The Impact Of Accounting Information On Lending Decision Of Commercial Banks In Nigeria

Project and Seminar Material for Accountancy / Accounting

The Impact Of Accounting Information On Lending Decision Of Commercial Banks In Nigeria


Most banks operating in Nigeria today are finding an increasing number of loans in their portfolios that have gone sour. The reasons for this undesirable situation vary as a result of bad loan decision at inception, deterioration later on or simply the effects of the economy. However, literature in the field of accounting has shown that accounting information is helpful in decision making not only in all spheres of business but also at all levels of management. This study, therefore investigates the impact of accounting information on lending decision in Nigerian commercial banks. To this end, two hypotheses were developed and tested at 5% level of significance using the nonparametric chi-square test. Then data used in the tests of the hypotheses were derived mostly through the administration of structured questionnaire to the 25 commercial banks that fall within the sample frame. These data supplemented by personal interviews with the respondents, were used to support the analysis to arrive major findings. Interviews with lending officers were held with a view to: Seeking practical insight into lending in commercial banks which only such interviews could provide: Gather information for refining lending principles and techniques in an effort to make them more applicable in commercial banks. Examine current practices as an aid in judging the relevance of accounting information that were thought to be applicable in banking lending. Following a detailed analysis of the responses to the questionnaire, the major findings of this study are summarized as follows: Accounting information is a necessary ingredient in bank lending decision. Accounting ratios enriches the decision making ability of lending officers, by providing them with pertinent information. The lending policy of Nigeria commercial banks revolve around the minimization of load defaults and the maximization of profit. Finally, other important areas for further research were suggested.

Recommendation; the researcher was of the view that if they are implemented by Nigerian commercial banks their lending decisions will improve significantly.

Chapter One


1.1 Background of the Study

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. In the past years, there were about 89 banks with 3,389 branches located in both rural and urban centres nationwide. These banks were characterized by structural and operational weaknesses such as:

  1. Low capital base; Dominance of a few banks
  2. Insolvency and illiquidity
  3. Over dependency on public sector deposits and foreign exchange trading.
  4. Weak corporate governance; A system with low depositor confidence
  5. 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, Morgan (2010; 10).

The recapitalization and consolidation exercise in the banking industries by the former Central Bank of Nigeria Governor Professor Charles Soludo has necessitated the need for different organization to engage in corporate consolidation (Mergers and acquisition). The concept of recapitalization refers to the current trend of compelling all commercial banks to raise their capital base from 2billion to 25 billion naira by the Central Bank of Nigeria on or before 31st December, 2005.

The effect of the recapitalization exercises are to

  1. Facilitate evolution of a strong and safe banking system;
  2. Improve transparency and accountability in the sector;
  3. Drive down the cost structure of banks and make them more competitive and development oriented;

A new banking system that depositors can trust and investors can rely upon usher in a new economy.

The ability of the commercial banking system to perform its tasks efficiently and in harmony with our needs and economic goals depends in large measure an efficient management. There is too much at stake to do otherwise.

However, the efficiency of a commercial bank as well as its overall success depends to a great extent on the quality of information available to its management in its decision making process. Effective planning and control of an organization requires good information system. Logical decision making requires an understanding of the circumstances surrounding on issue and knowledge of the alternatives available. The more pertinent and timely the information the better the resulting decision.

The accounting function helps in the accumulation of accounting data, which help management in the planning process. Benjamin C. [199: 6] define “accounting as process of measurement and communication in which the major responsibilities are recording, analyzing, reporting and interpreting financial information of an economic entity” Accounting is more than this; however, it permits informed judgements and decisions to be made by the users of the information. Perry, F.E (1973: 2) describe the users of accounting information as “Owners and prospective owners of a business enterprise, bankers and supplies of credit and government agencies”.

Other users are employees who requires information about the financial results of the enterprise activities on which their remuneration will be based and the management which has responsibility for the survival of the enterprise on behalf of the owners.

It must be noted that lending is probably 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 have increased significantly.

Obviously, inflationary presumes had much to do with this phenomenal increase, but the gain are very large, even when aptitude for the rise in prices.

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 requires 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, O’Donnell (1989: 12) The information often required are those that deal with solvency, liquidity and profitability of the firm seeking credit. Gohen Gerald (1998: 4) states that, the evaluation procedures involve three related steps:

  1. Obtaining information on the applicant,
  2. Analysing this information to determine the applicants credit-worthiness and
  3. Making the credit decision.

This study is specifically aimed at the relevance and

predictive power of accounting ratios in taking lending decision. This is based on the assumption that financial statements are provided or made available by the credit seeker.

