Fraud Detection, Conservatism and Political Economy of Whistle Blowing

This paper presents a discussion on whistle-blowing and take the view that whistle-blowing is an important fraud detection technique. A discussion of some factors that influence the whistle-blowers’ incentive to blow the whistle or to remain silent in the face of persuasive fraud red flags, is also presented. The paper suggests that the tradeoff between the cost and benefit of whistle-blowing may compel the whistle-blower to apply some degree of conservatism in their whistle-blowing activities. Also, some discussion on how whistle-blowing might be influenced by firm-level politics, country-level political economy, firm ownership and other institutional factors is presented. Finally, although the provision of incentives can increase the appeal to encourage whistle-blowing, the appeal to blow the whistle may be weakened when the whistle-blower takes into account the larger context that influence the decision to blow the whistle or to remain silent

COVID-19 in Africa: socioeconomic impact, policy response and opportunities

The COVID-19 or coronavirus pandemic which has affected the global economy has also affected the African economy through spillovers to African countries. Many African countries have taken bold quarantine and lockdown measures to control the spread of COVID-19 although this has come at a cost such as the collapse of health systems and a painful economic crisis or recession. A coordinated and bold response by African authorities is needed. First, public funds should be provided to improve the capacity of health systems in African countries. Second, financial support should be provided to individuals, entrepreneurs and corporations to help them cope with the adverse effect of the coronavirus crisis. Third, employers should be granted incentives to preserve employment during the crisis to avoid mass layoff of workers. Finally, the Central bank in African countries should provide liquidity and credit support as well as asset purchase programs to prevent credit and liquidity crunch in domestic financial markets

Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa

This study investigates the determinants of African bank profitability while controlling for bank capital regulation. Using static and dynamic panel estimation techniques, the findings indicate that bank size, total regulatory capital, and loan loss provisions are significant determinants of the return on assets of listed banks compared to non-listed banks. Also, regulatory capital has a more significant (and positive) impact on the return on assets of listed banks than non-listed banks particularly when listed banks have sufficient regulatory capital ratio. We also find that higher regulatory thresholds have a negative impact on the return on asset of non-listed banks

Impact of IAS 39 reclassification on Income Smoothing by European Banks

We examine the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. We predict that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. Our findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis

Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria.

Prior research show that banks have various motivations for influencing loan loss provisions. This study examines these motivations and the behaviour of loan loss provision in relation to the business cycle. After controlling for the impact of Basel regulation on LLP, I find strong evidence for income smoothing, capital management and procyclical LLP behaviour during the voluntary, not mandatory, adoption of IFRS in Nigeria. I find evidence of signaling only after including interaction terms in the model. Additionally, I find that (i) banks increase loan loss provisioning after the implementation of Basel; (ii) banks have some incentive to signal via LLP in the post-IFRS period relative to the pre-IFRS period (iii) banks have joint motivations to manipulate LLP and may face trade-offs in the choice of managing regulatory capital or smoothing income in the post-IFRS period. Overall, I conclude that IFRS reinforces LLP motivations and procyclical patterns. The findings of this paper are relevant to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning as well as the on-going debate on the mandatory implementation of IFRS in Nigeria

Financial inclusion in Nigeria: determinants, challenges and achievements

This article analyse several indicators of financial inclusion in Nigeria. The findings reveal that people with at least a secondary education and unemployed people had higher levels of debit card ownership, higher levels of account ownership of any type, and higher levels of account ownership in a financial institution. Also, people with at least a secondary education had higher levels of borrowings from a bank or another type of financial institution, and had lower levels of savings at a financial institution. On the other hand, savings using a savings club or persons outside the family decreased among females, poor people and among people with a primary education or less. Furthermore, there were fewer credit card ownership by unemployed people while credit card ownership increased among employed people, the richest people and among people with at least a secondary education. Also, borrowings from family or friends decreased for most categories in 2014 and 2017. Finally, the econometric estimation shows that borrowings and savings outside financial institutions (using family, friends or saving clubs) significantly contributed to economic growth than borrowing and savings through financial institutions. The findings have implications

Covid-19 pandemic and economic crisis: The Nigerian experience and structural causes

