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

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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

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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.

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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?

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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

Ho

2

: Conflict in accounting information does not affect the choice of portfolios.

Hi

2

: Conflict in accounting information affects the choice of portfolios.

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HYPOTHESIS THREE

Ho

3

: Accounting information has not improved effectively the basic roles of cost

minimization proper allocation of scarce resources and improvement of the

portfolios.

Hi

3

: 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.

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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.

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