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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.

1. 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

CHAPTER ONE

1. INTRODUCTION                                                         1

1.1    statement of problem                                                  5

1. Purpose of the study                                                   7
2. Significance of the study                                            9
3. Statement of hypothesis                                             10
4. Scope of the study                                                      11
5. Limitation of the study                                                 12
6. Definition of terms                                                       13

CHAPTER TWO

1. 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

Analysis of financial statements26

Component of financial statements28

The importance of financial statements32

Factors responsible for prudential reputation of banks in Nigeria36

The significance of prudential guideline 40

CHAPTER THREE

1. RESEARCH DESIGN AND METHODOLOGY                 43
   1. Source of data                                                             43

• Primary data                                                       43
• Secondary data                                                 45
  1. Sample used and sample size                                   45
  2. Methods of investigations                                          46

CHAPTER FOUR

1. DATA PRESENTATION AND ANALYSIS              49
   1. Data presentation and Analysis                                 49
   2. Data of hypothesis                                                      79

CHAPTER FIVE

5.0    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

1. Findings                                                                        88
2. Conclusion                                                                             95
3. Recommendation                                                        97

BIBLIOGRAPHY                                                                                       101

APPENDIX: QUESTIONNAIRE                                          104

 

CHAPTER ONE

1. 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

1. Interest or principal is due and unpaid for 90 days or more; and
2. 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