CHAPTER – 1

INTRODUCTION

1.1 Background of the study

Finance, the art and science of managing money, affects the lives of every person and
organization. Finance is concerned with the process, institutions, markets, and
instructions involved in the transfer of money among and between individuals,
businesses, and governments. Managerial finance( which is concerned with the duties of
the financial manager in the business firm) is important in all types of business including
banks and other financial institutions, as well as industrial and retail firms. It is important
in government operations, schools and hospital and highway departments.

While the specifics vary among organizations, the key finance functions are the
investment, financing and dividend for an organization. Funds are raised from external
financial sources and allocated for different uses. The flow of funds within enterprise is
monitored. Benefits to financing sources take the form of returns, repayments, products,
and services. These functions must be performed in business firm, governments, banks,
agencies, and non-profit organizations alike.

Financial analysis as a part of finance is also one of the major parts in every type of
organization, which is very useful to understand the firm’s performance. As the financial
services industry becomes more complex, the financial information provided to public
becomes more difficult to understand. Quality governance is impossible without effective
analysis and evaluation of financial information.

Traditional financial ratio analysis has focused on the numbers,. The value of this
approach is that quantitative relations can be used to diagnose strength and weaknesses in
the firm’s performance. It provides a framework for financial planning and control.
Financial managers need the information provided by analysis both evaluate the firm’s
past performance and to map future plans. Financial analysis concentrates on financial
statement analysis, which highlights the key aspects of firm’s operation.
Bank is considered as the backbone in the development of national economy. It is
financial institution, which acts as a transaction of money by accepting various types of
deposit, disbursing loans and rendering other financial services. Through the loan, there
will be increase in the environment of the investment and the bank has the major role in
creating such an environment.

A financial institution is the lifeblood of economic development of the country. Financial

institution acts as catalyst in the process of economic growth of the country. A bank is a
financial institution, which can play a significant role in the growth of the economic
situation of the developing country like Nepal. Banks play a vital role to encourage thrift
and discourage hoarding by mobilizing the resources and removing the habit of hoarding.

They pursue economic growth rapidly, developing the banking habit among the people
by collecting the small-scattered resources in one bulk, using them in the further
productive purposes and rendering other valuable services to the country. Thus, this gives
the individual an opportunity to borrow funds against future income, which may improve
the economic well-being of the borrower. Bank deals with the offer of collected deposits
and provides loan for commercial purpose.

1.2 Focus of the study

Numbers of research has been done previously to measure the ratio analysis of the
company listed in the security market. Separately some studies have also been conducted
to study rate of return to investor. This is an attempt to measure the performance and
return to investor. So this study will be more useful for concerned on its completion and
definitely will have a distinct place. Furthermore it will be more beneficial to investors
who assume overall risk while investing in stocks.

The study is focused on the analysis of financial performance of Nepal Investment Bank
Limited and Nabil Bank Limited. Financial analysis is the process of determining the
significant operating and financial characteristics of a firm from accounting data and
financial statement. The goal of such analysis is to determine the efficiency and the
performance of the firm’s management as reflected in the financial record and report. The
financial analysis tries to analyze profitability, income and expenditure, source and use of
funds of these institutions. Financial performance is evaluated with the help accounting
data and financial statements like balance sheets and profit and loss accounts. With the
help of these tools we can measure the performance of financial institution in rational
way.

1.2.1Profile of the banks

A. Nabil Bank
Nabil Bank Limited is a commercial bank in Nepal. Founded in 1984, the bank
has branches all across the nation with its head office in Kathmandu.

Nabil, the first foreign joint venture bank of Nepal, started operations in July 7,
1984. Nabil was incorporated with the objective of extending international
standard modern banking services to various sectors of the society. Nabil provides
a range of commercial banking services through its 51 points of representation
across the country and over 170 correspondent banks across the globe. It was
earlier known as Nepal Arab Bank Ltd. It has its head office located at Nabil
Center, Durbar marg, which is also a premium location of the capital. It has the
largest staff among private commercial banks of Nepal.