1.2 Statement of the Problem

Credit management is 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 non payment of obligations when they are due”, Edward Lee (1976: 9). 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:

  1. Because of the high rate at which loans go bad.
  2. Due to ineffective regulations guiding against loan defaulters in Nigeria.

In the recent years, 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, e.g. Oceanic bank,Inter-continental bank, Union bank and others.

Existing literature in banking recognize the ‘importance and relevance of accounting information in bank lending decision making. The relationship between accounting information and bank lending system form the fact that financial statements are among the most important sources of credit information available to bank lending officers.

1.3 Objectives of the Study

In a developing country like ours the role of banks is more pronounced in the sense that apart from performing their traditional banking functions, they also pay a developmental role of ensuring the overall growth of the economy. The primary aim of this research is to investigate and evaluate the accounting information in the decision of Nigerian commercial banks. It is also aimed at empirically examining the extent to which accounting information is utilized by lending officers. More specifically these work intends to investigate the following issues:-

  1. Whether Nigerian commercial banks request for accounting information from firms in quest for loans
  2. The extent to which they utilize accounting ratios in amending credit applicants.
  3. The quality and reliability of information derived from computed ratios
  4. Whether Nigerian commercial banks lend on the basis of accounting information or on the basis of collateral security offered.

Further, this work will aim to

  1. Make recommendation in line with the findings and
  2. Provide a spring board for further research on the project topic.

1.4 Research Questions.

The research questions are as follows;

  1. To what extent do Nigerian commercial banks rely on accounting information in their lending decision?
  2. How can a lending officer assess the credit worthiness of a firm seeking a loan?
  3. Should a bank lend on the basis of pro-positions or on the basis of collateral securities?

1.5 Hypotheses of the Study

In line with the problem statement and the objectives of the study, the following hypotheses are formulated.

  1. H1. Commercial banks lending depend on the extent of reliability of accounting information.
    Ho. Commercial banks lending does not depends on the extent of reliability of accounting information.
  2. H1. Accounting ratios are useful tools to a lending officer on determining the credit worthiness of a prospective borrower.
    Ho. Accounting ratios are not useful tools to a lending officer on determining the credit worthiness of a prospective borrower.
  3. H1 Should a bank lend on the basis of pro -positions or on the basis of collateral security.
    Ho. Banks should not lend on the basis of pro -positions or on the basis of collateral security.

1.6 Scope of the Study

This study is intended to cover twenty five (25) commercial banks disclosed by the directory of Nigerian banks as having their head office addresses in Lagos state. The choice of Lagos is influenced by the fact that it has a lion share of bank head offices, there are clustered within a twenty kilometers reduce thereby making them easily accessible for study at a minimum co st. In fact, of the twenty five banks operating in Nigeria as at December 2010, all of them have their head offices in Lagos.

1.7 Limitation of the Study

One complication in the tasks of relating accounting information to decision making is the fact that accounting information describes many different sets of data and information, It is possible to consider that any data or information which is obtained from or created in the accounting systems of a firm is accounting information whether cost aimed in a financial statement, a special report or verbal statement.

However, for the purpose of this study, that interpretation is too broad to be useful. Thus, this work intends to concentrate on accounting ratios because they are sets of data, which are quite relevant to bank lending. Also, this study pertains to lending to corporate business organization rather than persons or entities that are not statutorily allowed to publish their financial statement .

1.8 Significance of the Study

The primary objectives of accounting information is to aid the manager in making timely and formal decisions “providing vast amounts of data is not in itself helpful, in fact, it may confuse and hinder more than it helps; Perry etal,[1989;12] This study is one of the most numerous efforts directed towards evaluating the impact of accounting information on the lending decisions of Nigerian commercial banks. Firstly, credit manager who deserves to sharpen their decision making ability on loan request will find this study very useful. Secondly, it is hoped that this research will not only serve as an invaluable literature for further researchers but also generate ideas which will have policy implication for Nigerian commercial banks in extending credit facilities to their clients.

1.9 Definition of Terms

The following terms used in this study are defined for purpose of clarification .

Commercial Bank

A bank which undertakes all kinds of ordinary banking business Hanson (1978 : 81).

Management Information System

Some tangible or intangible entity that reduces about some state or event Mayo (1989: 44).

Accounting Information

Data organized for the special purpose of decision making. Osisioma (1990: 52)

Accounting Ratios

As expressed by Pickle (1974:31) presents a relationships and trends inherent in financial statements.
Pickle (1974: 3139).

Collateral Security:

Any property, negotiable interest or documentary evidence of a claim against or ownership in property conveying title to the holder as a pledge for the repayment of money lent.

