CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter presents the introduction, background of the study, statement of the problem, research questions, objectives of the study that is the main objective and the specific objectives, as well as the hypothesis, the justification of the study, the significance of the study, the scope of the study, and also the operational definition of terms.

1.1 Background of the Study

Accounting information as a scientific process is about provision of financial information needed to take decision especially when it comes to acquisition and use of scarce corporate resources as well as the elimination of wastes in the wealth creation chain to maximise profit.  Seetharaman and Raj (2011) defined accounting information as data organised for the special purpose of decision making. They consider information to represent data or knowledge evaluated for specific use, though information is not the same with data. According to Zhu (2013), information consists of data that have been retrieved, processed or otherwise used for informative or inference purpose, argument or as a basis for forecasting or decision making. Experts in business management have come to agree that in today’s business environment, where competition has become extremely keen, available and effective information is critical factor which enables business organization to have that vital edge over its competitors. 

The efficiency and effectiveness of the operations as well as the overall success of an enterprise depend to a large extent on the quality of information available to the management. Management must keep abreast with information that will enable it to plan for the attainment of pre-determined objectives, if business is to survive in rapidly changing environment. Financial statements must properly reflect the organisation’s financial and economic reality, so that the users are not induced to take decisions on misleading information. 

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 are 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, minimising the risk of bank failure (Vishnani & Shah, 2018).

According to a study conducted by Obara and Oyo (2014), 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 to stakeholders like shareholders, depositors, creditors, potential investor, and regulatory authorities.

According to Paul & Juliana (2015), to avoid financial reporting fraud and scandals that might hinder effective and informed investment decision making by investors and other users of these information, financial information is highly expected to be prepared according to national standards, corporate governance, professional ethics and the code of conducts as stipulated by the Companies and Allied Matters Act (CAMA) of 2004 as amended, the International Financial Reporting Standards (IFRSs), and the Nigerian Statement of Accounting Standards (SASs). Hence, the perceived relevance of financial information will provide reliable information about the true and actual financial position, performance (profitability), and changes in financial position of a business investment opportunity that could be useful to a wide range of prospective investors, managers, directors, financial institutions, financial analysts, government, regulatory agencies, the media, vendors and the general public in making informed or rational investment decision (Pushpa & Sumangala, 2012).  

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, 2014), 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, 1978). 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. Against this background, this study aims at examining the role accounting information plays on lending decisions of commercial banks in Buea.

1.2 Statement of the Problem         

This research work is necessitated by the fact that quoted commercial banks in Cameroon has undergone many turbulent times caused by the crumbling interest of investors in banking industries with lending decision. These problems largely contribute to the failure of the use of accounting information in business to monitor lending activities with the result that inaccurate decisions are made to the detriment of the organisation. Again, regardless of their extensive use and enduring advance, there is some concern that accounting theory and practice have not kept pace with rapid economic changes and high technology changes. This situation affects the relevance of accounting information (Meyer, 2017). Nevertheless, it is believed that accounting information plays an important role in influencing lending decision. The problem however lies in the quality and validity of the information, that is, if it is timely, adequate, and clear. The major purpose of the use of accounting information (such as inventory turnover ratio, liquid ratio, return on net worth, net book value, dividend per share, earnings per share, return on equity amongst others) is to minimise risk, failure and uncertainties with regards to non-performing loan and also stay ahead of competitors. Ozurumba (2016), believed that bad debts are familiar words to bankers; and people wonder occasionally why bad debts occur despite all the rules and regulations guiding banks. Yet the best way to avoid bad debt is to make zero lending, but banks cannot afford zero lending since greater proportion of their earnings come from interest earned on loan and advances. Despite the above methods of evaluating credit in the banking industry in Cameroon a lot of its advance and loans end up as NPLs

Existing literature in banking recognize the importance and relevance of accounting information in bank lending decision making. The relationship between accounting information and bank lending system form the fact that financial statements are among the most important sources of credit information available to bank lending officers (F. K. Emeni, 2014)

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 not only allows 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), articulated 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 led to the rationing of credit by the bankers (Takoudjou et al., 2013). This study is therefore aimed at addressing the problems faced by commercial banks in rationing funds to borrowing enterprises taking into account their financial information as presented by the financial statements they present. This will be done by giving answers to the research questions.

1.3 Research Questions

The main research question is; “What is the effect of Accounting Information on lending decisions of commercial banks in Buea”?

Specific Research Questions

The specific research questions include;

• Do commercial banks place importance to Accounting Information provided by borrowing firms before granting loans to them?
• Do commercial banks use accounting information provided as a basis for granting loans to borrowing enterprises?

1.4 Objectives of the Study

To provide answers to the research questions, we are guided by the research objectives. 

Main Objective

• The primary objective of this research work is to assess the role of Accounting Information on the decision of granting loans by commercial banks.

Specific Objectives

The specific objectives include;

• To assess whether commercial banks lend based on information provided by borrowing firm (trust)
• To assess the extent to which Accounting Information provided by loan seekers is reliable.

1.5 Hypothesis of the Study

Studies conducted by Emeni (2014) shows that there exists a significant relationship between accounting information and the lending decisions of commercial banks. Also, Obara and Oyo (2014) found out that accounting information provides the yardstick for measuring the performances of borrowing firms and therefore have a significant positive relationship with bank landing. Therefore, the hypothesis for this research project is;

1. Accounting information has no significant effect on bank lending decisions.
2. Accounting information has a significant effect on bank lending decisions.