An appraisal on the role of accounting information on the lending decisions of commercial banks

ABSTRACT

The purpose of this study was to analyze the role of accounting information on commercial banks’ lending decisions. The study sought to provide answers to whether commercial banks rely on accounting information provided by borrowing firms before granting loans to them?

The survey method used was 6 commercial banks with 5 questionnaire each in Buea where surveyed, the survey was distributed across all the 6 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 linear regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25.

The hypothesis was tested through a correlation test, and it revealed that there is a strong relationship between the variables (r=0.444). The study concluded thus that accounting information has a significant role on commercial banks’ lending decisions. The study recommended that financial statements of borrowing companies should be audited before bank use them as basis for granting loans.

KEYWORDS: Accounting information, loan decisions, financial statements, commercial 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 tum ensure the continuing soundness of the system itself and thereby, minimising the risk of bank failure (Ojo,2011).

According to a study conducted by Obara and Oyo (2013), 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 provides the yardstick for measuring the performances of borrowing companies. Information communicated by accounting records serves as a basis for corrective actions when outcomes deviate from pre-determined goals. Such information provides explanations of performance tostakeholders like shareholders, depositors, creditors, potential investor, and regulatory authorities.
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), a study conducted on the implications of the accounting data management on the exercise of loans discretion by banks in Cameroon wherein they found out that more than 75% of the respondents think that the financial statements contained in the loan request files of Small and Medium size Enterprises very often or always are manipulated by their managers.

These results are in line with those of some earlier studies on the determinants of loan supply (Essomba Ambassa, 2011), especially as far as the importance of physical collaterals when taking the decision to grant a loan is concerned.
Also, previous researches showed that accounting information plays an important role in banks in developed economies. Since the 1970s, banks in USA have considered financial reporting as the most important source for loan decisions (Stanga & Benjamin, 2012). This information can change the decisions of commercial banks.
Considering the economic and social importance of commercial banks in the Cameroonian environment, and the difficulties posed to them when making lending decisions, a relation between the quality of information produced and the decision to grant loans to enterprises merit to be studied.
1.2 PROBLEM STATEMENT