CHAPTER ONE

INTRODUCTION

1.1 STATEMENT OF THE PROBLEM

Before the introduction of the prudential guidelines, according to CBN circular (1990) some banks were used to declaring huge but unrealized profit, otherwise referred to as “paper profit”. 

The following problems will be investigated in this study:

(a) Did profit figures of the selected commercial banks decrease significantly post prudential guidelines?

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

1.2 RATIONAL OF THE STUDY

According to Olufun (1991) prudential guidelines seeks to infuse sanity into the chaotic banking industry.

Before the introduction of the guidelines most banks were used to declaring what is known as “paper profit “ and off – balance sheet, engagement ceased to form part of the majority commercial banks balance sheet totals. The guide line will assist banks in improving the assessment of their credit performance as well as providing banks supervisors and auditors with enhanced assessment criteria for adequate capital provision for the protection of the banks. Strict observation of prudential rules by banks contribute towards the efficiency of monetary policy.

1.3 SIGNIFICANCE OF THE STUDY

Obviously some literature exists on the effects of the CBN 1990 prudential guide lines on the financial statement.

However, the need to up-data such information exists and cannot be over emphasized. Therefore this research was undertaken in other to contribute to the existing literature by up-data it as much as possible.

The major significance of this study is aimed at educating the readers on the impact of the CBN guidelines on the financial statement. It was intended to ensure prudence in credit portfolio classification, provisioning for no-performing facilities. It was necessary to have such prudence to ensure reliability in published accounting information and operating results by financial institutions plus some measures of uniformity in credit portfolio disclosures and interest accruals. According to Eghodaghe (1993) it will help the monetary authorities to know how far the guidelines have achieved it’s primary objective reduction in the declaration of paper profits by banks.

This study will assist the commercial bank in coming up with strategies that will enhance their credit portfolio and reduce loan losses and subsequent provision for bad and doubtful debts. Finally it will provide a good reading material for students of banking and finance, management, practicing bankers including other related professionals and will expose other possible areas of research.

1.4 DEFINITION OF TERMS

F B N: First Bank Of Nigeria PLC

U B N: Union Bank of Nigeria PLC

C B N: Central Bank of Nigeria.

PORTFOLIO: According to Odoh (1998) is a list of securities held by and investor. A good portfolio will show a wide spread of investment in order to reduce the risk of loss.

BAD AND DOUBTFUL DEBTS:- It is referred to all non performing credit facilities to reflect such specification in the central bank prudential guidelines.

Monetary Policy:- A policy which deals with discretionary controls of money supply by monetary authorities (Orji 1998).

PRUDENTIAL GUIDELINES: According to Nwankwo (1991).

Prudential guidelines is a body of specific rules or agreed behaviour either imposed by some government or external agency that controls the activities and business of operation of the institutions.

PERFORMING ASSETS: These are those credit on which payment of both principal and interest are up to data in accordance with the agreed repayment terms. (Nigeria Accounting standard Board 1990).

NON-PERFORMING ASSETS:- Credits on which payment of both principal and interest are up to date in accordance with the agreed repayment term.

FINANCIAL STATEMANT:- According to Nigeria Accounting standard Board (1984) is a report which consist of Balance sheet, profit and loss account or income statement, the notes of the account, source and application of funds statement, value added statement and historical financial summary.

PAPER PROFIT :- False profit declaration.