The Impact of Accounting Information on Lending Decisions of Commercial Banks in Nigeria
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 play a developmental role in ensuring the overall growth of the economy. The primary aim of this research is to investigate and evaluate the accounting information in the lending decisions of Nigerian commercial banks. It is also aimed at empirically examining the extent to which accounting information is utilized by lending officers, More specifically this work intends to investigate the following issues: –
- Whether Nigerian commercial banks request accounting information from firms in the quest for loans
- The extent to which they utilize accounting ratios in amending credit
- The quality and reliability of information derived from computed ratios
- Whether Nigerian commercial banks lend based on accounting information or based on collateral security
Further, this work will aim to
- Make recommendations in line with the findings and
- Provide a springboard for further research on the project
A REVIEW OF RELATED LITERATRURE
A BRIEF HISTORY OF THE BANKING INDUSTRY
In the last decade, the banking industry in Nigeria has undergone a rapid transformation and phenomenal growth which make it the most viable and the fastest growing sector in the economy. Indeed, the 80’s will turn out to be the most important decade in the development of the banking industry. Olisambu (1991: 7), Decoster, D [1990: 23) Highlights of the impressive growth in the number of banks operating in the country.
Owing to the recent developments in the banking industry necessitated by the economic corruption and bankruptcy in the CBN as a bid towards sanitizing the industry came up with measures aimed at bringing succor to investors and depositors in the banking industry by fixing the minimum capital, requirements for commercial banks at N25 billion.
The management of commercial banks in a bid to raise this amount went into mergers and acquisition which resulted in some big operators in the banking sector requiring the smaller operators thereby planning the total number of commercial banks in the economy to 25. It is evident that over the years starting from 1980, the number of banks in Nigeria has increased significantly.
In 1980, there were more than 26 licensed banks in the country, 20 of these were commercial banks while the remaining 6 were merchant banks . [But by the end of 2006, 25 commercial banks operated. For the decade (1980 till date]
This growth trend in the banking industry has brought about a serious challenge of survival of the fittest, a competitive situation whereby banks could only survive through effective and efficient management of their human and material resources, Soludo C.C  aptly summarizes the situation facing the banking industry thus “Competition has interrupted, there has been increased innovation and sophistication in product design and delivery, while the new changes have enhanced the opportunities for business and profits, and they have also engendered challenges and problems calling for policy actions”.
The importance of the banking sector understands its sensitive nature as the custodian of loan able funds and the allocation of scarce commodities such as foreign exchange and credit According to Soludo et,al (2004: 7) “In popular jargon, banking sector has become one of the most critical sectors and commanding heights of the economy with w ide implications for the level and direction of economic growth and transportation and on such sensitive issues as the rates of employment and inflation which directly affect the lives of our people.
As a matter of fact the banking industry has become the medium for implementing a number of sensitive government policies and programs. Thus, the overall efficiency in the economy as a whole is affected by the level of efficiency in the banking sector. There is no doubt that governs our stage of economic development and the crucial role the banking industry has so far played in the implementation of the Structural Adjustment Program. The continuing development of the industry becomes of strategic importance to the well – being of the nation as a whole.
Existing literature in accounting recognizes the importance of accounting information in business or management decision making. The Central Bank of this study is to investigate and evaluate the extent to which Nigerian commercial banks utilize accounting information in performing their lending functions. We have decided to beam our searchlight on lending because it is one of the most intricate services offered by banks.
EXTENSION OF CREDIT AND THE BASIC PRINCI PLES OF LENDING
Credit is a wide term used in connection with operative or states involving lending, generally at short term. To give credit is to finance directly or indirectly, the expenditure of others against future repayment Adekanye et al (2006:5) states that “the primary function of commercial ban ks is the extension of credit to worthy borrowers. In making c redit available, commercial banks are rendering a great social service through their actions, production is increased, capital investments are expanded and a higher standard of living is realized.
Most writers in banking are of the view that of the traditional activities passed by the commercial banks, lending is the principal profit manner However, in contemporary banking in Nigeria, foreign exchange business could be seen as the lucrative source of profit for commercial banks due to the shortage in the su pply of foreign currencies as related to the high demand on them.
Nevertheless, approving loans and advances absorbs a large proportion of the efforts of all branch managers and their staff not to mention the wo rk done by staff in supporting departments in regional or head offices. Through lending, commercial banks therefore, act as intermediaries between depositors of money who cannot use the money themselves and people who can use the money but cannot provide it on their own. In this way banks bring toget her money from different sources and lend it out to those who will make profitable use of it.
This chapter sets out in details the methods used in the generation of data for the study. The presentation is made under the following sub headings viz:- introduction, research design, population description and determination of sample size, questionnaire design, data collection, method of analysis and summary
The survey method was considered appropriate and preferred to a case study because surveys are generally based large cross. Sectional sample which enable a researcher to assess the characteristics of the defined population and understand the interrelationships between or among variables under study.