Financial Statement:

May be referred to as overall general purpose entity statements that present the financial position and operating results of an entire business at the end of the annual accounting period or for a shorter period, Kennedy and Macmillan (1968 : 6).


The resolution or suppuration of data into their elements or component parts, the tracing of facts to their source, Osisioma (1990: 306).


A generic term that embraces all types of credit facilities like advances, overdraft, commercial papers, banker’s acceptance and bill discounted .


Making a choice between two or more alternatives


Is the extension of credit to worthy borrowers?


Is the ability to obtain goods, services, or money on exchange for promise to pay in future?

Chapter Five

Summary of Findings , Recommendations and Conclusion

5.1 Summary of Findings

Based on the analysis and summaries of the responses to the questions in the questionnaire, the findings for this study will be discussed in this section. Equally, the important finding s for this study will be discussed in this section. Equally, the important findings resulting from the applications of our major tool of statistical analysis, the non – parametric chi-square test is discussed in this section.

One of the most important sources of information to a lending officer is the financial statements presented by the borrowers. In support of this analysis, we discovered in table 4.2 earlier presented that all the commercial banks studied request for financial statements from loan applicants. However 88% of the respondents opined that they insist on independently audited financial statements while 12% stated that they sometimes accept un -audited account.

Our study also revealed that financial statements such as cash flow statement, profit and loss account, balance sheet and schedule of fixed accounts, are used simultaneously by the lending officers. This was revealed in table 4.4 based on the responses in table 4.6 it was revealed that the levels of comprehensiveness in the request for accounting reformation varied accounting to the type or nature of the credit applicant.

The commercial banks demanded more accounting information from limited liability companies than from sole traders and partnerships. Small businesses are often unable to company with the requirements of the banks i.e the provisions of the correct form of management accounting information.

Management accounting techniques are clearly vital to the preparations of reliable cash flow forecast but, many small businesses are incapable of producing little more than their historical amounts . The easy way out of this dilemma is for the banker to seek for collateral security or look for other criteria to access the loan seekers.

Other major findings of our study include:

  • Obtained a positively skewed response on table 4.5 that accounting information is significant for bank lending purpose. In the same vein, table 4.7 reveals that 48% of the respondents would reject a loan application when accounting information available does not meet the lending officer’s requirement. 20% indicated that the application will approved if other conditions are satisfactory while 8% stated that they would request for more accounting information.
  • The computation of accounting ratios in assessing loan applicants enriches the decision making ability of lending officers by providing them with decision choice and pertinent information to select from a range of options. If no such information were made available, their decision will be based on the rule of thumb or questionnaire.

The commercial banks studied, compute accounting ratios in assessing loan applicants. This option scores’100 percent responses as revealed by table 4.9. This was also corroborated by the responses summarized in table 4.11 were 52% described accounting ratios as very useful while 36% percent described them as useful.

But the study equally revealed that 60% of the respondents indicated that they rely on accounting ratios while 40 percent stated that they do not rely on them in determining whether an applicant is credit worthy or not.
However, we obtained a 100 percent response that accounting ratios are relied on monitoring granted loans.

Although, the 30 respondents representing 100 percent of the total response indicated that they are efficiency and profitability ratios, other broad categories of ratios such as long term solvency ratios, short term solvency ratios and potential and actual growth ratios are used simultaneously in monitoring the success of loan granted.

Nevertheless, the degree of importance attached to these board categories of ratios differed from one commercial bank to the other:

  1. The lending policy of the commercial banks studied revolves around the minimization of loan defaults and the maximization of profit. These two options recorded 52% percent and 36% percent responses respectively. This simply means that the respondents do not take the promotion of national economic growth into consideration when fashioning their lending policy.
  2. Using the non parametric chi -square test, we discovered in the test of hypothesis one that bank lending depends on the adequacy of accounting information. The test was conducted at 5% level of significance.

Consequently, the hypothesis was accepted. Using the same test, the second hypothesis equally stated that accounting ratios are useful tools to a lending banker in determining the credit worthiness of a prospective borrower and consequently accepted.

The test was conducted at 5% level of significance.

5.2 Recommendations

The greatest problem facing lending officers is h ow to correctly assess loan applicants in order to minimize loan defaults, in order to assess corporate credit applicants, lending officers rely on financial statements arid the computation of accounting ratio. The reliance on financial statements would prove total to lending decision because the figures contained in them could be doctored to deceive or hoodwink the lending officer. More importantly, the rate of inflation would also make figures and ratios derived t here to be out of tune with the present condition.

