THE IMPACT OF CENTRAL BANK ON NIGERIA PRUDENTIAL GUIDELINES ON THE FINANCIAL STATEMENT OF LICENSED BANK

(A case study of Union Bank of Nigeria PLC)

By

NDULUE DANIEL

Presented To

Department of Accountancy

ABSTRACT

The prudential guidelines for licensed banks which are based on global banking standards, imposed far- reaching requirements in the classification of risk assets and provision for bad doubtful debts.

Since its introduction in November 1990, thee implementation for the guideline has had a profound impact on the operations of banks.

In this project, the researcher has succeeded in identifying the features of guideline as well as its impact on published financial statements of commercial banks in Nigeria.

Published financial statements of the banks for the period of the inception of prudential guidelines were examined with that of the period of the case study.

Both primary and secondary sources of debts were used in the course of the research. Two hypotheses were tested using Chi-square test and correlation analysis.

The research work revealed among other that:

1. The net profit position of commercial banks in Nigeria has been significantly altered since the implementation of the prudential guidelines.

2. The provision for bad and doubtful debts of commercial in Nigeria has significantly increased since the implementation of the prudential guidelines.

The exercise were concluded with recommendation which include among others that:

(1) Credit decisions cannot be based entirely on any set of credit guidelines analytical techniques- banks should note that prudential guidelines should at best provide the maximum requirements or be the starting points for the credit policy of each bank which in itself should be more prudent than the prudential guidelines.

(2) Banks should generate lending policies that would de-emphasize reliance on securities and what can be realized from them. Instead banks may now focus on some more desirable qualitative characteristics of loan applicants such as character, willingness and ability to pay.

TABLE OF CONTENT

Title page II

Approval page III

Dedication IV

Acknowledgement V

Abstract VII

Table of content X

CHAPTER ONE

1.0 INTRODUCTION 1

1.1 statement of problem 5

1.2 Purpose of the study 7

1.3 Significance of the study 9

1.4 Statement of hypothesis 10

1.5 Scope of the study 11

1.6 Limitation of the study 12

1.7 Definition of terms 13

CHAPTER TWO

2.0 REVIEW OF RELATED LITERATURE 15

2.1 Theoretical review 15

2.2 Importance of prudential Guideline 18

2.3 The impact of prudential guideline in Banks 23

2.4 Analysis of financial statements 26

2.5 Component of financial statements 28

2.6 The importance of financial statements 32

2.7 Factors responsible for prudential reputation of banks in Nigeria 36

2.8 The significance of prudential guideline 40

CHAPTER THREE

3.0 RESEARCH DESIGN AND METHODOLOGY 43

3.1 Source of data 43

- Primary data 43

- Secondary data 45

3.2 Sample used and sample size 45

3.3 Methods of investigations 46

CHAPTER FOUR

4.0 DATA PRESENTATION AND ANALYSIS 49

4.1 Data presentation and Analysis 49

4.2 Data of hypothesis 79

CHAPTER FIVE

5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Findings 88

5.2 Conclusion 95

5.3 Recommendation 97

BIBLIOGRAPHY 101

APPENDIX: QUESTIONNAIRE 104

CHAPTER ONE

1.0 INTRODUCTION

Banks are very important in the economic development of any nation. They constitute the central part on which other sectors of the economy revolve. They mobilize resources from the surplus sector of the economy and lend to the deficit sectors for investment purpose. Hence they are obliged to comply with certain regulatory requirement, which are generally not applicable to other -sectors of the economy. One of the stationery guidelines is the subject of my study.

Loans and advances make up a major part of the lending. A careful look at the balance sheet of any commercial banks in Nigeria will reveal that loan and advances are by for the longest single items in the assets structure. Apparently, loan and advances make up the major sources of the operating income in banks. Because they are the most profitable assets for the employment of banks funds. Regardless of this fact, they could turnout to be bad ad doubtful debts.

In November 7, 1990 the central bank of Nigeria issued a circular entitled "Prudential Guideline" for licensed banks. It stipulated minimum requirements for assets classification and disclosure, provision of interest accrual and off balance sheet engagement (CBN) circular No. BSD/20/23 Vol.1 /11. in particular, the guideline imposed new and somewhat far-reaching requirements in the classification of risk assets and provision for bad and doubtful debts. (Nwankwo G.O 1990)

The guidelines also emphasized the time recognition of determination in the quality of assets and the classification of credit facilities into "performing s" and " non-performing" accounts.

A credit facility is deemed to be performing the payment of both principal and interest, which are up-to-date in accordance with the agreed terms, while credit facilities should be deemed as "non-performing" when any of the following conditions existence

(a) Interest or principal is due and unpaid for 90 days or more; and

(b) Interest payments equals to 90days or more have been capitalized, rescheduled, or rolled over, into a new loan (except where facilities have been reclassified as performing) the borrower must effect cash payment such that outstanding unpaid interest does not exceed 90 days.

Non- performing facilities are to be further classified into three categories as follows:

(a) Substandard: Where the interest or principal payments are in arrears for 90days-180 days

(b) Doubtful: Where interest or principals payments are in arrears for 180 days to 360 days, and no perfected tangible security is in course of realization.

(c) Cost: Where interest or principal payments are in arrears for more that 360 days and no perfected tangible security is in the course of realization. The guidelines required all licensed banks to make adequate provisions for perceived losses based on portfolio classification in order to reflect their true financial positions.

Furthermore, in order to ensure the reliability of their published operating results, banks have been directed to cease charging accruing interest on non-performing credit facilities and interest and interest accrued on such accounts should not be recognized as income.

