Financial Statement Analysis As A Bank Lending Decision

Financial Statement Analysis As A Bank Lending Decision

Abstract

Commercial banks serve multiple purposes. One of the most profitable investments of commercial banks is the provision of loans and advances to customers who require them, including business organizations, as loans are always required to increase the profitability of such organizations and assist them in carrying out projects that their capital cannot finance. Before granting such loans, institutions do consider these factors.

The objective of the research is to determine what role financial accounting information plays in the lending decisions of institutions. The objectives include determining whether banks require financial statements from their customers when making lending decisions, the extent to which they are influenced by such statements, and the degree to which the use of accounting information has contributed to the reduction of bad debt.

This type of work will be beneficial to various parties, including commercial banks, other lending institutions, the government, etc.

Index Of Contents

Second Part

1.0 Introductory Remark

1.1 Historical context of the investigation

1.2 Statement of the issues

1.3 Objective of the research

1.4 Investigative Question

1.5 Hypothesis.

1.6 The Scope (Boundaries) of the Research

1.7 Significance of the research

1.8 Terms and Their Definitions

SECOND CHAPTER

2.0 Overview of the Literature

2.1 Functions performed by commercial banks

2.2 Acceptance of Advance Payments

2.3 Provision of Loans and Overdraft Facilities to Customers

2.4 Transferring Funds Based on Customer Instruction

2.5 Facilitating Foreign Exchange Transactions

2.6 Miscellaneous Functions

2.7 Principles and Practices Regarding Lending

Section Three

3.0 Research Methodology and Planning

3.1 Research Methodology

3.2 Subject-Matter of Study

3.3 Population of the Research

3.4 Sample and Sampling Techniques

3.5 Tools for Information Collection

3.6 Verification of Instruments

3.7 Reliability of the Instrument

3.8 Methodology for Data Collection

(Management of Instrument)

3.9 Methodology for Data Analysis

Section Four

Presentation and Analysis of

1Interpretation

SECOND CHAPTER

5.0 Conclusions, recommendations, and recommendations Summary and findings

5.1 Summary of Conclusions

5.2 Conclusion of the Research

5.3 Recommendations

5.4 Consequences of the Findings

5.5 Suggestions for Future Research

5.1 Limitations of the research

Reference

Appendix

Second Part

1.1 Introduction

1.1 Introduction To The Study

Every organization pursues the achievement of its intended goals. Therefore, the organization strives for efficiency and appropriate effectiveness in its operations. However, the level of an organization’s efficiency and effectiveness, as well as the extent to which it is able to accomplish its desired objectives, are heavily dependent on the quality of available information and the manner in which the organization utilizes that information. The organization consistently utilizes information when allocating constrained resources to alternative purposes.

For a business to succeed in today’s environment of rapid change, its management must keep abreast of all relevant and current information that will aid in attaining the predetermined goal. Therefore, it is evident that management must plan the organization’s course of action, identifying medium and long-term objectives based on a detailed analysis of their feasibility and taking into account the socioeconomic and political environment. Not only should plans be developed, but the actual performance and final outcome should be compared to the plans to determine whether the objectives are being met. This facilitates accurate management reporting and improves the entire development process. A thorough examination of the planning procedure will reveal that accurate information and its application are required for the achievement of organizational objectives.

Accounting functions generate a great deal of useful information because they provide data that, when processed, serves as useful information for the management’s planning process. The information provided by accounting functions is an essential and effective tool for the management’s budgeting, planning, and operations.

There are three fundamental categories of accounting information required by management for its policies and plans. There are three categories of information: scorekeeping, attention-getting, and problem-solving. The scorekeeping information entails the accumulation and distribution of data collected for performance evaluation and position evaluation. Attention-directing information involves highlighting and investigating differences between plans and actuals in order to take the appropriate corrective action. Lastly, the problem-solving information focuses on analyzing competing alternatives and recommending the optimal course of action. Consequently, it is associated with the management decision-making process and beneficial during the implementation phase.

The commercial bank, as a business organization that must plan extensively, requires not just any information, but a great deal of pertinent, current, and useful accounting information in order to operate their business effectively and efficiently in order to achieve their goals. Commercial banks conduct the majority of their business through the provision of loans and advances to their consumers. In actuality, lending is the most profitable aspect of banks’ operations. Therefore, the profitability of banks is a function of the banks’ prudence and the efficiency with which they utilize accounting information derived from accounting data provided by customers for the purpose of borrowing.

Therefore, the banks are interested in financial accounting information, which will allow them to investigate initial loan decisions and monitor progress after advances have been made. The most important information concerns the firm’s solvency, liquidity, and profitability, as well as its financial health and long-term viability.

Therefore, the banks will ensure that the consumers (companies or businesses) are capable of paying accruing interest and repaying the loans on time. The duration of the loan is also considered when evaluating a loan application; if it is a short-term loan, banks are interested in estimated net cash inflows over the relevant months, whereas for a long-term loan, the banker ensures that the company is financially stable. Such that sufficient profit will be generated in the near future. Similarly, the bank should be preoccupied with the borrower’s capacity to repay both the principal and the interest. If the advance cannot be guaranteed, it should not be granted.