Another problem encountered in lending is the unpredictable nature of the borrower on the one hand an d the economy on the other hand. For instance, adverse economic conditions could render the payment of a loan facility impossible even when the debtor is genuinely serious of paying the principal inherent to the lender. At times the debtor may simply not be interested in paying back the loan. How then do the lending officers cope with the problem?

In a research of this nature, it does not suffice to merely identify problems and discuss findings without actually offering recommendations to improve existing situation. The major objective of these recommendations is to improve the lending skills of loan officers by suggesting ways to utilize accounting information in their decision making in order to minimize loan defaults. Based on our findings from the study, we wish to make the following recommendations .

(i) (i) When a lending officer is presented with financial statements how much faith can he put in it? The interpretation of financial statements presented to bank loan officers by borrowers. Both prospective and current is one of the most important elements in the evaluation of commercial loan request. Statements prepared by professional auditors are generally considered more reliable than those prepared by others. Therefore, the lending banker is bound to encounter the greatest problem in the area of un-audited statement. Since many types of opinions are expressed by professional auditors, the lending officer should recognize the differences between the opinions expressed and the related effect he may expect as to the financial reliability of the statements. A considerable amount of reliance can be placed on audited standards with unqualified (clean) opinions. Audited statements with qualified opinions may be guide reliable but it must be recognized that the statements are affected by the extent or character of the qualification. Hartley (1976)

  1. From a banker perspective, inflation must be recognized in lending decision since it affects the credit seekers income statement, balance sheet, statement of change in financial position and the probability of ultimate repayment. Therefore, funding officers should use inflation adjusted reports. In other words, they should be conversant with current cost accounting in order to narrow the gap between financial statements and the economic realities of inflation.
  2. In taking lending decisions, bankers should equally consider other factors which are not necessarily accounting information . The character capacity, collateral, security offered and the prevalent economic conditions should be given adequate attention in order to ensure safe lending .
  3. When a loan has been granted, its use must be properly Supervised and monitored so as to detect signals of Default, Early enough to take correct steps and avoid forced collection of the loan . Adverse financial trends indicated by accounting ratios, reluctance on the part of the borrower to furn ish information and general loss of his cooperation are mainly signs of a loan default.
  4. Finally, bankers should recognize that the impact of Accounting information depends on the skill of lending officers. Inadequate experience and qualification of the us er accounting information would lead to the misinterpretation of financial statements. This could lead to unintended consequences for both lenders and borrowers of funds. Therefore, experienced hands should be employed in such a sensitive area of bank lending.

5.3 Conclusion

This study attempted an empirical survey and analysis of the impact of accounting information on bank lending decisions in Nigeria commercial banks. The choice of the topic was motivated by the problems of huge loan losses suffered by most banks and, the consequent annual provision for bad and doubtful debts in their profit and loss account. It should be noted that increasing provision for bad and doubtful debt leads to narrower profit margins because it is an experience in a commercial banks profit and loss account. As a matter of fact, most commercial banks especially state owned ones are facing serious financial problems because of their increasing loan write offs.

Therefore, efforts were made to know the extent to which accounting information is used in appraising the applications of credit seekers.

From the non -parametric chi-square tests, we made the following findings:

  1. Commercial banks lending depends on the extent of reliability of accounting information on the credit applicant.
  2. Accounting ratios are useful tools to a lending officer in determining the credit worthiness, of a prospective borrower. In other words, accounting ratios are sufficient to determine whether to lend or not.

I discovered in the study that commercial banks rely on accounting ratios in monitoring the success of loan and in assessing the applicant for a loan.

Based on these findings, certain recommendations were just forward. It is of the view that if they are implemented by Nigerian commercial banks their lending decision will improve significantly.

These are also of the view that findings from a research of this nature can not claim to be comprehensive enough as to have touched all issues pertaining to accounting information and bank lending , it is in the light of the above that we suggest that further researchers be carried out on the impact of accounting information on lending by Nigerian merchant banks.

Commercial banks differ from merchant banks in the sense that the former concentrate in short term lending while later concentrate on long term lending . A comparative study on the impact of accounting information in both types of banks could serve as a spring bond for future researchers. It is equally pertinent to note that this research concentrated on accounting ratios as one of the categories of accounting information used in bank lending. Other researcher could be based on the impact of budget statements and statement of sources and application of funds, on bank lending decisions. This will fill the gap in t his study and try to make up for the limitations of accounting ratio as a tool for financial analysis.

5.4 Recommendation for Further Studies

This research work is suggested for further study in the following ways:

  1. The impact of budget statement
  2. Statement of source and application of funds on lending decision.

This will fill the gap in this study and try to make up for the limitations of accounting ratios as a tool for financial analysis.

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