CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Every commercial bank targets the attainment of its desired objectives. They therefore aim towards efficiency and proper effectiveness in conducting its affairs. However, the level of this efficiency and effectiveness of any bank or the extent to which it is able to achieve its desired goals depends to a large extent on the quality of the available accounting information and on how the bank utilizes the available information.
For any commercial bank to be sure of success in the management of their portfolios in this day’s rapid changing environment, the management and staff must update themselves with every relevant and current accounting information that will be beneficial in determining the predetermined goals. Management must therefore plan the course of action of the bank by identifying the long, medium and short term goals based on the detailed analysis of feasibility, bearing in mind the socio-economic and political situation that might affect the plans to be achieved.
Optimal bank portfolio management is a continuous struggle of maintaining a balance between liquidity, profitability and risk. Banks need liquidity because such a large portion of their liabilities are payable on demand. The decision to choose one combination of portfolio over another, given the liquidity size and capital accounts of
2
the bank would have direct and significant effect on bank’s profitability, liquidity and risk.
Commercial banks are very important financial institution in the economy in the expansion of investments and risks. Unfortunately, a deviation from profits to losses in portfolios will bring about wrong investment decisions by the bank which will bring about a defeat in their future risk taking policies and profit performance. A thorough analysis of the risk presented by an investment will improve the portfolio management thereby yielding less risk and more profitable portfolios.
The bank’s portfolio management is a major success factor of bank management. Numerous discussions on the new capital adequacy proposals enlighten the necessity to consider the banks portfolio management from both the internal and regulatory point of view. The question now is: with a simplified bank portfolio, is it possible to examine the impact of the regulatory risk limitation rules on the optimal situations under unfavorable market condition and intensifying competition bearing in mind that they are exposed to decreasing return margin on the portfolio and at the same time, their shareholders demand for higher risk premium for the capital they invested.
Based on this, this research work is assessing the extent to which banks are enlightened on how to strike a balance between risks and portfolios and whether commercial banks use accounting information especially on decisions to buy or not to
3
buy a portfolio considering factors like the personality and integrity of the prospective investor and the Nigerian stock exchange trade guidelines.
1.2 STATEMENT OF THE PROBLEM
Commercial banks might not really understand the impact of adequate accounting information in the management of their portfolios until probably they undermine the use of it in their bank. Inadequate or lack of accounting information exposes or leaves portfolio management to certain problems such as:
- Malfunctioning and wrong decision making by managers in the management of risks arising from the portfolios.
- High occurrence of factors that may result to high incidence of losses instead of expected profits where proper accounting information on portfolio management is not on hand.
- Inability of the managers to strike a balance between risk and investment, the negative effects which is seen on the low profits derived from the portfolios.
- The implications of continued incidence of losses due to poor portfolio management on the productivity of the portfolios.
1.3 OBJECTIVES OF THE STUDY
The overall purpose of this research work is to evaluate and determine the impact of accounting information on the portfolio management of bank.
4
Specifically, this research work stands to achieve the following objectives:
1) To determine whether accounting information has enhanced the portfolio management of commercial banks.
2) To find out whether conflict in accounting information affects the choice of portfolios.
3) To determine whether accounting information has improved the basic roles of cost minimization, proper allocation of scarce resources and improvement of the portfolios.
4) To ascertain the extent to which adequate use of accounting information reduces the risks associated with the portfolios.
1.4 RESEARCH QUESTIONS
The following research questions will be used in this study to form the research hypothesis.
1. Has accounting information enhanced the portfolio management of commercial banks?
2. Can conflict in accounting information lead to improper management of banks portfolios?
3. Has accounting information improved the basic roles of cost minimization, proper allocation of scarce resources and improvement of the portfolios?
5
4. To what extent do factors that bring about losses other than profits occur in the bank’s portfolios?
5. To what extent does adequate use of accounting information reduce risks in bank’s portfolios?
1.5 STATEMENT OF HYPOTHESES
This research work is undertaken on the basis of the following hypothesis:
HYPOTHESIS ONE
Ho: Accounting information does not enhance the portfolio management of commercial banks.
Hi: Accounting information enhances the portfolio management of commercial banks.
HYPOTHESIS TWO
Ho2: Conflict in accounting information does not affect the choice of portfolios.
Hi2: Conflict in accounting information affects the choice of portfolios.
6
HYP