FINANCIAL STATEMENT ANALYSIS AS A BANK LENDING DECISION

 
Commercial banks perform numerous functions.  One of the most profitable investments of the commercial banks is granting of loans and advances to those customers that need such including business organization as loans are always needed to enhance profitability of such organization and help them execute such projects, which their capital cannot finance.  These are factors, which banks do consider before granting such loans. The research work is geared forward finding out the role which financial accounting information plays in lending decision making of the banks.  The objectives amongst others include to know whether the banks do demand for financial statement from their customers while making lending decision, the extent to which they are influenced by such statements, the extent to which adequate use of accounting information has led to reduction an incident of bad debt. A work of this nature will be of help to different groups including commercial banks, other lending institution credit analysis the government etc. 
 
Every organisation targets the attainment of its desired objectives.  The organisation therefore aims towards efficiency and proper effectiveness in conducting its affairs.  However, the level of the efficiency and effectiveness of any organisation or the extent to which it is able to achieve its desired goals to a large extent depend on the quality of available information and on how the organisation utilize the available information.  The organization always makes use of information in allocating scarce resources to different alternative uses.
 
For any business to succeed in today’s rapidly changing environment, the management must update itself with every relevant and current information that will be beneficial towards achieving the predetermined objective.  It can therefore be seen that management must plan the course of action of the organisation, identifying the medium and long term goals based on detailed analysis of feasibility, bearing in mind the socio-economic and political situation around.  Not only will plans be formulated, the actual performance and the end result should be compared with the plans to see whether the goals are being achieved or not.  This helps the management to report appropriately as well as improving the entire process of development.  A proper look at the planning process will reveal that proper information as well as its utilization is needed for the attainment of the organizational goals.
 
A great deal of useful information comes from accounting functions as it provides data which when processed, serves as useful information to the management in its planning process.  The information provided by the accounting functions serves as important and effective tool in the budgeting or planning as well as operations of the management.
 
There are three basic types of accounting information which management needs in the information of its policies and plans.  They are score-keeping method of information, attention directing information and problem solving information.  The score-keeping information involves the accumulation and allocation of data collected for the purpose of performance appraisal and position evaluation.  Attention directing information deals with highlighting and investigating the differences between plans and actual for proper corrective action.  Lastly the problem solving information focuses on analyzing and recommending the best course of acting among competing alternatives.  It is therefore associated with the management decision making process and useful in the implementation stage.
 
The commercial bank as business organization that need to plan greatly need not just any information but much of relevant, current and useful accounting information for the purpose of operating their business effectively and efficiently towards the attainment of their objectives.  Much of the business of the commercial banks revolves round grating of loans and advances to their customers.  In fact it should be realized that the most profitable business of banks is lending.  The profitability of the banks is therefore a function of how prudent the banks are as well as how effective they utilize the accounting information sourced from accounting data provided by the customers for the purpose of borrowing.
 
The banks are therefore interested in financial accounting information, which will enable them research initial loan decisions, and also help to monitor progress after advances have been made.  The information so needed are those that deal with solvency, liquidity and profitability, the firm’s financial stand and long term viability. The banks will therefore assure themselves that the customers (companies or firms) are capable of paying interest accruable as well as repaying the loans as and when due.  Some other factors are also considered concerning loan application for instance, on the duration of the loan; if it is a short term loan, the banks are interested in estimated net cash inflows over the relevant months, for a long term loan the banker satisfies itself that the company is financially stable.  Such that adequate profit will be earned in the foreseeable future.  Similarly, the ability of the borrowing firm to repay both the principal and the interest should be the prime consideration of the bank.  Where it cannot be guaranteed, the advance should not be granted.
 
The Nigerian economy received a great blow, which was as a result of the financial distresses in the banking sector.  These distresses were as a result of lack of proper use of accounting information by the lending banks. It can be seen that this research work is timely hence the interest and attention of the researcher have been caught by it.  The work therefore assesses extent to which commercial banks in Nigeria do utilize accounting information presented to them by the customers in affecting loans and advances proposal.
 
(1)    Bank managers allowed their personal interest to conflict with overall objectives of the bank when loans are advanced.  They consider personal benefits derivable from customers than protecting the banks interest.
(2)    The managers did not emphasis on the collateral rather than on viability of the project for which the loan was being sought as a result defaulters escaped unapprehended.
(3)    The bank managers failed to consider the reliability of the customers with regards to loan repayment schedule profile evidence.
(4)    The profit and loss account as well as balance sheet of the intended borrower was not properly considered by the banks in lending decision.
 
