EFFECT OF ACCOUNTING INFORMATION ON LENDING DECISIONS OF COMMERCIAL BANK

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

Accounting information by definition is about provision of financial information needed to take decision particularly in respect of acquisition and use of scarce corporate resources as well as the elimination of wastes in the wealth creation chain to maximize profit. Agbaje, Busari and Adeoye (2014), stated that information as representing data or knowledge evaluated for specific use. He sees accounting information as "data organized for the special purpose of decision making" Oluwolaju and Ogunsan (2016), "information consists of data that have been retrieved, processed or otherwise used for informative or inference purpose, argument or as a basis for forecasting or decision making".

 Agbaje, Busari and Adeoye (2014), Opined that information is not synonymous with data. She stated that information is to data what a finished product is to the raw materials used in producing it. In other words data is information in its raw unprepared forms. She further added that information has become for management, a very valuable commodity. This is because experts in business management have come to agree that in today's business environment, where competition has become extremely keen, available and effective information can indeed become the critical factor which enables business organization to have that vital edge over its competitors. Agunbiade and Adeboye (2015), further sees information as "a fact, datum, observation, perception or any other thing that adds to knowledge. Information requirements tend to differ with the organizational level. Since the nature of decision making varies as one move up the organizational pyramid, managers rely on detailed information that is contained in reports. These report usually specified in financial terms often originate from the accounting system.

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. At the beginning of the past decade, there were about 89 banks with 3,389 branches located in both rural and urban areas 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 (Oluwolaju & Ogunsan, 2016).

In recent times, strong emphasis on the need for information to be transparent has provoked thoughts to further understand the creditors’ use of accounting information. Yap (2017) in his study on the need for cash flow statements concluded that accounting information take a central role in a creditor's decision to lend or not.

An entity's accounting information (AI) act as important tools that provide vital information that helps its users in making different business decisions. The usefulness of the information derived from these financial statements by its user determines whether the accounting information is of good quality or not. It is for this reason that has given rise to early studies on the usefulness of information from financial statements.

Getahun (2014) noted that lending is probably one of 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 in Nigeria have increased significant. 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 require 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, 2009). The information often required are those that deal with solvency, liquidity and profitability of the firm seeking credit. Gohen (2008) stated that, the evaluation procedures involve three related steps: Obtaining information on the applicant; Analyze this information to determine the applicant's credit-worthiness and making the credit decision.

Hence, this study is specifically aimed at evaluating the effect of this accounting information on the lending decisions of diamond bank CAS branch, to verify how effective accounting information has helped in the lending process of the bank and also the relevance and predictive power of accounting ratios in taking lending decision in diamond bank CAS. This is based on the assumption that financial statements are provided or made available by the credit seeker.

1.2     Statement of the Problem

Commercial banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development of a country. In performing these roles, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments (Ruggeri, Leotta & Rizza, 2018). Currently the banking business is so sensitive because more of their income (revenue) are been generated from credit (loan) given to their customers (Jeoitta, 2017). This credit creation process exposes the banks to high credit risk which leads to loss; as such credit management becomes 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 nonpayment of obligations when they are due (Edward, 2016). 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: because of the high rate at which loans go bad and also due to ineffective regulations guiding against loan defaulters in Nigeria.

Severally, 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 (Daniela, Antonio & Carmela, 2018). The relationship between accounting information and bank lending decisions form the fact that financial statements are among the most important sources of credit information available to bank lending officers. Hence, the main thrust of this study is to empirically investigate the effect of accounting information on the lending decisions of banks in Nigeria and how this has helped to avert/curb the risks associated with lending, taking Diamond bank CAS branch as a study.

