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
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Date
2007-07
Authors
SABO, Bello
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Abstract
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
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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.
Description
A DESSERTATION SUBMITTED TO THE POSTGRADUATE SCHOOL
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD
OF THE DEGREE OF DOCTOR OF PHILOSOPHY IN BUSINESS
ADMINISTRATION
DEPARTMENT OF BUSINESS ADMINISTRATION
FACULTY OF ADMINISTRATION
AHMADU BELLO UNIVERSITY
ZARIA
Keywords
EMPIRICAL ASSESSMENT,, BUSINESS FORECASTING TECHNIQUES,, STUDY ON FORECASTING BANK PROFIT,, NIGERIA