ABSTRACT
The study is on Influence of inflation
and reported profit: implication on decision-making. The study was set to
achieve the following objectives:, to determine the extent to which lending
decision in Nigeria banks were affected by inflation between 2006 – 2011, to
ascertain the extent to which inflation has impacted on the reported profits of
commercial banks in Nigeria between 2006 – 2011, to examine the extent to which
reported profits under inflationary period affect investment decision of Nigeria
banks between 2006 – 2011, to find out other factors that influence decisions
on reported profit apart from inflation. The research design adopted in this
study is ex-post factor research design which is characterized as events that
have taken place in the past. The target population of the study is all the
banks quoted in Nigeria stock exchange. The sample size is the first two new
generation banks (FBN and UBA Plc). Secondary data were sourced from Annual
Reports of the banks under study. The data will be presented using sample table
frequency and the formulated hypotheses will be tested using linear regression
technique. The study discovered that there is no significant positive
relationship between lending decision and inflation on Nigerian banks and it is
revealed that it could not be established that inflation has adversely affected
reported profits on Nigerian banks within 2006 to 2011 fiscal year. Also it was
found that investment decisions within the reported profits of Nigerian banks
have no direct relationship with inflation within the period under review and
finally that inflation on other decision factors (Gearing and Solvency) has no
significant relationship on reported profit on Nigerian banks. Also the
decision of organization obeys the trends and situation of the economy either
in lending or reported profits, investment decisions, gearing and solvency.
Thus in the presence of all these factors inflation and reported profit have
negative influence on decision-making.
CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Inflation is a word that most people
hear these days and virtually nobody would like to experience or come in
contact with. Unfortunately it has come to stay with us. Clautier and Underdown
(2001) described it as what hits the consumer’s pocket by eroding the
purchasing power of the currency and sometimes acts as hidden tax. It reduces
nation competitiveness in world markets and can have a general debilitating
effect on almost all type of economic activities. When one thinks of inflation
what comes to mind is the dynamic situation of persistent increase in the price
level which results in the diminution of real purchasing power of naira at your
disposal at any time. Inflation, be it creeping, cost push, wage push or profit
push is a condition of unrelenting price spiral. It has been generally described
as a situation of rising prices arising from too much money chasing too few
goods and always results when the aggregate demand exceeds the aggregate supply
of goods and services. It has the net effect of reducing the purchasing power
of the monetary unit. When this reduction in the purchasing power of money is
gradual as it was the case in the early 60s, the recipient of fixed income is
not worried. However, when change in price is a run-away (hyper) inflation as
has been experienced in Nigeria since late 70’s the entire economic system will
be at the brink of collapse (Emekekwe, 2008).
However, inflation is not completely
dreadful. A certain level of inflation is desirable in order to ensure
sustainable economic growth. Beyond that level, it becomes a hydra –headed
monster that has baffled monetary economics over the years, (Emekekwuse, 2008).
At the undesirable level, inflation greatly affects financial decisions thereby
constituting big source of uncertainty in the economic world. According to Gill
(1997), the issue of inflation in decision making had received very little or
no attention. He attributes this to the fact that much of the literature
existing then on economic analysis has been developed in the USA and other
technically advanced nation where the rate of inflation are comparatively
small. In recent time the need has risen for a more precise analysis because
even in some of the advanced economies, the impact of inflation and decision
can no longer be overlooked. According to Sizer (2000), in the case of consumer
price index, Nigeria leads with an annual rate of 34%. To this effect,
virtually all developed and developing counties, capitalist and noncapitalist
have woken up to the reality of the need for accountant to strive to produce
inflation adjusted accounts. This gives rise to the study of “The impact of
inflation on reported profit and its implication for decision-making”. Decision
making requires information which is measured on appropriate basis. Gluatier
and Underdown (2001) argue that the monetary unit of measurement decreases in
value because its purchasing power falls according to the degree of inflation.
The consequences of the instability in the dimension of the unit of measurement
in accounting are that objects and events which are measured in one period of
time cannot be compared with similar goods and events which were measured in
subsequent period.
It is important to note that
Accountants are still unwilling to provide information to external users about
future expectations, which will be useful for decision making since this will
mean abandoning a tradition based on objectivity. The development of accounting
as an information science concerned with the need for decision makers to
require measurements which are relevant and useful for these needs. In
particular, such measurement should possess a high degree of predictive
ability. Unfortunately, the practice in this country possesses serious obstacle
to the use of reported profit for decision– making by external users. The two
financial institutions to be examined in this study are United Bank of Africa
(UBA) Plc and First Bank of Nigeria (FBN) Plc between the years 2006 to 2011.
The two banks are quoted on the Stock Exchange and are deemed to be investment
opportunities. UBA was founded in 1949 when the British and French Bank Limited
(“BFB”) commenced business in Nigeria, following Nigeria’s independence from
Britain UBA was incorporated in 1961 to take over the business of BFB. First
Bank was formally known as British Bank for West Africa and was founded in
1894. These two expatriate Banks dominated the Nigerian Banking scene, until
1933 when National Bank of Nigeria was established. The two banks were taken
over by the Nigeria Government in 1972 and 1977 respectively, and were later
privatized to the Nigerian public. 1.2 STATEMENT OF PROBLEM The world is in the
grip of soaring inflation. The inflation if it crosses the single digit is an
index of a weak economy. Inflation can prompt trade unions to demand higher
wages, to keep up with consumers prices. Rising wages in turn can help fuel
inflation. Inflation has negative effects, because it reduces the value of
money, resulting in uncertainty of the value of gains and losses of borrowers,
lenders, and buyers and sellers. The increasing uncertainty which inflation
brings discourages saving and investment. It also has serious effect on
reported profits because of high increase in the devaluation of money. The
value of the reported profit today might be less tomorrow because of inflation
and the decision made today on that reported profit may be misleading tomorrow
because of inflation. These problems arise because the financial reporting
concept is based on age old concepts which for long have ignored the presence
of inflation and its implication for decision making both by management and external
users of reported profit. Overstated profits are measured in monetary terms;
rising prices will induce external users to make investment decision without
appreciating the consequences of the reduced value of their investment.
The financial institutions that
benefit from rising prices also suffer from decreases in savings and investments.
This is because people have become used to the idea that inflation reduces the purchasing
power or their savings and investments.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to
examine inflation and reported profit: it’s implication for decision-making.
Specifically, the study will achieve the following objectives:
(i) To determine the extent to which
lending decision in Nigeria banks were affected by inflation between 2006 –
2011.
(ii) To ascertain the extent to which
inflation has impacted on the reported profits of commercial banks in Nigeria
between 2006 – 2011.
(iii) To examine the relationship
between reported profits under inflationary period and
investment decision of Nigeria banks
between 2006 – 2011.
(iv) To find out other factors that
influence decisions on reported profit apart from
inflation.
1.4
RESEARCH QUESTIONS
The research questions were formulated
from the specific objectives of the study as follows;
i. To what extent can inflation affect
lending decision on Nigeria banks?
ii. How does inflation impact on
reported profit of commercial banks?
iii. To what extent does inflation
affect investment decision in Nigeria banks?
iv. How do other factors other than
inflation influence decision on reported profit of Nigeria
Banks?
TOPIC: INFLUENCE OF INFLATION ON REPORTED PROFIT FOR DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA
Format: MS Word
Chapters: 1 - 5
Delivery: Email
Delivery: Email
Number of Pages: 80
Price: 3000 NGN
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