The Impact Of Accounting Information On Lending Decision Of Commercial Banks In Nigeria

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Most banks operating in Nigeria today are finding an increasing number of loans in their portfolios that have gone sour. The reasons for this undesirable situation vary as a result of bad loan decision at inception, deterioration later on or simply the effects of the economy. However, literature in the field of accounting has shown that accounting information is helpful in decision making not only in all spheres of business but also at all levels of management. This study, therefore investigates the impact of accounting information on lending decision in Nigerian commercial banks. To this end, two hypotheses were developed and tested at 5% level of significance using the nonparametric chi-square test. Then data used in the tests of the hypotheses were derived mostly through the administration of structured questionnaire to the 25 commercial banks that fall within the sample frame. These data supplemented by personal interviews with the respondents, were used to support the analysis to arrive major findings. Interviews with lending officers were held with a view to: Seeking practical insight into lending in commercial banks which only such interviews could provide: Gather information for refining lending principles and techniques in an effort to make them more applicable in commercial banks. Examine current practices as an aid in judging the relevance of accounting information that were thought to be applicable in banking lending. Following a detailed analysis of the responses to the questionnaire, the major findings of this study are summarized as follows: Accounting information is a necessary ingredient in bank lending decision. Accounting ratios enriches the decision making ability of lending officers, by providing them with pertinent information. The lending policy of Nigeria commercial banks revolve around the minimization of load defaults and the maximization of profit. Finally, other important areas for further research were suggested.

 Recommendation; the researcher was of the view that if they are implemented by Nigerian commercial banks their lending decisions will improve significantly.








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 31st


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 lending is probably the most important service provided by commercial banks, advances are the most important assets held by banks, and bank lending 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 lending 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:


(i)  Obtaining information on the applicant,


(ii)    Analysing this information to determine the applicants credit-worthiness and

(iii)       Making the credit decision.


This study is specifically aimed at the relevance and


predictive power of accounting ratios in taking lending decision. This is based on the assumption that financial statements are provided or made available by the credit seeker.




Credit management is the core of the entire operations of the banking industry. However, “the numerous and varied risks in lending 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 lending, 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, lending 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 lending decision making. The relationship between accounting information and bank lending system form the fact that financial statements are among the most important sources of credit information available to bank lending officers.



 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

 decision of Nigerian commercial banks. It is also aimed at empirically examining the extent to which accounting information is utilized by lending officers. More specifically these work intends to investigate the following issues:-


(i)           Whether Nigerian commercial banks request for accounting information from firms in quest for loans

(ii)         The extent to which they utilize accounting ratios in amending credit applicants.


[iii)    The quality and reliability of information derived from

 computed ratios

 iv)         Whether Nigerian commercial banks lend on the basis of accounting information or on the basis of collateral

security offered.

 Further, this work will aim to

 (i)  Make recommendation in line with the findings and

 (ii)   Provide a spring board for further research on the project topic.



 The research questions are as follows;

 -             To what extent do Nigerian commercial banks rely on accounting information in their lending decision?

-             How can a lending officer assess the credit worthiness of a firm seeking a loan?

-             Should a bank lend on the basis of pro-positions or on the basis of collateral securities?



 In line with the problem statement and the objectives of the study, the following hypotheses are formulated.

H1.     Commercial banks lending depend on the extent of

 reliability of accounting information.

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

H1.     Accounting ratios are useful tools to a lending officer on

 determining the credit worthiness of a prospective borrower.


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


H1     Should a bank lend on the basis of pro-positions or on

 the basis of collateral security.

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


 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.



 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 lending. Also, this study pertains to lending to corporate business organization rather than persons or entities that are not statutorily allowed to publish their financial statement.




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 lending 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.

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The Impact Of Accounting Information On Lending Decision Of Commercial Banks In Nigeria