B. Nepal Investment Bank Limited

Nepal Investment Bank Limited is one of the leading commercial banks of Nepal.
Previously known as Nepal Indosuez Bank Ltd., the bank was established in 1986
as a joint venture between Nepalese and Credit Agricole Indosuez. The Nepalese
investors bought all the shares of French company i.e. 50% in 2001. From then
the Nepalese investors have raised this bank to one of the most trusted and
popular bank in the country. Till date it has 47 branches (82 ATM outlets)
scattered throughout the country giving modern banking services of international
class from 9:30am to 7pm evening.
1.3 Statement of the problem
A bank financial health is measure on the basis of ratio analysis. Almost all the private
sectors bank is earning profit rather than government bank. It appears that bank do not
have proper system in managing the market risks. The people have been raising question
over the correction or credit classification and provision of sum banks. Should be doubt
come true? It is very costly to the all customers & national economy. It would be pursuits
advise Nepal Rastra Bank to strictly implement its directives so that banks avert the fate
of public sector banks.

The fundamental problem of this study is to investigate the financial health of Nabil and
NIBL in the framework of ratio analysis based on market data. The study analyzes the
performance of the banks with the analysis of some market related ratios of the two banks
in terms of some commonly used ratios such as the price earnings multiple, price to
earnings growth, among a few of the ratios depicted in the course of the study. These
ratios are studied and compared for a period of 9 years for the two banks in question. In
addition a regression analysis is also performed to analyze which variables have the
greatest impact on the performance of the banks.

1.4 Objectives of the study

 To assess and compare the performance of two commercial banks in Nepal namely
the Nabil Bank and the Nepal Investment Bank.
 To analyze the key performance indicators of sample commercial banks through
relevant ratio analysis.
 To analyze which variables have the greatest impact on performance, with the use of
regression analysis.
 To make suggestions and recommendations based on the findings.

1.5 Significance of the study

Research itself has its own importance because it aims to gain knowledge and to add the
new literature to the existing field. This study is expected to be helpful to shareholders,
management policy maker and other related outsider.
Significance to shareholders
The study will be helpful to shareholders to get important information about the financial
states and performance of each bank. And the comparison will help them to identify
productivity of their funds in each their bank.

Significant to management
This study aims to give new information to a management. Managements review their
individual sector wise performance and to make a right decision to related field.
Significance to policy maker

Generally in Nepal government and Nepal Rastra Bank top level management is the
policy maker. It helpful suggests to the policy maker to make necessary policies to attract
private sector investment in the productive sector and reforms in policies relating to
performance. Therefore the study will also be helpful to them while formulating policies
regarding NEPSE & banking sector. It will help them to find out the problems and
prospects in near future.

Significance to outsider
Among outsiders, customers, stake holder's investor, traders can identify to which sector
they should go the study will be helpful for them to find out the relative worth of
different sector. The significance of this study lies mainly in filling a research gap on the
study of financial performance analysis of Nepal Investment Bank Limited and Nabil
Bank Limited.
Significance to researcher
The study is important for the researcher to know about this field. This analysis helps to
researcher which was known about this subject matter.

1.6 Limitation of the study

Every research mutually has some limitation so this study is not exceptional case this
study is carried out as an academic requirement for degree of Master of Business
Administration (MBA). So this study may not be able to reveal the reliability and validity
in every field. Basically the major limitations to the study are as follows:

i) The study is only linked to financial performance analysis of Nepal Investment Bank
Limited and Nabil Bank Limited. Therefore all the activities are intended to analyze the
financial performance.
ii) Last nine year data are taken to consideration for the study purpose, which are
collected from the secondary sources.
iii) Data published by different authorities' different figure published by NRB and banks
annual report.
iv) Time and finance constraints are also the major limitation of the study. The report has
to submit in a limited time period.
v) Major portion of analysis and interpretation will be done on the basis of available
secondary data and information.
vi) Analysis is based on the tools developed.
vii) The study is to fulfill the requirements of MBA. So the study cannot cover all the
dimensions of the subject matter.

1.7. Organization of the study

This study is organized into five chapters which are as follows.

Chapter 1 Introduction

Introduction chapter includes background of the study, focus of the study statement of the
problem, objectives of the study significance of the study, limitation of the study.
Hypothesis is also setup in this chapter.

Chapter 2 Review of Literature

It includes review of literature. Conceptual review and review of related studies, review
from books, Journals.
Chapter 3 Research Methodology

It includes the research design, data collection procedure, tools for analysis and method
of analysis and presentation.

Chapter 4 data presentation and analysis

It is the main body of the research. It includes data presentation, interpretation and
analysis and financial tools to measure financial performance.

Chapter 5 Summary, Conclusion & Recommendations.

The last chapter is followed by the basic conclusion of the study based on the fourth
chapter.