Impact of Accounting information on banks portfolio management

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
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
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.
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?
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.
HYPOTHESIS THREE
Ho3: Accounting information has not improved effectively the basic roles of cost
minimization, proper allocation of scarce resources and improvement of the
portfolios.
Hi3: Accounting information has improved effectively the basic roles of cost
minimization, proper allocation of scarce resources and improvement of the
portfolios.

1.6 SIGNIFICANCE OF THE STUDY
This research work lays much emphasis on the impact of good accounting information
on banks portfolio management and as such will help commercial banks as they analyze on
their portfolio management and also help them in reducing the high incidence of losses
instead of expected profits from the portfolios.
This work will also be of much help to the government in finding out measures to
apply in order to curb or reduce the high incidence of losses and risks in the bank’s portfolios
in other to increase the national income and output of the economy.
Finally, this work will be of immense help to students, researchers and scholars as it
will open a new area of study for further research and also form a basis for view of related
literature.

1.7 SCOPE OF THE STUDY
This research work will specifically focus attention on the impact of accounting
information on banks portfolio management. Due to logical point that not all the commercial
banks can be studied, this research work is therefore limited to First Bank of Nigeria Plc,
Enugu. Any other reference is just for a better understanding of the topic but not within the
scope.

1.8 LIMITATION OF THE STUDY
A major limitation of this study is that it did not go into the general impact of
accounting information on portfolio management of both bank and non-bank financial
institutions, rather it is limited to only banks portfolio management.
The conservation nature of banks and their apathy towards providing information
especially with respect to their internal operating policies is another limitation.
Human errors and biasness are other limitations of this study as some of the data were
collected through interviews therefore there is a possibility of omitting and exaggeration of
vital information in order to give their bank a positive credit for fear of what seem like an
invasion in the bank’s privacy.

Chapter Two: Literature Review

2.0 INTRODUCTION:

This chapter provides the background and context of the research problems, reviews the existing literature on the Impact of Accounting information on banks portfolio management, and acknowledges the contributions of scholars who have previously conducted similar research [REV61906] …

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