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PROJECT TOPIC-INFLUENCE OF INFLATION ON REPORTED PROFIT FOR DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

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 Under-down (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 non-capitalist 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.

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

.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?

1.5 RESEARCH HYPOTHESES

Based on the objectives of this study, the following Null hypotheses were formulated to guide
the study.
i. There is no positive and significant relationship between lending decision and inflation on
Nigeria banks.
ii. Inflation has not adversely affected reported profits on Nigeria banks within 2006 – 2011
fiscal year.
iii. Investment decisions within the reported profits of Nigeria banks have no direct relationship
with inflation within the period under review.
iv. Inflation on other decision factors ( Gearing and Solvency ) has no significant relationship
on reported profit on Nigeria banks.

1.6 SIGNIFICANCE OF THE STUDY

The study will be significant to the researcher, to Government, to management of banks, to the
general public and to educationist.
To the researcher: This study will add more to the knowledge bank of the researcher in the

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

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