1.3     Objectives of the Study

The broad objective of the study was to investigate the effect of accounting information on the lending decisions of Banks, with special reference to Diamond Bank CAS branch. The following constitutes the specific objectives of the study, they are as follows;

    i.            To determine effect of accounting information about assets on loan decision at Diamond Bank CAS branch.

  ii.            To find out the effect of accounting information about Liquidity position on the lending decision at Diamond Bank CAS branch.

iii.            To verify the effect of accounting information about profitability on the lending decision at Diamond Bank CAS branch.

1.4                 Research Questions

The following research questions will be addressed in the course of this study, they are as follows;

    i.            What is the effect of accounting information about assets on the lending decision at Diamond Bank CAS branch?

  ii.            What is the effect of accounting information about liquidity on the lending decision at Diamond Bank CAS branch?

iii.            What is the effect of accounting information about profitability on the lending decision at Diamond Bank CAS branch?

1.5                 Hypotheses of the Study

The main arguments of the study were synthesized into the following hypotheses and they are as follows;

Hypothesis One

H0: Accounting information about assets has no effect on the lending decision at Diamond Bank CAS branch.

Hi: Accounting information about assets has significant effect on lending decision at Diamond Bank CAS branch.

Hypothesis Two

H0: Accounting Information on liquidity has no effect on the lending decision at Diamond Bank CAS branch.

Hi: Accounting Information on liquidity has significant effect on the lending decision at Diamond Bank CAS branch.

Hypothesis Three

H0: Accounting Information about profitability has no effect on the lending decision at Diamond Bank CAS branch.

H1: Accounting Information about profitability has significant effect on the lending decision at Diamond Bank CAS branch.

1.6      Scope of the Study

The scope of the study is strictly on accounting information and lending decision in Diamond Bank CAS branch Abakaliki, Ebonyi State. The choice of diamond bank is because it has remain the only consistent commercial bank operating within the confined of the Ebonyi State University, as such it is believed that it would have carried out several loan and or lending activities. Hence, the criteria and conditions to which the lending activities were done is what this study seeks to analyze and justify.   

1.7                Limitations of the Study

This study is limited to the fact that it tends to focus it study on just a branch of Diamond Bank which is one of numerous type of commercial bank in operation in the Ebonyi state, Nigeria. Another major limitation is that associated with sourcing of information with respect to data for this study from the bank under consideration, tends to pose a problem as they feel reluctant to release information. Hence, it takes time to convince them that the documents are sourced for academic purpose only.

1.8      Significance of the Study

Banks are one of the contributors of a country's growth through lending money to investors and the business community. Lending also has important function for commercial banks. Its contribution to asset and income portfolio is very high in banking industry. Therefore, accounting information will help enhance the lending decisions of banks.

As such, the study will help management of banks to make them aware and to give due attention about the factors that affect lending. The findings of this study will also be of importance to understand the behavior and tendencies of commercial banks in distributing loans and credits to the public.

Also, the study will have great contribution to the existing knowledge in the area of accounting information and bank lending decisions in the Nigerian context. This in turn will contribute to the well-being of the financial sector of the economy and the society as a whole. Hence, other beneficiaries from this study will be commercial banks, regulatory bodies, the academic staff of the country and the society as a whole in the country. Finally, this study will also be used as a basis for any future study that will need to be explored on some other concerns which was not covered in this study.

1.9     Operational Definition of Terms

The following terms used in this study are defined for purpose of clarification and they are as follows;

Financial Institution: A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions (Olowolaju & Ogunsan, 2016).

Insolvency: Insolvency is defined as a financial condition or state experienced when: A legal entity or a person's liabilities (debts) exceeds their assets, commonly referred to as 'balance-sheet' insolvency (Minh, 2015).

Illiquidity: Illiquid refers to the state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets may also be hard to sell quickly because of a lack of ready and willing investors and speculators to purchase the asset (Shahabi, 2015).

Recapitalization: Recapitalization is a financial strategy used by a company to change its financial structure in order to weather through a rough financial situation or to help improve the company's financial stability (Olowolaju & Ogunsan, 2016).

Consolidation: Consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements (Musyoka, 2016).