analysis of feasibility within the context of the political and social values formulation of the policies and programmes or project for achieving the planned goals, others are provision of suitable organization/structure and identification of the desired type of personnel to implement the selected programme or project.  Also to monitor the end result so as to measure actual performance in relation to plan goals, of achievement and thereby improve the entire process of development looking at the planning process, it appears that for each stage, information is needed for the attainment of the organization objectives.

The accounting function helps in the accumulation of accounting data which helps management in the planning process. It also provides management with financial accounting information which serves as important tool for projecting into the future.  In order to make the desired projection for planning purpose, management needs three basic type of accounting information which are integrated in different stages of the planning process.  These are store keeping information, attention directing information and problem solving information.

The store-keeping information involves the accumulation and allocation of data ex-post for the purpose of product costing, income determination performance appraised and position evaluation.

Attention direction information involves highlighting and investigation of variances for corrective actions.  This is done by comparing ex-post results with decisions implemented ex-ante, and it is useful in the evaluation stage of planning.  Attention directing information is concerned with the control function principle of management by exception.  It bring out the problem solving information is useful in the implementation stage of planning, since it focuses on analyzing and recommending the best course of action among many alternative course. It is closely associated with management decision making process and consists of non-routine and ad-hoc and special decision.

Commercial banks have to plan also, because their planning environment also changes rapidly.  They required adequate information for the purpose of operating their business efficiently since, their profitability depends principally on the amount of loan and advance granted.

In utilizing the data presentation to them by customers for purpose of lending, the banks are interested in financial accounting information which enables them to reach an initial loan decision and also helps them to monitor progress after the advance has been made.  These places of information are those that deal with solvency, liquidity and profitability that is obtaining information that will describe a firm’s financial stand and long term viability.

The bank as users of accounting information would want to satisfy themselves that the company will be able to meet the interest payment accruing during the period of the loan and repayment of capital sum at the end of the loan period.

There are other factors considered by banks when considering loan application.  The bankers emphasizes on different aspects of his investigation depending on the expected duration of loan for a short term loan, the banker is interested in estimates of the net cash flow over the next few months, whereas for a long term advance the banker will need to be convinced that the company is financially table and that adequate profits will be earned throughout the foreseeable future.

The ability of a borrower to repay both the interest and capital sum should be the banker’s prime consideration, if for casts indicate that these condition cannot be met, the advances will not be made.

The study is therefore aimed at assessing the extent to which commercial banks in Nigeria do utilizing accounting information presented to them by their clients affecting loan proposals.

1.      STATEMENT OF THE PROBLEM

Studies have shown that commercial banks do not place as much emphasis on the viability of projects as on collaterals.  They give more emphasis to application which are backed by collateral and chattels presented by them by the customers.  It was found that mortgage (as a good example of tangible assets) were the most difficult collateral security in term of case realization even through banks regarded them as the most desired collateral securities.  This means that not much use is made, by bank of the information on viability of proposed projects as could be deciphered from the financial statement presented by prospective borrowers.  The study is aimed at assessing and evaluating the extent to which banks have restorted to the analysis of financial statement for purpose of determining the credit worthiness of their clients.  It will also assess the reason why little emphasis is placed on financial statement for evaluating project viability.

1.      OBJECTIVE AND PURPOSE OF THE STUDY

Banks are very important financial institution in any economy.  They aid in the expansion of investments and credit, commercial banks experience defaults in loan repayments.  This may be attributable to the faulty decision made by the credit analysts.  A thorough analysis of the financial statements presented by clients could improve the situation.

To determine whether banks always demand financial statement from their customer while making lending decision.

To determine the extent to which the financial accounting information presented by loan applicant influence bank lending decision.

To ascertain the extent to which adequate use of accounting information has contributed to reduction in  incidences of bad debts.

To ascertain the extent to which improper accounting records by borrowers have contributed to non payment of loan.

