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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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