The economic downturn in Nigeria was triggered by a combination of declining oil price and spillovers from the Covid-19 outbreak, which not only led to a fall in the demand for oil products but also stopped economic activities from taking place when social distancing policies were enforced. The government responded to the crisis by providing financial assistance to businesses, not to households, that were affected by the outbreak. The monetary authority adopted accommodative monetary policies and offered a targeted 3.5trillion loan support to some sectors. These efforts should have prevented the economic crisis from occurring but it didn’t. Economic agents refused to engage in economic activities for fear of contracting the Covid-19 disease that was spreading very fast at the time. In this paper, I analyse the Covid-19 spillovers to Nigeria and the structural weaknesses in Nigeria’s infrastructure that helped bring on the current economic crisis and discuss prospects for reform

COVID-19 in Africa: socioeconomic impact, policy response and opportunities

The COVID-19 or coronavirus pandemic which has affected the global economy has also affected the African economy through spillovers to African countries. Many African countries have taken bold quarantine and lockdown measures to control the spread of COVID-19 although this has come at a cost such as the collapse of health systems and a painful economic crisis or recession. A coordinated and bold response by African authorities is needed. First, public funds should be provided to improve the capacity of health systems in African countries. Second, financial support should be provided to individuals, entrepreneurs and corporations to help them cope with the adverse effect of the coronavirus crisis. Third, employers should be granted incentives to preserve employment during the crisis to avoid mass layoff of workers. Finally, the Central bank in African countries should provide liquidity and credit support as well as asset purchase programs to prevent credit and liquidity crunch in domestic financial markets

CREDIT SMOOTHING AND DETERMINANTS OF LOAN LOSS RESERVES EVIDENCE FROM EUROPE, US, ASIA AND AFRICA

This study provides a link between accounting, managerial discretion and monetary policy. Monetary authorities encourage banking institutions to supply credit to the economy. Increased bank supply of credit is a good thing but too much of a good can be a bad thing. This paper investigates under what circumstances excessive loan supply ceases to be a good thing and how bank managers react to this. After examining 82 bank samples, I find that (i) bank underestimate the level of reserves to boost credit supply in line with expectations of monetary authorities, particularly, in Asia and UK (ii) consistent with the credit smoothing hypothesis, US and Chinese banks smooth credit supply to minimize unintended stock market signaling; (iii) managerial priority during a recession is to smooth credit over time rather than to boost credit supply; (iv) non-performing loans, bank portfolio risk and loan portfolio size are significant determinants of the level of loan loss reserves; and (v) credit risk, proxy by loan growth, do not have a significant impact on loan loss reserves but tend to have some significant effect during a recession, particularly, when change in loans is negative. The implications of these findings are two-fold: (i) bank managers use their discretion over reserves to influence bank credit supply; (ii) bank supply of credit is not solely driven by loan demand but by a combination of several factors, particularly, capital market concerns, the need to avoid scrutiny from monetary authorities, and country-specific factors

Bank loan loss provisions research: A review

We review the recent academic and policy literature on bank loan loss provisioning (LLP) to identify several advances in the literature, to highlight some challenges in LLP research and suggest possible directions for future research with some concluding remarks. Among other things, we observe some major advancement in country-specific and cross-country analyses and substantial interaction between LLPs and existing prudential, accounting, institutional firm characteristic, cultural, religious, tax and fiscal framework. We observe that managerial discretion in provisioning does not necessarily generate LLP estimates that reflect the true and underlying economic reality of banks' credit risk exposure but rather managerial discretion in provisioning is strongly linked to income smoothing, capital management, signalling and other objectives. We also address several issues including the ethical dimensions of income smoothing, motivations and constrains to income smoothing, methodological issues in the bank loan loss provisions literature and the dynamic loan loss provisioning experiment. Moreover, we suggest several avenues for further research such as: finding a balance between sufficient LLPs which regulators want versus transparent LLPs which standard setters want; the sensitivity of abnormal (specific and general) LLPs to changes in equity; the persistence of abnormal LLPs following CEO exit; country-specific interventions that induce LLP procyclicality in emerging countries; investigating LLP behaviour in the post-financial crisis sample period; the impact of Basel III on banks' provisioning discretion; LLP behaviour among systemic and non-systemic financial institutions; etc. We conclude that, because provisioning models are only as good as the assumptions underlying such models as well as the accuracy of the inputs included in such models, regulators need to pay attention to how much discretion banks and lending institutions should have in determining reported provision estimates, and this has been a long standing issue