To find out the extent to which poor financial position as contained in the financial statements of borrowers have contributed to non-approval of loan applications.

To make recommendation which might assist bank in perfecting their lending decision.

1.      SIGNIFICANCE OF THE STUDY

This research work would be immense significance to the following.

COMMERCIAL BANK:  The quality of lending decision by commercial banks would be improved as a result of the knowledge acquired from this research work.

OTHER LENDING INSTITUTIONS

Lending institution like finance house, insurance companies and development bank will avail themselves of the importance of scrutinizing accounting information from prospective borrowers before making lending decision.  This will reduce the incidence of loan defaults and improve credit expansion.

PROSPECTIVE BORROWERS

Borrowers will find this piece of work very necessary as they will be enlightened as to the bank financial accounting requirement during loan applications.

CREDIT ANALYSTS

The credit officers and analysts in the advance section of banks will find this research work very hardly while analyzing loan proposals.

ECONOMY

This work will help improve the National output and thereby national income.  This is because the apparent reduction in the incidences of bad debts and the increase in credit expansion, which will achieved through adequate utilization of financial accounting information, as preached by the researchers.

RESERACHERS

The other researcher on the same or similar topic will find their research work helpful as it will form a base of review of related literature and also a stepping stone for future researchers.

1.6     SCOPE AND LIMITATION OF THE STUDY

          Scope:  The work will find out the impact of accounting information on bank lending decision.  The researcher will carry out a corporative study of the commercial banks in Enugu.  These are the following

1.       Afrik Bank Ltd                                 Okpara Avenue

2.       Allied Bank Ltd                                Ogui Road

3.       African Banks Ltd                            Ogui Road

4.       Bank of Credit and Commence

International                                     Okpara Avenue

5.       Co-operative and Commerce Bank   Okpara Avenue   

6.       First Ban of Nigeria Ltd          Okpara Avenue

7.       Orient Bank of Nigeria Ltd      Garden Avenue

8.       Union Bank of Nigeria Ltd               Ogui Road

9.       Standard Trust Bank               Okpara Avenue

10.     Diamond Bank                                  Okpara Avenue

11.     Zenith Bank                                      Okpara Avenue   

RESEARCH QUESTION

1.      Do you always demand financial statement from your customer for making lending decision?

2.      To what extend does the accounting information received from customer influence your decision to approve their credit demands.

3.      Do you insist on independently and personally audited financial statements of customers?

4.      Does accounting information help the bank I their accumulation of accounting data?

5.      Has the principle derived from accounting information crate better management for the bank?

1.7     DEFINITION OF TERMS

INFORMATION:  This is news or knowledge that give about things which enlighten one aid make one be aware of what is happening in his environment.

BUSINESS:  This is engaging in buying and selling, commerce and trade.

PLAN:  In this context, a plan could be regarded as considering something in advance.

COMPANY:  A company is a legal person or entity oriented by an association of a number of people in accordance with the law, for the purpose of a defined object.  It is a corporate body and individuals arising by statute and having the status of a separate being or person and these persons constituting the members have their liabilities limited according to circumstances.

MEDIUM: This is a channel by which something is done.

BANK:  A bank is a corporation that provide the maximum banking service and which is licensed as a banking institution.

EX-POST:  This is information of result, collected, made or expressed after the fact or something has already happened.

EX-ANTE:  This is also information or result colleted, made or expressed before the fact or planned and anticipated before something actually happened.

CUSTOMERS:  Customers as used in this context refer to current account holders who are entitled to advances and loans e.g. sole proprietors, partnership, joint stock companies, public corporation etc.

BANKER:  This is the body of person or corporation who stay in the bank and offer service to the people.

COLLATERAL:  This is a security the bank demands from prospective borrowers before they grant loans to the borrowers.

CHATERL:  This is a pieces of movable property.

ACCOUNTING INFORMATION:  This is basically in financial statement like the profit and loss account and balance sheet.


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