A structured questionnaire was therefore designed by the researcher and personally administered to the commercial banks (with head offices in Lagos) which fell within the sample frame The questionnaires were left with the heads of administration for completion It was not possible for the questionnaire to be collected immediately on administration cause of the tight schedule of work o f the officers concerned. Therefore, repeated visits were made for the collection of the questionnaires.
In the process of administering and collecting the questioners, personal interviews were held with the top officials in the various credit depart ments visited. The discussion centered on various issues contained in the questionnaire especially the extent to which they utilize financial statements to the decision regarding the granting of loans requests from their clients. These oral interviews greatly helped to facilitate researchers understanding of the organization of lending in Nigerian commercial banks.
The data collected from the survey were analyzed through sorting, grouping, cross tabulation and collection from such procedures.
Through these means, deduction and inferences were made. The analysis of the data was with chi -square because the test was on the relationship between variables. The test adopted the 5% level of significance.
The target population for this research was made up of commercial banks with their head offices in Lagos . In order words, commercial banks with head offices outside Lagos were excluded from the target population. Apart from being the nerve centre of commercial activities in Nigeria, the choice of Lagos is influenced by the fact that it has a high share of banks head offices. Moreover, these head offices are clustered within a twenty kilometer radius. This makes them easily accessible for study at minimum cost . It is noteworthy that all the major decision concerning lending is taken at the head office for the branches to implement. This explains why questionnaire were not distributed to the branches of the commercial banks studied .
DATA PRESENTATION AND ANALYSIS
This chapter seeks to tabulate, analyze and summarize the responses to the questions in section A and section B of the questionnaire administered. As stated earlier, we shall use the chi-square test to test the hypothesis stated in chapter one.
SUMMARY OF FINDINGS , RECOMMENDATIONS AND CONCLUSION
SUMMARY OF FINDINGS
Based on the analysis and summaries of the responses to the questions in the questionnaire, the findings for this study will be discussed in this section. Equally, the important finding s for this study will be discussed in this section. Equally, the important findings resulting from the applications of our major tool of statistical analysis, the non – parametric chi-square test is discussed in this section.
One of the most important sources of information to a lending officer is the financial statements presented by the borrowers. In support of this analysis, we discovered in table 4.2 earlier presented that all the commercial banks studied request for financial statements from loan applicants. However 88% of the respondents opined that they insist on independently audited financial statements while 12% stated that they sometimes accept un -audited account.
Our study also revealed that financial statements such as cash flow statement, profit and loss account, balance sheet and schedule of fixed accounts, are used simultaneously by the lending officers. This was revealed in table 4.4 based on the responses in table 4.6 it was revealed that the levels of comprehensiveness in the request for accounting reformation varied accounting to the type or nature of the credit applicant.
The commercial banks demanded more accounting information from limited liability companies than from sole traders and partnerships. Small businesses are often unable to company with the requirements of the banks i.e. the provisions of the correct form of management accounting information.
Management accounting techniques are clearly vital to the preparations of reliable cash flow forecast but, many small businesses are incapable of producing little more than their historical amounts . The easy way out of this dilemma is for the banker to seek for collateral security or look for other criteria to access the loan seekers.
Other major findings of our study include:
- Obtained a positively skewed response on table 4.5 that accounting information is significant for bank lending In the same vein, table 4.7 reveals that 48% of the respondents would reject a loan application when accounting information available does not meet the lending officer’s requirement. 20% indicated that the application will approved if other conditions are satisfactory while 8% stated that they would request for more accounting information.
- The computation of accounting ratios in assessing loan applicants enriches the decision making ability of lending officers by providing them with decision choice and pertinent information to select from a range of options. If no such information were made available, their decision will be based on the rule of thumb or
The commercial banks studied, compute accounting ratios in assessing loan applicants. This option scores’100 percent responses as revealed by table 4.9. This was also corroborated by the responses summarized in table 4.11 were 52% described accounting ratios as very useful while 36% percent described them as useful.
But the study equally revealed that 60% of the respondents indicated that they rely on accounting ratios while 40 percent stated that they do not rely on them in determining whether an applicant is credit worthy or not.
However, we obtained a 100 percent response that accounting ratios are relied on monitoring granted loans.
Although, the 30 respondents representing 100 percent of the total response indicated that they are efficiency and profitability ratios, other broad categories of ratios such as long term solvency ratios, short term solvency ratios and potential and actual growth ratios are used simultaneously in monitoring the success of loan granted.
Nevertheless, the degree of importance attached to these board categories of ratios differed from one commercial bank to the other:
- The lending policy of the commercial banks studied revolves around the minimization of loan defaults and the maximization of profit.
- These two options recorded 52% percent and 36% percent responses respectively. This simply means that the respondents do not take the promotion of national economic growth into consideration when fashioning their lending policy.
- Using the nonparametric chi -square test, we discovered in the test of hypothesis one that bank lending depends on the adequacy of accounting The test was conducted at 5% level of significance.
Consequently, the hypothesis was accepted. Using the same test, the second hypothesis equally stated that accounting ratios are useful tools to a lending banker in determining the credit worthiness of a prospective borrower and consequently accepted.
