Abstract

Early researches have focused more on the needs and usage of accounting information in favor of investors. Hence, there have been less attention towards creditors’ information needs. As such, accounting information and lending decisions have become an issue of major economic significance in recent years. This has led to resurgence of interest in analyzing the phenomenon. Existing literature in banking recognizes the importance and relevance of accounting information in bank lending decision making. Financial statements are among the most important sources of credit information available to bank lending officers (Kitindi et al., 2009: Obara& Oyo 2004; and F. K. Emeni, 2014). However, some researchers hold that Accounting information is most often tempered with by managers who present an «advantageous» financial situation that reveal a low default risk in order to finance themselves at a lower cost (Takoudjou et al., 2013; Mai Thi H., 2015). In this study therefore, an analysis of the impact of accounting information on commercial banks’ lending was undertaken. The study sought to provide answers to the following research question; do commercial banks place importance on Accounting Information provided by borrowing firms before granting loans to them? The survey method was used wherein 7 commercial banks in Buea where surveyed. Although the number of banks surveyed was not large, the survey was distributed across all the commercial banks in buea to ensure representativeness. Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using the pearson product moment correlation test with the help of Statistical Package for Social Sciences (SPSS) software. Hypothesis were tested, and it revealed that accounting information has a significant impact on commercial banks’ lending decisions. This study also gave oriented solutions to improve on loan decision-making by banks.

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

The competitive nature of business environment in recent times calls for judicious use of resources by any business entity. Banks as financial intermediaries assist in channeling funds from surplus economic units to deficit units to facilitate business transactions and economic development. The funds involved in this intermediation process is largely owned by third parties. It is only proper that such funds be efficiently managed to sustain the confidence of depositors and shareholders in the banking system. This will in turn ensure the continuing soundness of the system itself and thereby, minimizing the risk of bank failure (Ojo, 1991). According to Obara and Oyo (2004), bank lending provides the main avenue for banks profitability, but the exercise is a part of asset and liability management, which is a primary focus of commercial banks fund management. It deals with the acquisition of funds from savers (liability management) and the allocation of funds to borrowers (assets management), the basic objective being the attainment of high profitability consistent with liquidity, solvency and regulatory constraints. The Cameroonian financial system being the largest in the Economic and  Monetary Community of  Central  Africa  and  accounting  for  almost  half  of regional financial assets, according to the Cameroon financial profile, make commercial banks and other financial institutions occupy a very important position in the Cameroonian economy. Accounting information fully plays its role only if it meets the quality criteria of relevance and reliability defined by the Financial Accounting Standard Board (FASB). Accounting Information is relevant if it has a predictive value, feedback value and is timely. It is reliable when it meets the criteria of verifiability, representational faithfulness and neutrality. It is only when these criteria are met that Accounting information can be credible and gain the confidence of the users of the financial statements.  In practice, banks  are, just like the tax administration, regular users of accounting information. However, there is usually an existence of an informational asymmetry between the accounts and the managers of borrowing companies. It is likely that the leaders are tempted to manipulate this information to change the perception of the financial situation of the enterprise that the other stakeholders have, according to Takoudjou et al. (2013). Considering the economic and social importance of commercial banks in the Cameroonian environment, it appears indispensable to consider their lending actions aiming at supporting actions of development. Looking also at the difficulties posed to banks in lending decisions, a relation between the quality of information produced and the decision to grant loans to enterprises merit to be studied. The lending decision process in commercial banks may be affected differently when accounting information are being used or not, these effects may include;

a). In order to maximize available lending opportunities in the economy, commercial banks requires adequate accounting information to evaluate the probability of loan repayment, estimate the potential loss if the borrower does not pay, and decide on, the terms of the financing if a loan is to be made Konter, O’Donnell (1989: 12) The information often required are those that deal with solvency, liquidity and 5 profitability of the firm seeking credit. Gohen Gerald (1998: 4) states that, the evaluation procedures involve three related steps:

(iii)       Obtaining information on the applicant,

(ii)        Analyzing this information to determine the applicants credit worthiness

(iii)       Making the credit decision.

b.) Meanwhile, in circumstances where the bank doesn’t use accounting information for their lending decision there is no certainty about whether or not the loan seeker will be able to repay the debt or not.

1.2 Problem Statement

Accounting information on lending decisions has become an issue of major economic significance in recent years. This has led to revival of interest in analyzing the phenomenon and diverse forms that accounting information assume in influencing lending proposal and credit management in banks (Obara& Oyo 2004). Existing literature in banking recognize the importance and relevance of accounting information in bank lending decision making. However, some researchers hold that Accounting information is most often tempered with. The managers can be tempted to present an

«advantageous» financial situation that reveal a low default risk in order to finance themselves at a lower cost (Takoudjou et al., 2013). The freedom enjoyed by borrowing enterprises’ managers do not only allow them to shape the accounting information in the respect of the legal setting, but also to carry out stealing operations or hide information that can bring the banker into error. According to Mai Thi H. (2015), Vietnamese company’s financial Statements have faced many issues together with problems, in which faithful representation is most underrated. This implies less reliability to company financial statements. Also, Takoudjou et al (2013), found out that, banks prefer non- accounting indicators to accounting indicators, which is explained by the lack of confidence by the banks in the financial statements communicated by borrowing enterprises. Financial Accounting information constitutes for the banker an important element in the appreciation of the risk of default of the borrower. For the manager of borrowing enterprise, it represents an instrument of communication strategy. This difference in view of Accounting information lead to the rationing of credit by the bankers (Takoudjou et al., 2013). Typically called financial accounting, the record of a business’ financial history for use by external entities is used for many purposes. When a company goes to a bank for example NFC bank for a loan, they will be required to bring alongside their accounting information in other to see if the company has the potential to repay the loan in due time. On the other hand, loan can also be granted to someone giving he has a collateral security for many banks like NFC bank give development loans to individuals who don’t have companies but have goods which can be used as collateral security.

1.3 Research Question

After considering the contradictions in views of previous authors in relation to the importance of Accounting information in loan discretion, it is therefore necessary for this research project to provide answers to the following question.

❖How useful is accounting information in the lending decision in commercial banks?

1.4 Objectives Of The Study

This study is built upon the following objectives.

1.4.1 Main Objective

The primary objective of this research work is to investigate the use of Accounting Information in credit decisions by commercial banks.

1.4.2 Specific Objectives

The specific objectives include;

1. To investigate whether commercial banks lend based on information provided by borrowing firm (trust) or based on collateral security.
2. To investigate the extent to which Accounting Information provided by loan seekers is reliable.
3. To provide a spring board for further research, if need be, on the project topic.