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.