THE EFFECT OF RATIO ANALYSIS ON GRANTING LOANS BY COMMERCIAL BANKS IN BUEA

ABSTRACT

This study was about the impact of ratio analysis on granting loan by commercial banks. The objectives were to find out the various types of ratios and their relationships in determining the loan portfolio in granting of loans in commercial banks and to examine the Relationship of ratio analysis in granting of loans in commercial banks. The methods of data collection were primary, primary data which are information gotten directly from the field through the administration of questionnaire.

Data was obtained using questionnaires of sample size 30. The methods of analysis were descriptive analysis and correlation analysis. Our findings shows a strong significant positive relationship between the ratio analysis and lending decision (r=0.799**, p>0.01) which presupposes that if commercial banks effectively makes use of financial ratios it will lead to correct lending decisions by 79.9%.

Therefore 20.1% is the gap that needs to be closed by commercial banks and this is majorly due to short falls of the ratio analysis. This study is important because it enables commercial banks know the influence ratio analysis have on the granting of loans in microfinance’s which is important for decision making by the microfinance’s themselves and the government. It was recommended that commercial banks should regulate their lending effort as they look on the influence ratio analysis have on granting of loans.

This will have the effect of ensuring a stable banking sector which plays a big role in the economy.

KEYWORDS: Ratio Analysis, lending decisions.

CHAPTER ONE
INTRODUCTION

1.1 Background to the Study

Commercial banks are special institutions in modern economy and key pillars of financial systems because of their ability to efficiently transform financial claims of savers into claims (advances) issued to businesses, individuals and governments (Mishkin and Eakins, 2007).A commercial banks ability to evaluate information, control and monitor borrowers implies that the commercial bank accepts a credit risk on this loans in exchange for a fair return sufficient to cover the cost of funding. Credit risk arises from the possibility that the borrower will not be a potential defaulter to the bank (Mishkin and Eakins, 2007).
The complex nature of past business world and the transformation of the entire world into a global village have been of great concern to managers of all forms of business organizations. According to Ojuigo (2001), the problems of managers are multi-varied because of inefficiency in management of poor decisions outcomes of to achieve these organizations.

Therefore, the managers are unable to achieve the organizational objectives within a period of time. As diverse as business is, its controllable and uncontrollable factors influence all decisions which ultimately lead to the realization of set objectives. To achieve this, management needs reliability, authentic and relevant information from the financial statements of potential debtors to efficiently facilitate loan decision making.
Stakeholders always seek the existing order and understanding about the phenomena governed by laws governing their relationship and need to predict their behaviour.

This kind of attitude towards access to integrated data collection was done to make better decisions considering to the high volume of raw data to create and develop the growing market the need for investment in human societies use. The use of financial information has always led to intellectual challenges to provide useful information and good decision makers (Asghar, 2011).
One of these cases, trying to balance between the discoveries of financial information has been using financial ratios decisions since nineteenth century, though before the fit theory was developed in the human sciences (Asghar, 2011).

The first causes of financial statement analysis can be traced back to the last stages of America’s drive to industrial maturity in the last half of the nineteenth century. As the management of enterprises in the various industrial sectors transferred from the enterprising capitalists to the professional manager and as the financial sector became a more predominate force in the economy, the need for financial statement increased accordingly. Both of these were primary causes of financial analysis, but the shift in power to the financial institution was especially important (James, 2013).
The first financial ratio of the financial analysis was more than the current information needs to those awarded credit supplies, then came to be able to view the relations between financial data expressed in the form of a system. This idea led to the emergence of triangular system that Thompson was still valid and desirability is necessary. This activity challenges from different angles of a commercial institution, such as: lending decisions, operational and financing to continue and lead to the formation of financial ratios are different schools. Experience using financial analysis, financial ratios reflect the different applications in a variety of decisions, but in theory, principles, they have not been examined.

In the United States, as in all other countries that now possess a developed financial ratio analysis, the only important financial instruments in existence were until in 1840, money, short term trade credit, long term credit, and urban mortgages. The only important financial institutions were banks of issue and commercial banks (Lasher, 2005).
Banks in South Africa have undergone immense regulatory and technological Changes since the attainment of constitutional democracy in 1994. South African banks are faced with increasing competition and rising costs as a result of regulatory requirements, financial and technological innovation, entry of large foreign banks in the retail banking environment and challenges of the recent financial crisis. These changes had a dramatic effect on the performance of the commercial banks. Most studies on bank performance in South Africa have studied the efficiency of South African banks using Data Envelopment Analysis (hereafter DEA), studying the periods 1997-2007 and 2000-2005 respectively.

This study evaluates banks performance for the period 2005-2009 using financial ratio analysis, (Ncube, 2009).
The history of Cameroonian formal banking is less than 50 years old and its origins are traced to the later era of colonialization i.e. during the post second war French and English mandate rule in Cameroon. (Nico halle, 2001).
Cameroonian commercial banks have undergone immense regulatory and technological changes since the attainment of constitutional democracy in 1994. Their banks were faced with increasing competition and rising costs as result of regulatory requirements, financial and technological innovation, entry of large foreign banks in the retail banking environment and challenges of the recent financial crisis, so financial ratios analysis enable us to identify unique bank strengths and weaknesses, which in itself inform bank profitability, liquidity and credit quality (Robert, 2010).
However, the success or failure of today’s business depends largely on the quality of decisions made by management, which in turn depends on the reality of accounting on them. The collapse of many businesses either private or public is due to poor decision. The question is whether management has used information provided in the financial statement extensively to enable rational decisions. This study therefore aimed at examining the effect of ratio analysis on granting loans by commercial banks in Buea.
1.2 Statement of the Problem