This study focused on the challenges of Credit Risk Management in Ghanaian Commercial
Banks with the searchlight on the operations of Barclays Bank Ghana (BBG), Ghana
Commercial Bank (GCB), Zenith Bank Ghana and Merchant Bank Ghana (MBG), all
operating in the Accra Business District. The study essentially had the objective of examining
the loan application appraisal processes of these banks as well as ascertaining the adequacy of
their loan monitoring mechanism.
In conducting the study, the researcher adopted the questionnaire technique as the research
instrument to solicit information from both customers and officials of the banks. Purposive
sampling technique was employed in selecting officials from the banks whose duties centered
on Credit Risk Management. Random sampling technique also helped the researcher in
selecting the sample size for the customers of the banks.
Findings made uncovered the fact that poor sales and exchange rate losses, product
substitutes due to trade liberalization and inability to enter into the foreign market and
account for a chuck of the loan default cases experienced by the banks. It is recommended,
among others, that the Government’s information on Venture Capital Trust fund should be
made more accessible to the SMEs sectors through official sponsored workshops whilst the
capacity and logistics of the Eximguaranty Limited are strengthened to alleviate the credit
requirement ‘headaches’ of SMEs. Conclusions drawn centered on the fact that some banks
minimize risk factors in credit management by entering into some covenants with borrowers’
under which certain figures and ratios are periodically sent to the banks electronically. Most
banks also dispatch their officials to monitor and evaluate the loan disbursement schedules
agreed with the customer to minimize bad debt associated with SMEs.
Table of Contents
1. Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Purpose and Rationale of the study
