The Use of Annual Financial Statements by Loans Officers in Kenya

Abstract

In Kenya, the incidence of bad loans is worrying and this put to question the credit models and quality of information employed by credit analyst. A possible explanation could be the quality of information contained in annual reports. Loan managers use financial statements in deciding to grant a loan, the amount to lend, the rate of interest rate and the other details to incorporate in the loan (bond) covenant. Stephens (1980) revealed that half of bank lending officers would refuse to loan to a company that did not submit financial statements, even though explicitly requested. The findings reported in the papers were based on evidence obtained from a survey. A structured questionnaire consisting of closed-ended questions is administered to all credit analysts in commercial banks in Kenya. At the time of the study, there were 43 commercial banks in total. The questionnaire covered: Lending objectives; Sources of information; Level of reading of different sections of financial statements; Additional information to be included in financial statements; Additional information to be incorporated in the Company’s Act; and Background Information. The findings show that financial statements are rated as a very important source of information by credit risk analysts. However, commercial banks do not rely on one source of information. Customer records with the commercial bank, visits to customer premises and customer project proposals were also ranked as a very important source of information. The worry is evidence of lack for concern about social objectives when lending. Social justice and politics are core tenets of corporate governance. Credit risk analysts are not satisfied with the current financial disclosure levels in the company act. They would like potential borrowers to disclose a change in top management, cash flow statement, turnover, profit forecast and sales forecast in annual report. There is a need to review the company’s act.

Keywords: Commercial Banks; Financial Statements; and Company’s Act

DOI: 10.7176/RJFA/11-8-15

Publication date: April 30^th 2020