Abstract

Ratio analysis is a critical financial tool used by commercial banks to evaluate the creditworthiness of loan applicants and make informed lending decisions. This study explores the impact of ratio analysis on the loan-granting process in commercial banks located in Fako Division, South West Region of Cameroon. The research examines how different financial ratios, including liquidity ratios, profitability ratios, solvency ratios, and efficiency ratios, influence the decision-making process of banks when granting loans to individuals and businesses.

The study employs a mixed-methods approach, integrating quantitative analysis of loan approval data with qualitative interviews of bank loan officers and financial analysts. The quantitative component involves analyzing historical loan data and financial ratios of approved and rejected loan applications to assess the correlation between ratio analysis and loan granting decisions. The qualitative component includes interviews with bank personnel to gain insights into their use of ratio analysis in evaluating loan applications and the factors influencing their decisions.

The findings reveal that ratio analysis significantly impacts the loan-granting process in commercial banks in Fako Division. Liquidity ratios, such as the current ratio and quick ratio, are crucial in assessing an applicant’s ability to meet short-term obligations, which influences the decision to grant or deny a loan. Profitability ratios, including return on assets (ROA) and return on equity (ROE), provide insights into the financial health and performance of businesses, helping banks evaluate their potential to generate sufficient returns to repay the loan. Solvency ratios, such as the debt-to-equity ratio, are used to assess the long-term financial stability of applicants and their ability to handle additional debt.

Efficiency ratios, such as the inventory turnover ratio and receivables turnover ratio, provide information on how effectively an applicant manages their assets and operations, which impacts their ability to service the loan. The study finds that banks in Fako Division rely heavily on these ratios to minimize risk and ensure that loans are granted to financially sound and creditworthy applicants.

However, the research also identifies challenges in the application of ratio analysis. In some cases, banks face difficulties in obtaining accurate and timely financial information from applicants, which can affect the reliability of ratio analysis. Additionally, over-reliance on ratios without considering qualitative factors, such as the applicant’s business plan and market conditions, can lead to incomplete assessments. The study recommends improving data collection processes, integrating qualitative factors into the decision-making process, and providing training for bank staff on advanced financial analysis techniques.

In conclusion, ratio analysis plays a pivotal role in the loan-granting process of commercial banks in Fako Division. By utilizing financial ratios effectively, banks can make more informed lending decisions and manage credit risk. The study provides valuable recommendations for enhancing the application of ratio analysis in loan evaluation and improving the overall effectiveness of the loan-granting process in the region.

Keywords: Ratio analysis, loan granting, commercial banks, liquidity ratios, profitability ratios, solvency ratios, efficiency ratios, Fako Division, Cameroon.