Banks are very important financial institutions in the economy and in the expansion of investments and credits.  Unfortunately defaults in loan repayment attributable to faulty lending decisions by the banks have brought about a defeat in their future lending policies and profit performance.  A thorough analysis of the financial statements presented by the clients will improve the situation.  The objectives of this research work are therefore:
(1)    To determine the extent to which the financial accounting information presented by prospective borrowers influence lending decisions.
(2)    To determine whether the banks always demand for financial statements from their customers while making decisions.
(3)    To ascertain the extent to which adequate use of accounting information reduce bad debts.
(4)    To ascertain the extent to which improve accounting records by borrowers have contributed to non-repayment of loans.
(5)    To find out the extent to which poor financial positions of prospective borrowers has led to non-approval of loan.
(6)    To make recommendation that will lead to efficiency in bank lending decisions.
 
1.     Do banks always demand for financial statement from their customers while making lending decision?
2.     To what extent do financial accounting information presented by prospective borrowers influence lending decisions?
3.     To what extent has adequate use of accounting information reduce incidence of bad debts?
4.     To what extent has improper accounting records by borrowers contributed to non-repayment of loans?
5.     To what extent has poor financial position of intending borrowers led to non approval of loan application?
 
Hypotheses are intelligent guesses regarding some pertinent variables.
H0:    Financial statement analysis does not and bank in making lending decisions.
H1:    Financial statement analysis and bank in making lending decisions.
H0:    Inadequate analysis of accounting information does not bring about an increase in the incidence of bad debts.
H1:    Inadequate analysis of accounting information bring about an increase in the incidence of bad debts.
 
The significance of the study lies in the benefit that will be derived from it by the underlisted sectors of the economy.
Commercial Banks:  If the information so contained in this research work is appropriately utilized, it will go a long way to improving the quality of lending decision of the commercial banks.  Other lending institutions; the non-bank financial institution like finance houses, insurance companies and even development banks will if properly utilize these information see the need for scrutinizing accounting information from prospective borrowers before making lending decisions.  This goes to reduce incidence of loan default and improper credit expansion.
Credit Analysis:  The work will be of help to them as they on daily basis analyse the proposals made by prospective borrowers.
Prospective Borrowers:  The ignorance on the part of the loan applicants with regards to the requirement of the banks will be removed by the knowledge of the information contained in the work.
Researchers:  This work will also become of immense help to students and researchers on the same or similar topics, as it will form a basis for review of related literature.
The Government:  The government is always interested in the economy of the nation.  This measures to apply in order to curb the high incidents of default in repayment of loan as well as distress in banking section.
 
Apart from these specifically mentioned above, this research will go to enlighten the generality of the public (as many as will come across it).  This will go a long way to causing every hand to be on deck towards the overall improvement of the economy of this nation.  If properly used, there will be increase in national output, national income as the high incident of bad debt on the banks be drastically reduced.
 
The aim of this research is to find out the financial statement analysis as a bank lending decision. A comprehensive study of the topic as it concerns First Bank of Nigeria PLc Okpara Avenue, Enugu will be carried out. Any other reference is just for a better understanding of the subject topic but not within the scope.
 
There are some words considered technical which if not defined might be an impediment to an ordinary man’s understanding and appreciation of the research work. 
Banks:  Unless otherwise stated, any reference to banks in this study is demand to mean commercial banks.
Customers:  For the purpose of this study, this refers to current account holders that have recourse to advances and loans.  Some of them include sole proprietors, partnership, joint stock companies, public corporation etc.
Final Accounts:  This is often used to mean collectively the trading, profit and loss account.  These account are generally presented in conjunction with the balance sheet (through the balance sheet is not an account) but a statement drawn up at the end of each financial peril showing the various assets and liabilities of the business concern as at that date.
Null Hypothesis:  This is a hypothesis, which states that “no difference” or “no relationship” exists between two or more variable.  It is a hypothesis of “no effect” or “no difference”.
Accounting Information:  These are information contained in the published account of the company or firm.  These includes, profit and loss accounts items, balance sheet items.  The information collected through the daily transactions, sales and purchases daybooks, customer’s advances ledgers are all accounting information.