The guideline made it mandatory for all licensed banks to review their credit portfolio continuously, at least once in three months, with a view to recognizing our determination in their quality according to Eghodaghe (1993)

Finally, prior to the issuance of the guidelines, it was common to find institutions declining paper profit, which resulted from interest, accrued in non-performing facilities being taken into profit and loss account. The non-performing assets in financial institutions were not uniformly classified; neither was adequate provision made for such facilities. These practices not only made compassion between institutions difficult, they also ended to hide inefficiencies and distort performance.

1.1 STATEMENT OF THE PROBLEM

Before the institution of prudential guidelines some banks were accused of declining huge but unrealized profits Banker were required by the guidelines to mandatory suspended interest due but unpaid on classified assets. Such interest was to be transferred to an interest suspense account to be only recognized on cash basis as against the previous practice of including such interest in revenue. The implementations of the measure directly reduced profits, but which were now more realistic than before the prudential guidelines.

Though the guidelines were introduced in 1990, yet few write-ups have placed emphasis on its impact on the banking industry. According to CBN Circular (1990).

The following problems will be investigated in the study:

(a) Did profit figures of the selected commercial bank decrease significantly post prudential guideline?

(b) What are the estimated profits of the bank from (1995-1998)?

(c) Did provision for bad and doubtful debts increase significantly under prudential guidelines?

(d) On what basis did commercial banks recognize interest due but unpaid on classified assets pre-prudential?

(e) How do banks perceive the statement; prudential guideline sense as a hedge against the posting a paper profit by banks.?

1.2 PURPOSE OF THE STUDY

The objectivity of the study is to examine measures introduced by banks and how effective that will be in order to meet the requirement of the prudential guidelines of the central banks in Nigeria.

Discretionary powers have been granted to officials at different levels to negotiate debt settlement, it can be seen that banks have put in place measures to effectively comply with the requirements of the Central bank of Nigeria prudential guidelines. More so, aggressive debt recovery is now the same on the industry. It is envisaged that with intensified debt recovery efforts, the bank will definitely some out stronger that ever before in subsequent years (Union Bank of Nigeria Plc). Hence it is necessary to

a. To ascertain if adequate for bad (1990) prudential guideline will reduce the commercial banks profit.

b. To trace the history of bad debts in the banks and how the new measures will facilitate the recovery of the debts.

c. To find out whether the case of bad debts are traceable to lack of managerial skills, commitment on the part of the Board Director and others involved in credit appraisal/ approval.

d. To find if the prudential guidelines has helped to sanitize the banking industry.

e. To determine other impacts of the prudential guideline on published financial statements of the selected commercial bank for the period of (1995-1998).

f. To recommend ways through which the impact of the guidelines on the financial statements of the bank for the period covered (1995-1998). Will help in achieving the total objectives of the guidelines.

1.3 SIGNIFICANCE OF THE STUDY

The major significance of this study and hence its relevance is in its aim if educating the reader on the impact of the CBN (1990) prudential guidelines on the financial which was intended to ensure prudence or due diligence in credit portfolio classification provision from non-performing facilities. It was necessary to have such prudence to ensure reliability in financial institution some measure of uniformity in credit portfolio disclosures and interest accruals.

It is envisage that it will help the monetary authorities to know how far the guidelines have achieved its primary objectives of reduction in the declaration of paper profit by banks.

This study will assist the commercial banked in coming up with strategies that will enhanced their credit portfolio and reduce loan losses and subsequent provision for bad and doubtful debts.

It will provide a good reading material for students of Accountancy, Banking and finance management, practice bankers and other related professionals.

Finally, it will expose and contribute to other possible areas of prudential research.

1.4 RESEARCH HYPOTHESIS

This is a statement about any set of phenomena, which is capable of being refuted by confrontation with facts. A research hypothesis is therefore a theoretical proposition, which may be right or wrong; as opposed to a tautology, which is always, true by definition.

The researcher will test and validate the following hypothesis:

Ho: The net profit of commercial banks not been significantly altered since the implementation of prudential guidelines.

HI: The net profit position of commercial banks has been significantly altered since the implementation of prudential guidelines.

1.5 SCOPE OF THE STUDY

this research was to determine the impact of central bank of Nigeria prudence guide lines on the financial statements of licensed bank. The implementation of the prudential guideline has had profound impacts on the operation of bank. One to the current emphasis in the acts of fraud, for genes and financial regulates relation to loan aid advances granted under suspicious circumstance, the study focused attention on the CBN prudential guidelines in respect to provision for bad and doubtful debts charged in the revenue account.

1.5 LIMITATION OF THE STUDY

The study concentrate solely on Union bank of Nigeria Plc. Empirical generalization will be made of other commercial banks in Nigeria.

A very detailed research work was not possible as a result of limitation suffered by this work. The major of this is as a result of this secrecy of banks in Nigeria, Union bank do not let out information to people easily especially researchers. They limit this to the fact that other people can make reference to the research work and use the information against the them.

This topic being researched an help make the matter worse as Central Bank of Nigeria will not wish to lay down their prudential guidelines to the public.

Other limitations imposed on this study are that of shortage of time and financial constraints. The time set for the project work makes it impossible for detailed research work to be carried out. The financial constraints also accounted for the limitation of sample size to one selected bank.

1.6 DEFINITION OF TERMS

Prudential guidelines: This is the central bank document that/anticipates minimum requirements for assets classification and disclosure, provision of interest accrual and off balance sheet engagement.

Analysis of financial statement: This refers to the interpretation, anticipation and translation of fact and data contained in the financial statements with the purpose of drawing relevant conclusions, therefore, making interference's as to business operations financial position and future prospects.

Balance sheet: is a statement of assets, liabilities and the net worth or the owner's interest in the business. Net worth or shareholders equity is made up of ordinary share capital, reserve and returned earnings.

Source and applications of fund: this is a statement that shows the source from which funds have flowed into the company and the is which that have been used.