CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

The competitive nature of the business environment in recent times calls for judicious use of resources by any business entity. Banks as financial intermediaries assist in channelling 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 (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 is being used or not, these effects may include;

1. In order to maximize available lending opportunities in the economy, commercial banks require 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)
2. The information often required are those that deal with solvency, liquidity and 5 profitability of the firm seeking credit. John Gerald (1998: 4) states that the evaluation procedures involve three related steps:

• Obtaining information on the applicant,

(ii) Analyzing this information to determine the applicant’s credit ­worthiness

(iii) Making the credit decision.

1. 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. Statement of Problem and Justification of Study

Accounting information on lending decisions has become an issue of major economic significance in recent years.

This has led to a revival of interest in analyzing the phenomenon and diverse forms that accounting information assumes in influencing lending proposals and credit management in banks (Obara & Oyo 2004).

Existing literature in banking recognizes 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 reveals a low default risk in order to finance themselves at a lower cost (Takoudjou et al., 2013).

The freedom enjoyed by borrowing enterprises’ managers does 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 leads to the rationing of credit by the bankers (Takoudjou et al., 2013).

Typically called financial accounting, the record of a business’s 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 order to see if the company has the potential to repay the loan in due time.

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 the following questions.

The main research question is how useful is accounting information in the lending decisions by commercial banks?

Specific research questions include:

-How do commercial banks lending is based on accounting information provided by borrowing firm (trust) or based on collateral securities.

– To what extent does accounting information provided by loan seekers is reliable.

– What are the challenges banks face in using accounting information in the granting of loans.

1.3. Objectives of the Study

The main objective of this research work is to investigate the use of Accounting Information in credit decisions by commercial banks in order to achieve this, the following specific objectives are useful:

-To investigate whether commercial banks lending is based on accounting information provided by borrowing firm (trust) or based on collateral securities.

-To investigate the extent to which Accounting Information provided by loan seekers is reliable.

-To assess the challenges banks face in using accounting information in the granting of loans.

1.4 Hypothesis of the Study

-Commercial banks’ lending does not affect Accounting information provided by borrowing firms (trust) or based on collateral securities.

-Accounting information provided by loan seekers is insignificant.

-The challenges banks face in using accounting information does not affect the granting of loans.