The use of Accounting Information in credit decisions by Microfinance institutions (MFIs) in Buea Municipality
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Background of the Study
The information of the economic systems is mostly provided by economic evidence or databases. Zare and Shahsavari (2012) mentioned that most parts of information in organizations are accounting information. This statement sustained by the fact that the accounting information systems include components and elements of an organization, which provides information for users by processing financial events. Based on the accounting information function, which is used to provide information for making substantiate decisions, and considering the two components of accounting, financial and managerial accounting, we can assert that accounting has an internal information function, for the enterprise management, and an external one, for the third parties. Internal decision-making and analysis of cause and effect relationships can require very specific models and accounting information (Eierle and Wolfgang, 2013). Because managers should obtain high quality and suitable information from formal and informal channels for decision making (Zare et al., 2013), and because financial accounting information is regarded insufficient (Eierle and Wolfgang, 2013), the managerial accounting may provide information underlie the decision making both inside and outside the enterprise. Accountants play a crucial role in providing information for making economic and financial decisions. These decisions are essential elements for organizations. Implementing the wrong ones can affect the company in a very negative way and may sometimes lead to its bankruptcy.
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 informational asymmetry between the accounts and the managers of borrowing companies. The leaders are likely 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). 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;
- 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) The information often required are those that deal with solvency, liquidity and 5 profitability of the firm seeking credit. Gohen Gerald (1998: 4) states that the evaluation procedures involve three related steps:
(i) Obtaining information on the applicant,
(ii) Analyzing this information to determine the applicant’s creditworthiness
(iii) Making the credit decision.
- 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.
- Statement of the Problem
Studies have shown that financial institutions do not place as much emphasis on the viability of projects as on collaterals and chattels presented by customers. It suffices to say that not much use is made by these financial institutions such as banks and MFI of information on the viability of propose projects as could be observed from the financial statement provided by prospective borrowers.
information necessary for 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 information needed in lending assume in influencing lending proposal and credit management of financial institutions (Obaraand Oyo, 2004). Existing literature recognizes the importance and relevance of accounting information in financial institutions 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 to finance themselves at a lower cost (Takoudjou et al., 2013). The freedom enjoyed by borrowing enterprises’ managers doesnot 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), the 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, financial institutions prefer non-accounting indicators to accounting indicators, which is explained by the lack of confidence by the financial institutions in the financial statements communicated by borrowing enterprises. Financial Accounting information constitutes for the MFIs an important element in the appreciation of the risk of default of the borrower. For the manager of the borrowing enterprise, it represents an instrument of communication strategy. This difference given Accounting information leads to the rationing of credit by the MFIs (Takoudjou et al., 2013). Typically called financial accounting, the record of a business’ financial history for use by external entities is used for many purposes. When a company or individual goes to a financial institution such as MFI, for a loan, they will be required to bring alongside their accounting information in other to see if the company or individual has the potential to repay the loan in due time.
- The objective of the Study
1.3.1 Main Objective
The primary objective of this research work is to investigate the use of Accounting Information in credit decisions by Microfinance institutions (MFIs) in Buea Municipality.
- Specific objectives
Specifically, the study seeks to;
- Investigate whether MFIs request for accounting information from firms in the quest for loans
- Investigate whether MFIs lend based on information provided by borrowing firm (trust) or based on collateral security.
- Investigate the extent to which Accounting Information provided by loan seekers is reliable.
- Make a recommendation in line with the findings
- Research Question
- Main Research Question
What accounting information is necessary for credit decision lending of Microfinance Institutions in Buea Municipality?
- Specific Research Questions
- To what extent do MFIs in Buea Municipality rely on accounting information in their lending decision?
- Do MFIs lend based on information provided by borrowing firm (trust) or based on collateral security?
- What extent to which Accounting Information provided by loan seekers is considered reliable?
- The hypothesis of the Study
In line with the problem statement and the objectives of the study, the following hypotheses are formulated;
Ho. MFIs lending does not depend on the extent of the reliability of accounting information.
H1. MFIs lending depends on the extent of the reliability of accounting information.
Ho2: Accounting information has no significant use of MFIs lending decisions.
H2: Accounting information has a significant use on MFIs lending decisions