The Use of Annual Financial Statements By Loans Off icers In Kenya

Abstract

The Kenyan capi tal market i s thin and only 54 companies are l i s ted at the Nai robi Stock Exchange. Thi s makes commercial banks a major suppl ier of capi tal . However, the incidence of bad loans is worrying and put to question the credit models and quality of information employed by credit analyst. This study reports the results of a survey on the use of annual financial statements by loan officers of commercial banks in Kenya. Design/methodology/approach: The findings reported in the paper are 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 ffinancial 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 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. Research limitations/implications A l imi tat ion of the study stems f rom i t s design, which involved the use of a posted ques t ionnai re to captur e relevant informat ion. Per sonal int erviewing, observat ion or content a n a l y s i s o f c r e d i t r i s k a n a l y s t s ’ r e p o r t s mi g h t h a v e o b t a i n e d r i c h e r r e s p o n s e s . But, credit risk analysts are not satisfied with the current financial disclosure levels in the company act. They would like potential borrowers to disclose 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. Originality/Value of paper/Further Research The study is important because corporate governance is unattainable in the absence of quality information. Currently, the Company Act is being reviewed. The research contributes to the debate on how to improve on information to be contained in annual reports in Kenya.