Full Project – ACCOUNTING SYSTEM AND DEBT MANAGEMENT IN NIGERIA

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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 31^st 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 debt management is probably the most important service provided by commercial banks, advances are the most important assets held by banks, and bank debt management 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 debt management 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:

• Obtaining information on the applicant,
• Analysing this information to determine the applicants credit-worthiness and
• Making the credit decision.

This study is specifically aimed at the relevance and predictive power of accounting ratios in taking debt management 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 debt management 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 debt management, 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, debt management 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 debt management decision making. The relationship between accounting information and bank debt management system form the fact that financial statements are among the most important sources of credit information available to bank debt management 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 debt management decision of Nigerian commercial banks. It is also aimed at empirically examining the extent to which accounting information is utilized by debt management officers. More specifically these work intends to investigate the following issues:-

• Whether Nigerian commercial banks request for accounting information from firms in quest for loans
• The extent to which they utilize accounting ratios in amending credit applicants.
• The quality and reliability of information derived from computed ratios
• Whether Nigerian commercial banks manage debt on the basis of accounting information or on the basis of collateral security offered. Further, this work will aim to

• Make recommendation in line with the findings and
• 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 debt management decision?
• How can a debt management officer assess the credit worthiness of a firm seeking a loan?
• Should a bank manage debt 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.

1. H1.     Commercial banks debt management depend on the extent of reliability of accounting information.

Ho.   Commercial banks debt management does not depends on the extent of reliability of accounting information.

2. H1.     Accounting ratios are useful tools to a debt management officer on determining the credit worthiness of a prospective borrower.

Ho.   Accounting ratios are not useful tools to a debt management officer on determining the credit worthiness of a prospective borrower.

3. H1     Should a bank manage debt on the basis of pro-positions or on the basis of collateral security.

Ho.   Banks should not manage debt on the basis of pro-positions or on the basis of collateral security.

1.6  SCOPE OF THE STUDY

This study is intended to cover twenty five (25) commercial banks disclosed by the directory of Nigerian banks as having their head office addresses in Lagos state. The choice of Lagos is influenced by the fact that it has a lion share of bank head offices, there are clustered within a twenty kilometers reduce thereby making them easily accessible for study at a minimum cost. In fact, of the twenty five banks operating in Nigeria as at December 2010, all of them have their head offices in Lagos.

1.7  LIMITATION OF THE STUDY

One complication in the tasks of relating accounting information to decision making is the fact that accounting information describes many different sets of data and information, It is possible to consider that any data or information which is obtained from or created in the accounting systems of a firm is accounting information whether cost aimed in a financial statement, a special report or verbal statement.

However, for the purpose of this study, that interpretation is too broad to be useful. Thus, this work intends to concentrate on accounting ratios because they are sets of data, which are quite relevant to bank debt management. Also, this study pertains to debt management to corporate business organization rather than persons or entities that are not statutorily allowed to publish their financial statement.

1.8  SIGNIFICANCE OF THE STUDY

The primary objectives of accounting information is to aid the manager in making timely and formal decisions “providing vast amounts of data is not in itself helpful, in fact, it may confuse and hinder more than it helps; Perry etal,[1989;12] This study is one of the most numerous efforts directed towards evaluating the impact of accounting information on the debt management decisions of Nigerian commercial banks. Firstly, credit manager who deserves to sharpen their decision making ability on loan request will find this study very useful. Secondly, it is hoped that this research will not only serve as an invaluable literature for further researchers but also generate ideas which will have policy implication for Nigerian commercial banks in extending credit facilities to their clients.

1.9  DEFINITION OF TERMS

The following terms used in this study are defined for purpose of clarification.

COMMERCIAL BANK

A bank which undertakes all kinds of ordinary banking business Hanson (1978: 81).

MANAGEMENT INFORMATION SYSTEM

Some tangible or intangible entity that reduces about some state or event Mayo (1989: 44).

ACCOUNTING INFORMATION

Data organized for the special purpose of decision making. Osisioma (1990: 52)

ACCOUNTING RATIOS

As expressed by Pickle (1974:31) presents a relationships and trends inherent in financial statements. Pickle (1974: 3139).

COLLATERAL SECURITY:

Any property, negotiable interest or documentary evidence of a claim against or ownership in property conveying title to the holder as a pledge for the repayment of money lent.

FINANCIAL STATEMENT:

May be referred to as overall general purpose entity statements that present the financial position and operating results of an entire business at the end of the annual accounting period or for a shorter period, Kennedy and Macmillan (1968: 6).

ANALYSIS

The resolution or suppuration of data into their elements or component parts, the tracing of facts to their source, Osisioma (1990: 306).

LOANS

A generic term that embraces all types of credit facilities like advances, overdraft, commercial papers, banker’s acceptance and bill discounted.

DECISION

Making a choice between two or more alternatives

DEBT MANAGEMENT

Is the management of credit to worthy borrowers?

CREDIT

Is the ability to obtain goods, services, or money on exchange for promise to pay in future?

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Full Project – ACCOUNTING SYSTEM AND DEBT MANAGEMENT IN NIGERIA