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- No of Pages: 94

- No of Chapters: 5

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Introduction:

Abstract

Commercial banks perform numerous functions. One of the most profitable investments of the commercial banks is granting of loans and advances to those customers that need such including business organization as loans are always needed to enhance profitability of such organization and help them execute such projects, which their capital cannot finance. These are factors, which banks do consider before granting such loans.



The research work is geared forward finding out the role which financial accounting information plays in lending decision making of the banks. The objectives amongst others include to know whether the banks do demand for financial statement from their customers while making lending decision, the extent to which they are influenced by such statements, the extent to which adequate use of accounting information has led to reduction an incident of bad debt.



A work of this nature will be of help to different groups including commercial banks, other lending institution credit analysis the government etc.

Table of Content

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Introduction

INTRODUCTION



BACKGROUND OF THE STUDY



Every organisation targets the attainment of its desired objectives. The organisation therefore aims towards efficiency and proper effectiveness in conducting its affairs. However, the level of the efficiency and effectiveness of any organisation or the extent to which it is able to achieve its desired goals to a large extent depend on the quality of available information and on how the organisation utilize the available information. The organization always makes use of information in allocating scarce resources to different alternative uses.



For any business to succeed in today’s rapidly changing environment, the management must update itself with every relevant and current information that will be beneficial towards achieving the predetermined objective. It can therefore be seen that management must plan the course of action of the organisation, identifying the medium and long term goals based on detailed analysis of feasibility, bearing in mind the socio-economic and political situation around. Not only will plans be formulated, the actual performance and the end result should be compared with the plans to see whether the goals are being achieved or not. This helps the management to report appropriately as well as improving the entire process of development. A proper look at the planning process will reveal that proper information as well as its utilization is needed for the attainment of the organizational goals.



A great deal of useful information comes from accounting functions as it provides data which when processed, serves as useful information to the management in its planning process. The information provided by the accounting functions serves as important and effective tool in the budgeting or planning as well as operations of the management.



There are three basic types of accounting information which management needs in the information of its policies and plans. They are score-keeping method of information, attention directing information and problem solving information. The score-keeping information involves the accumulation and allocation of data collected for the purpose of performance appraisal and position evaluation. Attention directing information deals with highlighting and investigating the differences between plans and actual for proper corrective action. Lastly the problem solving information focuses on analyzing and recommending the best course of acting among competing alternatives. It is therefore associated with the management decision making process and useful in the implementation stage.



The commercial bank as business organization that need to plan greatly need not just any information but much of relevant, current and useful accounting information for the purpose of operating their business effectively and efficiently towards the attainment of their objectives. Much of the business of the commercial banks revolves round grating of loans and advances to their customers. In fact it should be realized that the most profitable business of banks is lending. The profitability of the banks is therefore a function of how prudent the banks are as well as how effective they utilize the accounting information sourced from accounting data provided by the customers for the purpose of borrowing.



The banks are therefore interested in financial accounting information, which will enable them research initial loan decisions, and also help to monitor progress after advances have been made. The information so needed are those that deal with solvency, liquidity and profitability, the firm’s financial stand and long term viability.



The banks will therefore assure themselves that the customers (companies or firms) are capable of paying interest accruable as well as repaying the loans as and when due. Some other factors are also considered concerning loan application for instance, on the duration of the loan; if it is a short term loan, the banks are interested in estimated net cash inflows over the relevant months, for a long term loan the banker satisfies itself that the company is financially stable. Such that adequate profit will be earned in the foreseeable future. Similarly, the ability of the borrowing firm to repay both the principal and the interest should be the prime consideration of the bank. Where it cannot be guaranteed, the advance should not be granted.