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THE 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.
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