The test was conducted at 5% level of significance.
The greatest problem facing lending officers is h ow to correctly assess loan applicants in order to minimize loan defaults, in order to assess corporate credit applicants, lending officers rely on financial statements arid the computation of accounting ratio. The reliance on financial statements would prove total to lending decision because the figures contained in them could be doctored to deceive or hoodwink the lending officer. More importantly, the rate of inflation would also make figures and ratios derived t here to be out of tune with the present condition.
Another problem encountered in lending is the unpredictable nature of the borrower on the one hand an d the economy on the other hand. For instance, adverse economic conditions could render the payment of a loan facility impossible even when the debtor is genuinely serious of paying the principal inherent to the lender. At times the debtor may simply not be interested in paying back the loan. How then do the lending officers cope with the problem?
In a research of this nature, it does not suffice to merely identify problems and discuss findings without actually offering recommendations to improve existing situation. The major objective of these recommendations is to improve the lending skills of loan officers by suggesting ways to utilize accounting information in their decision making in order to minimize loan defaults. Based on our findings from the study, we wish to make the following recommendations .
- When a lending officer is presented with financial statements how much faith can he put in it? The interpretation of financial statements presented to bank loan officers by borrowers. Both prospective and current is one of the most important elements in the evaluation of commercial loan Statements prepared by professional auditors are generally considered more reliable than those prepared by others.
Therefore, the lending banker is bound to encounter the greatest problem in the area of un-audited statement.
Since many types of opinions are expressed by professional auditors, the lending officer should recognize the differences between the opinions expressed and the related effect he may expect as to the financial reliability of the statements. A considerable amount of reliance can be placed on audited standards with unqualified (clean) opinions. Audited statements with qualified opinions may be guide reliable but it must be recognized that the statements are affected by the extent or character of the qualification. Hartley (1976)
- From a banker perspective, inflation must be recognized in lending decision since it affects the credit seekers income statement, balance sheet, statement of change in financial position and the probability of ultimate repayment. Therefore, funding officers should use inflation adjusted In other words, they should be conversant with current cost accounting in order to narrow the gap between financial statements and the economic realities of inflation.
- In taking lending decisions, bankers should equally consider other factors which are not necessarily accounting information . The character capacity, collateral, security offered and the prevalent economic conditions should be given adequate attention in order to ensure safe lending .
- When a loan has been granted, its use must be properly Supervised and monitored so as to detect signals of Default, Early enough to take correct steps and avoid forced collection of the loan . Adverse financial trends indicated by accounting ratios, reluctance on the part of the borrower to furn ish information and general loss of his cooperation are mainly signs of a loan
- Finally, bankers should recognize that the impact of Accounting information depends on the skill of lending Inadequate experience and qualification of the us er accounting information would lead to the misinterpretation of financial statements. This could lead to unintended consequences for both lenders and borrowers of funds. Therefore, experienced hands should be employed in such a sensitive area of bank lending.
This study attempted an empirical survey and analysis of the impact of accounting information on bank lending decisions in Nigeria commercial banks. The choice of the topic was motivated by the problems of huge loan losses suffered by most banks and, the consequent annual provision for bad and doubtful debts in their profit and loss account. It should be noted that increasing provision for bad and doubtful debt leads to narrower profit margins because it is an experience in a commercial banks profit and loss account. As a matter of fact, most commercial banks especially state owned ones are facing serious financial problems because of their increasing loan write offs. Therefore, efforts were made to know the extent to which accounting information is used in appraising the applications of credit seekers.
From the non -parametric chi-square tests, we made the following findings:
- Commercial banks lending depends on the extent of reliability of accounting information on the credit
- Accounting ratios are useful tools to a lending officer in determining the credit worthiness, of a prospective In other words, accounting ratios are sufficient to determine whether to lend or not.
I discovered in the study that commercial banks rely on accounting ratios in monitoring the success of loan and in assessing the applicant for a loan.
Based on these findings, certain recommendations were just forward. It is of the view that if they are implemented by Nigerian commercial banks their lending decision will improve significantly .
These are also of the view that findings from a research of this nature can not claim to be comprehensive enough as to have touched all issues pertaining to accounting information and bank lending , it is in the light of the above that we suggest that further researchers be carried out on the impact of accounting information on lending by Nigerian merchant banks .
Commercial banks differ from merchant banks in the sense that the former concentrate in short term lending while later concentrate on long term lending . A comparative study on the impact of accounting information in both types of banks could serve as a spring bond for future researchers. It is equally pertinent to note that this research concentrated on accounting ratios as one of the categories of accounting information used in bank lending. Other researcher could be based on the impact of budget statements and statement of sources and application of funds, on bank lending decisions. This will fill the gap in t his study and try to make up for the limitations of accounting ratio as a tool for financial analysis.
RECOMMENDATION FOR FURTHER STUDIES
This research work is suggested for further study in the following ways:
- The impact of budget statement
- Statement of source and application of funds on lending
- This will fill the gap in this study and try to make up for the limitations of accounting ratios as a tool for financial analysis.
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