AN EMPIRICAL ASSESSMENT OF BUSINESS FORECASTING TECHNIQUES: A STUDY ON FORECASTING BANK PROFIT IN NIGERIA

AN EMPIRICAL ASSESSMENT OF BUSINESS FORECASTING TECHNIQUES: A STUDY ON FORECASTING BANK PROFIT IN NIGERIA

ABSTRACT Banking environment by its very nature is volatile, uncertain & risky. Due to sudden changes in monetary policies, interests and other variables, banks are placed in a serious position with regards to designing policy measures to deal vi ii with these events as and when they arise so that they can take advantages of situations and also get protected from severe shocks of the environmental changes and risks. Like any other business entity, a bank should be able to anticipate with some level of accuracy, those changing variables that affect its earnings/loss and by extension; its existence so that it can take appropriate decisions to deal with the emerging situations in which it finds itself. Similarly owing to problems of volatility in exchange rate, assets, deposit and level of earning , loss of confidence in the sector developed and the banks and monetary authorities are looking for policies or combination of techniques that could help them turn this ugly situation around. Against this background, this thesis undertakes the empirical assessment of business forecasting techniques in forecasting bank profit in Nigeria. The study utilized a random sample of 150 respondents drawn from 10 sampled banks quoted on the Nigerian Stock Exchange. A questionnaire made up of both open and close-ended questions was used in collecting the primary data. These were processed using SPSS software and analyzed using qualitative evaluation method. Secondary data in the form of earnings before interest and taxation (EBIT) was also extracted from the sampled banks various annual accounts for the period 1996 – 2005. The secondary data was used for running the three exponential smoothing techniques selected for the study namely; simple exponential smoothing, Holt’s two-parameter model and Winter’s three-parameter model using appropriate soft wares. The study found a moderately weak correlation between actual and forecast profit of the sampled banks, indicating low model consistency and inability of the forecast generated under each of the models to reliably and accurately forecast the EBIT under the present conditions. Using a MAPE benchmark of 0.25, the study also established the inability of the techniques to forecast bank profit under conditions of earnings volatility and uncertainty. It also found out that the three models, each has a unique measure of accuracy depending on the bank data on which it was applied. The study also established that type A Banks appeared to have relatively lower Mean Absolute Percentage Error (MAPE) under Winter’s Three Parameter model compared to other banks, which did not indicate any inclination towards any of the other two models. It was also established that fluctuations in earnings are more pronounced in type C and Type B banks compared to Type A banks which have relatively stable earnings. The study also found that under the existing conditions, Winter’s Three-Parameter Model has the highest tendency for accuracy when compared to the other two models, which enabled the study to conclude that the higher the explanatory variables of the models the higher the tendency for its accuracy. Finally, the study also found a significant relationship between bank managers’ academic qualification and their familiarity with the forecasting techniques. The study calls for continuous search, identification, experimentation and development of suitable techniques for Nigerian banks taking into consideration their own peculiarities and volatility of the environment. Efforts should be intensified by banks in anticipating the fluctuations/changes of important parameters affecting their earnings giving continued priority to educational training & model development. The study also called for consistent efforts by banks at increasing their performing asset and loan bases by cutting down cost and risky outlets since the size of assets has been found to affect earnings stability of the banks. We also called for consistency and stability in macroeconomic and monetary policies.

TABLE OF CONTENT

Title page- – – – – – – – – i
Approval page – – – – – – – -ii
Dedication – – – – – – – – -iii
Acknowledgement – – – – – – – -iv
Abstract – – – – – – – – – -v
Table of content – – – – – – – -vi

CHAPTER ONE
INTRODUCTION – – – – – – – -1
1.0 Background of the study – – – – -1
1.1 Statement of the problem – – – – -5
1.2 Purpose of the study – – – – – -6
1.3 Significance of the study – – – – -8
1.4 Research questions – – – – – -9
1.5 Scope of the study – – – – – – -10

CHAPTER TWO

LITERATURE REVIEW – – – – – – -11

CHAPTER THREE

Research methodology – – – – – – -39
Design of study – – – – – – – -40

CHAPTER FOUR

Presentation, analysis and interpretation of data – -48

CHAPTER FIVE

Summary of findings – – – – – – -60
Conclusion – – – – – – – – -61
Recommendations – – – – – – – -62
Suggestions for further research – – – – -64
References – – – – – – – – -65
Appendix I – – – – — – – – -68
Questionnaire. – – – – – – – -69

AN EMPIRICAL ASSESSMENT OF BUSINESS FORECASTING TECHNIQUES: A STUDY ON FORECASTING BANK PROFIT IN NIGERIA