By Dr Jean Cédric Kouam & Maurice Tchegho (Download Pdf Version)
According to the report published by the World Bank, which ranks the world’s economies Doing Business (2020) according to the ease of doing business, Cameroon ranked 167th out of 190 economies, a loss of one place compared to 2019. However, the country gained 0.1 point by recording a score of 46.1 points out of the 100 at stake. According to the World Bank, this slight increase is the result of the improvement of one of the ten indicators taken into account in the calculation of the score, that relating to access to credit. Indeed, with the help of the Economic and Monetary Community of Central Africa (CEMAC), Cameroon has established a framework for the granting of licenses and the operation of credit bureaus (1) which has enabled it to rank 80th in terms of obtaining credit, with a score of 60 out of 100 for obtaining credit and 6 for the depth of information on credit. Conversely, the score for credit bureaus is zero (World Bank, 2020). Despite this notable progress, particularly with regard to access to credit information, information asymmetry remains a serious problem in the relationship between the credit applicant and the credit provider in Cameroon. Defined as the lack of communication of accurate and reliable information from companies, this translates into the fact that one of the contracting parties holds information that it decides, voluntarily or not, to transmit to the other party. This constitutes an obstacle to project financing. From this situation, a major concern arises: What are the causes and consequences of informational opacity in the credit granting process in Cameroon?
1) The causes of information asymmetry in the credit granting process in Cameroon
The importance of access to financial products and services is well established. It facilitates daily life and helps households and businesses to diversify their activities. The supply of financial services to users generally takes the form of transactions, payments, savings, insurance or credit, which often remains subject to a significant information deficit between the main players. This is due to several causes which can be divided into two categories.
On the side of credit providers or lenders, which are generally secondary banks and microfinance institutions (MFIs), the causes of information asymmetry in the credit granting process are both functional and organisational. These include:
- Lack of compliance with monetary regulations. In order to receive liquidity from the central bank, secondary banks in the six CEMAC countries must comply with the requirements set by the Central African Banking Commission (COBAC) regarding compliance with procedures. Thus, according to the money market bulletin published by the central bank, only 20% of the liquidity requested by secondary banks has been granted. The procedures are not always known by all the managers of banking institutions.
- Advertising costs are sometimes very high, which makes it difficult to share information on the changes observed in the granting of credit. Indeed, very few structures communicate on the duration, nature and quality of their credit offer, both through advertising spots and on social networks and media. Many of them do not have the means to do so.
On the side of credit applicants, i.e. borrowers (households, companies, etc.), the picture is far from rosy. These clients, who generally access financial services either to secure their assets or to boost their economic activities, bear a large share of the responsibility for the existing information asymmetry. By way of illustration, we can list :
- The rogue behaviour of some users seeking finance: who present false information in backdated and/ or unaudited documents. These incongruities disqualify them from the credit granting process; bankers do not have sufficient elements on which to base their credit ;
- The informality of enterprises is another factor in the asymmetry of information between credit providers and credit applicants. It reflects the obvious willingness of some entrepreneurs to hide the real situation of their financial statements for administrative and/or fiscal or other reasons; this makes them less credible to financial institutions
- Defects in the approval of certain service providers who operate illegally naturally put them in difficulty with bankers.
2) Consequences of information asymmetry in the credit granting process in Cameroon
On the credit supply side, information asymmetry can lead to a drop in commercial banks’ financing from the central bank. In fact, the performance of some banks can be undermined, thus affecting the pace of economic growth. In the CEMAC, an asymmetry of information between the credit applicant and his bank can also lead to mismanagement reprehensible by the Banking Commission of Central Africa (COBAC). Moreover, bad or false information can lead to bad financing and, more seriously, to a default in payment or repayment leading to the bankruptcy of the lender with all the related collateral damage to economic activity (loss of jobs, excessive debt, etc.).
On the side of the credit applicant, information asymmetry is a major obstacle to the financing of business projects or their evolution. Borrowers who have not taken the trouble to carefully and voluntarily provide all the information required to obtain credit (valid documents, valid tax file, etc.) are generally refused financing for their projects. As a result, the bank may either refuse to grant the credit requested or grant it late after the information has been provided.
Overall, the asymmetry of information when it comes from the credit applicant makes it difficult for the banker to evaluate his file, which consequently influences the credibility of the project for which the credit is requested. Such a situation naturally creates a climate of suspicion in the choice of “good” and “bad” clients and, by the same token, biases the selection decisions of projects to be financed.
We recommend to each of the parties involved the application of the following few measures:
On the side of credit applicants (households, companies and sometimes banks), it is recommended to :
- Make updates of accounting documents which will help to reduce the information asymmetry with the banks. This would help to establish a relationship of trust between the banker and the entrepreneur credit applicant;
- Develop tax information and taxpayer records through Public Credit Bureaus (PCBs) and Incident Bureaus (IBs) that will operate more efficiently and provide banks and potential credit applicants with valid information. PCBs are places where information on credit applicants is gathered. They centralise information on parties and assess profiles. BIs manage the insolvencies of officials and report cases of fiscal abuse ;
On the side of the client providers, i.e. the banks, it is important to :
- Widely disseminate the quarterly resolutions of the Bank of Central African States (BEAC), the COBAC and the Ministry of Finance in the media and platforms previously created bringing together these different actors. These include the total effective rate (TEG) (minimum credit rate) in force at banks and microfinance institutions.
- Train and/or retrain credit applicants in setting up business projects, convincing and sustainable business models, and bankable and viable business plans.
Cameroon’s performance on the “getting credit” indicator is very poor. This is due to weak credit information systems and poor implementation of effective collateral and bankruptcy laws that help facilitate the lending process. The latitude and openness of credit information disseminated by credit bureaus in relation to the number of people and enterprises registered in the credit register as a percentage of the adult population is asymmetric. Despite the presence of collateral and bankruptcy laws that are supposed to facilitate lending in Cameroon, this does not yet lead to rapid distribution of credit. There is therefore a need to improve the credit information bureau in terms of openness and rationality in the dissemination of information. This can be done by producing reliable accounting records that can help reduce the information asymmetry between banks and clients.