Nigerian Business Intelligence Expert, Owoade Probes Managerial Discretion in Banks’ Loan Loss Provisions in new study

By Tosin Clegg

The persistent issue of non-performing loans in Nigeria’s banking sector has prompted increased academic and professional scrutiny.

However Oluwayemisi Owoade, a business intelligence and data expert, has examined the discretionary use of loan loss provisions (LLPs) by Nigerian deposit money banks, shedding light on the complex interplay between managerial decisions and financial stability.

Owoade’s study focuses on the period between 2007 and 2017, a decade marked by financial turbulence and regulatory reforms, particularly with the adoption of International Financial Reporting Standards (IFRS). She hand-collected datasets from annual reports of sixteen Nigerian banks to analyse how managerial discretion influences provisioning behaviour.

“Our findings indicate that managerial discretion plays a significant role in how banks handle their loan loss provisions,” Owoade told this reporter. “Even with reforms embedded in IFRS, discretionary adjustments often occur to manage earnings or capital rather than purely reflecting loan risk.”

Using principal components analysis, Owoade developed a managerial discretion index (MDI) to quantify the extent to which bank managers exercise discretion in setting LLPs. This approach provides a more nuanced understanding of the strategic behaviour behind reported financial figures.

She then segregated LLPs into reported LLPs (TLLP) and discretionary LLPs (DLLP), employing Prais-Winsten ordinary least squares regression and panel data models to test her hypotheses. These techniques allowed her to assess both the absolute and discretionary elements of provisioning practices.

The study revealed that managerial discretion generally has a negative effect on both TLLP and DLLP, reflecting an increase in profitability without overt manipulation of LLPs. However, during IFRS adoption, banks were observed to use LLPs more strategically, particularly for capital management and earnings smoothing.

“Managers are often faced with the challenge of balancing regulatory requirements and profitability,” Owoade explained. “Our research shows that in some instances, the adoption of IFRS may inadvertently encourage managerial discretion to achieve these objectives.”

One notable finding is that risky banks, threatened by solvency concerns, tended to increase discretionary LLPs rather than total LLPs, highlighting the use of provisions as a financial buffer rather than an accurate reflection of loan risk.

Owoade’s research also contributes to the literature on accounting for loan losses by introducing the managerial discretion index. This index encapsulates earnings smoothing, capital management, and earnings signalling, offering a framework for understanding the multifaceted purpose of LLP adjustments.

The study underscores the need for stronger regulatory oversight. Owoade recommends that Nigerian banking regulators enhance surveillance to detect and prevent opportunistic behaviour, ensuring that LLPs accurately reflect underlying credit risks.

Her findings carry implications for both investors and policymakers. By highlighting the discretionary nature of LLPs, investors are better equipped to interpret financial statements, while regulators can design frameworks that reduce manipulative practices.

Owoade’s work has already drawn interest from banking professionals and academics seeking to improve governance and reporting quality in Nigeria’s financial sector.

Her expertise in SQL, R, Power BI, and predictive analytics underscores the technical rigour of her research, ensuring that her findings are both empirically grounded and practically relevant.