THE ROLE OF FINANCIAL STATEMENT IN ASSESSING THE PERFORMANCE OF FINANCIAL INSTITUTIONS IN SOKOTO (A CASE STUDY OF SOME SELECTED BANKS WITHIN SOKOTO METROPOLIS)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Banks and non-bank financial institutions, supported by efficient money and capital markets ensure the successful operation of the financial system in an economy. The performance of the banking industry plays a crucial role in achieving sound and accelerated economic growth since it is a critical part of the financial system in every economy (Galbis, 2016). This implies that inefficiencies in the banking sector will impact negatively on the economy by slowing growth. The banking industry has a critical role to play in the economic development process, serving as the main intermediation channels between savings and investments in an economy. Banks as financial intermediation channels provide interest earning avenues for depositors and passing on their deposits to businesses and even government that will utilize them on their operations and developmental projects, leading to business expansions and economic development. Sokoto has a diverse financial system, made up of foreign and local major banks, rural and community banks, savings and loans companies, microfinance institutions, leasing companies, discounting houses and insurance companies. Financial statement analysis is a method used by interested parties such as investors (current and potential), creditors and management to evaluate the past, current and project conditions and performance of the firm and use to compare the strengths and weaknesses in various firms. Ratio analysis is the most common form of financial analysis .It provides relatives measures of firm’s conditions and performance. Financial statement discloses the internal structure of the firm. It indicates the existing relationship between sales and cash income statement account. It shows the mix of assets that produce income and the mix of the source of capital, whether by current or long term debt or by equity funding. In countries where financial instability is rife and financial intuitions are becoming popular, when it comes to investing, the sound analysis of financial statements is one of the most important elements in the fundamental analysis process. At the same time, the massive amount of numbers in a company’s financial statement can be bewildering and intimidating to many investors, creditors and those who are concern with the financial statement. However, through financial ratio analysis, the study would be able to work with these numbers in an organized fashion and present them in a concise form for easily understandable to both the management and other stakeholders.”……… ratios constructed to judge comparative performance. The perceived relevance of financial information is to provide reliable information about the true and actual financial position, performance (profitability), and changes in financial position of a business investment opportunity that could be useful to a wide range of prospective investors, managers, directors, financial institutions, financial analysts, government, regulatory agencies, the media, vendors and the general public in making informed or rational investment decision. The content of financial information is often expected to be prepared according to national standards, corporate governance, professional ethics and the code of conducts as stipulated by the Companies and Allied Matters Act (CAMA) of 2011 as amended, the International Financial Reporting Standards (IFRSs), and the Nigerian Statement of Accounting Standards (SASs). This is to avoid financial reporting fraud and scandals that might hinder effective and informed investment decision making by investors and other users of these information. Another purpose of expected standards and ethics in financial reporting is to re-orientate professional accountants, financial experts, auditors and corporate organisations on the need to abide by the code of conducts that facilitate public confidence in their services (Okafor, 2006). This study identifies one key aspect of financial information, the effect on performance of an organization or institution, and the relationship subsisting between financial information and performance of the institution. This study seeks to examine the role of financial statement in assessing the performance of financial institutions in Nigeria.

1.2 STATEMENT OF PROBLEM

The measurement of bank performance is crucial because they play vital roles in the financial system of every economy, which contributes immensely to economic stability and development. Inefficiencies in the industry can impede economic growth, since they are the main financial intermediation channels between savings and investments in every economy. Losses in the banking sector could have significant negative effects on the whole economy. The poor performance of the United States (U.S) and European Union (E.U.) banking industries has slowed down their respective economies and growth of the global economy until recent period (Said and Tumin, 2011). Therefore, the study of the role of financial statement in assessing the performance of banks becomes a relevant issue which could help banks to well appreciate the current conditions of the industry they operate in and the necessary factors they should consider in making decision and formulating policies either for recovery or operational improvements.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the role of financial statement in assessing the performance of financial institutions. Other general objectives of the study are:

1. To examine the role of financial statement in assessing the performance of an organization.

2. To examine the nature of financial statements of an organization.

3. To examine the impacts of financial statements on performance assessment in a financial institution.

4. To examine the earning and assets quality of a financial institution

5. To examine the relationship between financial statements and financial institutions performance.

6. To suggest ways that financial statement could be applicable on the performance of the financial institution.

1.4 RESEARCH QUESTIONS

1. What are the roles of financial statement in assessing the performance of an organization?

2. How is the nature of financial statements of an organization?

3. What are the impacts of financial statements on performance assessment of a financial institution?

4. How is the earning and assets quality of a financial institution?

5. What is the relationship between financial statements and financial institutions performance?

6. What are the suggested ways that financial statement could be applicable on the performance of the financial institution?

1.5 RESEARCH HYPOTHESES

H01: There is no impact of financial statements on performance assessment of a financial institution.

H02: There is no significant relationship between financial statements and financial institutions performance.

1.6 SIGNIFICANCE OF THE STUDY

The researcher hope that this analytical research will play its part in giving attention to the financial performance of an organization, to the organization management as well as users of the financial statements. Also it will be useful for the management on setting of and selection of appropriate financing and operating strategies to be competent in any organization. In addition to that, it helps the researchers to employ their theoretical knowledge in to practice. Besides, the study and frame work designed to evaluate the financial performance of organizations will be expected to serve as an input for future researchers interested in assessing the performance of an organization using financial statements.

1.7    SCOPE OF THE STUDY 

The study is based on the role of financial statement in assessing the performance of financial institutions in Sokoto (A case study of some selected banks within Sokoto metropolis).

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Financial Statement: Is a summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is it current financial position. The three basic financial statements are the (1) balance sheet, which shows firm's assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm's activities during a stated period.

Performance: The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the fulfilment of an obligation, in a manner that releases the performer from all liabilities under the contract.

Assessing: Is the action or an instance of making a judgment about something: the act of assessing something.

Ratios: A ratio is the relationship between two amounts that results from dividing one by the other. It is an accounting term used to describe the financial index which compares two financial variables such as current assets and current liabilities. Examples of ratios are quick ratio, and test etc.

Ratio Analysis: It is an analytical tool designed to identify significant relationships between two financial statement amounts.