The Nigerian economy was severely damaged as a result of the finance sector’s financial difficulties. These difficulties were caused by lending institutions’ improper use of accounting data.

It can be seen that this research is timely, so the researcher’s interest and attention have been piqued by it. This study evaluates the extent to which commercial banks in Nigeria use accounting information provided by customers to determine loan and advance proposals.

1.2 Statement Of Problems

When advancing loans, (1) bank managers allowed their personal interests to conflict with the bank’s overarching goals. They are more concerned with gaining personal benefits from customers than with safeguarding the bank’s interests.

(2) As a consequence of managers placing less emphasis on collateral than on the viability of the project for which the loan was sought, defaulters escaped unapprehended.

(3) The bank managers neglected to evaluate the customers’ dependability in terms of loan repayment profile evidence.

(4) The profit-and-loss statement and balance sheet of the prospective borrower were not adequately considered by the lending institutions.

1.3 OBJECTIVES OF THE STUDY

Banks are crucial financial institutions for the expansion of investments and credit in the economy. Unfortunately, loan defaults attributable to erroneous lending decisions by banks have resulted in a loss of future lending policies and profit performance. The situation will be improved by a comprehensive analysis of the financial statements provided by the clients. Therefore, the objectives of this study are as follows:

(1) To ascertain the extent to which prospective borrowers’ financial accounting information influences lending decisions.

(2) Determine if banks always request financial statements from their customers before making decisions.

(3) Determine the extent to which proper use of accounting data reduces problematic debts.

(4) Determine the extent to which improved accounting records maintained by debtors have contributed to loan default.

(5) Determine the extent to which poor financial positions of prospective debtors have contributed to loan denials.

(6) To provide recommendations that will result in efficient bank lending decisions.

1.4 Research Questions

1. When making lending decisions, do banks always require financial statements from borrowers?

2. To what extent do prospective borrowers’ financial accounting statements impact lending decisions?

3. How much has the use of accounting information decreased the incidence of problematic debts?

4. How much have borrowers’ improper accounting records contributed to their failure to repay loans?

5. How much has the weak financial standing of prospective borrowers led to loan applications being denied?

1.5 HYPOTHESIS

Hypotheses are intelligent approximations regarding some pertinent variables.

First Hypothesis:

Financial statement analysis does not rely on bank deposits

making lending judgments.

Analysis of financial statements and reliance on

making lending judgments.

The Third Hypothesis

Inadequate analysis of accounting data has no effect.

not increase the occurrence of poor debts.

H1: Inadequate analysis of accounting data contributes to a rise in the incidence of problematic debts.

1.5 SCOPE

The purpose of this study is to determine the significance of financial statement analysis in bank lending decisions.

Enugu’s Okpara Avenue, First Bank of Nigeria PLc will be the focus of a comprehensive research of the topic.

Any additional references are merely for a better comprehension of the subject matter and are outside the scope.

1.7 Significance Of The Evaluation

The significance of the study resides in the benefits it will provide to underrepresented sectors of the economy.

Commercial Banks: If the information contained in this research is utilized appropriately, it will go a long way toward enhancing the quality of commercial banks’ lending decisions. Other lending institutions, including non-bank financial institutions such as finance houses, insurance companies, and even development banks, will, if these data are properly utilized, recognize the need to scrutinize prospective borrowers’ accounting information prior to making lending decisions. This reduces the likelihood of loan default and improper credit expansion.

Credit Analysis: The work will be beneficial to them as they analyze prospective borrower proposals on a daily basis.

Prospective Borrowers: Knowledge of the information contained in the work will eliminate the naivety of loan applicants regarding the requirements of banks.

This work will also be of great assistance to students and researchers working on the same or similar topics, as it will serve as a basis for a literature review.

The Government: The government is always concerned with the nation’s economy. To implement these measures in order to reduce the high incidence of loan default and distress in the banking sector.

In addition to the above-mentioned individuals, this investigation will educate the general public (or as many as will encounter it). This will go a long way toward ensuring that all hands are on deck to enhance the economy of this nation. As the high incidence of bad debt on institutions is drastically reduced, there will be an increase in national output and national income if the system is utilized properly.

1.8 DEFINITION OF TERMS

There are a few technical terms that, if not defined, could hinder the comprehension and appreciation of the research by the average person.

The following are:

Unless otherwise specified, all references to banks in this study are intended to refer to commercial institutions.

Customers: For the purposes of this study, this refers to those who have access to advances and loans. There are sole proprietorships, partnerships, stock corporations, and public corporations, among others.

Final Accounts: This term is frequently used to refer to the combined trading and profit and loss account. Generally, these accounts are presented in conjunction with the balance sheet (though the balance sheet is not an account, but rather a statement compiled at the conclusion of each fiscal period detailing the assets and liabilities of the business as of that date).

This is a hypothesis that asserts that there is “no difference” or “no relationship” between two or more variables. It is a “no effect” or “no difference” hypothesis.

This refers to the information contained in the corporation or organization’s published account. These include items from the profit and loss account and the balance sheet. Accounting information includes the data collected through daily transactions, sales and purchases daybooks, and customer advances ledgers.