1.4 Research Questions
1.5 Research Methodology
1.6 Justification for the Study
1.7 Scope and Limitation of the Study
1.8 Chapter Disposition
2. Literature Review
2.1 Introduction
2.2 The Right Credit Standards
2.2.1 Credit Culture
2.2.2 Standards
2.3 General Principles of Lending
2.3.1 A Philosophy for Lending: Art or Science?
2.3.2 The Professional Approach
2.3.3 A Methodical Approach to Appraisal
2.3.4 Introduction of the Customer
2.3.5 The Application
2.3.6 Review of the Application
2.4 Banks and Trade Financing
2.4.1 Collecting overdue Accounts
2.4.2 Bill of Lading
2.5 Credit Standards for Large Personal Lending
2.5.1 Home Loans
2.5.2 Lending to Executors and Administrators
2.5.3 Lending to Trustees
2.5.4 Lending to Clubs and Associations
2.6 Managing Risk in Lending to Small Corporate Organisation
2.6.1 Limitations of some Customer-Generated Information
2.6.2 Appraising Business proposals without Good Quality Financial Information
2.6.3 Ability and Integrity of Proprietors
2.6.4 Liquidity and Cash Needs
2.7 General Framework of Credit Policies of Some Banks in Ghana
2.7.1 Overall Strategies
2.7.2 Credit Requirements
2.7.3 Credit Facility Policy Objectives
2.8 Banks’ SME Finance Policy
2.8.1 Type and Amount of Credit
2.8.2 Borrower Diversifications
2.8.3 Purpose of Credit and Qualifying Borrowers
2.8.4 Loans and Overdrafts
2.8.5 Security or Collateral
2.8.6 Recovery
2.8.7 Pricing
2.8.8 Approval Authorities and Lending Limits
2.8.9 Approving Authorities
2.8.10 Documentation
2.9 Factors Affecting Credit Policy and Credit Scheme
2.10 Customers Request and Loan Documentation
3. Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Population of the Study
3.3.1 Primary Data
3.3.2 Secondary Data
3.4 Sampling Procedure
3.5 Research Instrument
3.6 Data Collection Procedure
3.7 Data Analysis
4. Data Analysis and Presentation
4.1 Introduction
4.2 Distribution and Analysis of Responses received from Banks’ customers
4.2.1 Distribution of Customer Representation in Sample
4.2.2 Benefit derived from Loans
4.2.3 Pre-requisite for Bank Loan
4.2.4 Collateral and Loan Repayments
4.2.5 Precautions against Bad Debt
4.2.6 Views on Reasons for Loan Default
4.3 Views on Mechanism for Safe Guarding Loans
4.3.3 Distribution of Responses based on type of facilities often demanded by SMEs
4.3.4 Distribution of responses based on maximum credit obtained from the banks by SMEs.
4.3.5 Distribution of Respondents’ view on alternatives to Bank facilities
4.3.6 Distribution of SMEs Credit applications and Approvals
4.4 Research Findings
4.4.1 Loan Default
4.4.2 Mechanisms to Ensure Loan Repayments
4.4.3 Banks Support Scheme for Customers
4.4.4 Officials’ View of the impact of banks’ Credit Policy on Credit Risk
5. Summary, Conclusions and Recommendations
5.1 Introduction
5.2 Summary
5.3 Conclusion
5.3.1 Items that the Banks Scrutinize on customer Application Proposals
5.3.2 Loan Monitoring Mechanisms
5.3.3 Factors that Precipitate Loan Default
5.3.4 Effectiveness of Collateral
5.3.5 Arrangements for Effective Management of SMEs
5.3.6 Credit Policies and Minimization of Bad Debt
5.4 Recommendations
5.4.1 Finance
5.4.2 Government and Institutional support SMEs
5.4.3 Equipment and Technology
5.4.4. International Markets and Loan Default
5.4.5 Managerial Challenges
Objectives and Research Themes
This study evaluates the credit risk management mechanisms within Ghanaian commercial banks, specifically focusing on the loan appraisal and monitoring processes for SMEs to mitigate high default rates.
- Credit risk management practices in commercial banks.
- Appraisal processes for loan applications.
- Efficacy of loan monitoring mechanisms and collateral security.
- Factors influencing loan default among SME borrowers.
Excerpt from the Book
2.2.1 Credit Culture
Credit culture, according to Kamath et al (2005) can be defined as a bank’s attitude to all matters relating to its management of credit risk. If it is to produce a sound credit risk portfolio it must: Fit with the overall business and organization of the bank. The culture must be capable of delivering the service the bank requires to meet the needs of its customers. It can only do this if it is compatible with the overall business strategy of the bank and is championed by top management of the bank. Because the credit culture must be a balance between taking new risks and also limiting the amount of risk, it is bound to run into opposition of various types. Top management is the only source that can ensure that the culture supports appropriate credit standards, but also is commercial enough not to cost the bank good business.
Solid credit standards, in the view of Rouse (2002), will inevitably cost the bank some business, which in hindsight would have been good. But at the time of the decision 20/20 hindsight is not available. There must be agreement throughout the bank that there is some business it is willing to lose and a consensus as to the criteria to be used in deciding which business to do away with. This policy has to be laid down by top management and should cover the type and level of risk the bank is prepared to take and the reward it expects to earn for given levels of risk, both at the individual lending and portfolio level. Establishing the relative status and authority of the credit risk function in the bank means that there must be clarity over the extent that credit has a veto over the activities of the business developers.
Summary of Chapters
Chapter One: Introduction: This chapter introduces the research focus on credit risk management in four specific commercial banks in Ghana, outlining the problem statement, objectives, and the significance of the study.
Chapter Two: Literature Review: This section examines contemporary theories and concepts regarding credit standards, lending principles, and the specific challenges of managing risks for small-scale corporate organizations.
Chapter Three: Research Methodology: This chapter details the research design, which combines quantitative and qualitative methods using primary survey data and secondary sources to investigate credit practices.
Chapter Four: Data Analysis and Presentation: This chapter presents the empirical findings gathered from SME customers and bank officials, utilizing statistical tables and charts to analyze credit request patterns, default causes, and risk management strategies.
Chapter Five: Summary, Conclusions and Recommendations: This concluding chapter synthesizes the research findings, draws logical conclusions on the state of SME credit management, and proposes strategic recommendations for the government and financial institutions.
Keywords
Credit Risk Management, Ghanaian Commercial Banks, Loan Default, Small to Medium Scale Enterprises (SMEs), Loan Appraisal, Collateral Security, Relationship Banking, Financial Policy, Credit Standards, Bad Debt, Monitoring Mechanisms, Banking Operations, SME Finance, Risk Mitigation, Economic Development.
Frequently Asked Questions
What is the primary focus of this study?
The study examines the challenges of credit risk management in Ghanaian commercial banks, with a focus on their operations within the Accra Business District and their relationships with SME customers.
What are the central themes of the work?
The central themes include evaluating loan application appraisal processes, the role of collateral, the adequacy of loan monitoring mechanisms, and the impact of banking credit policies on SMEs.
What is the primary objective of this research?
The main objective is to evaluate existing credit risk management mechanisms and provide recommendations to mitigate high loan default rates in the SME sector.
Which research methodology does the author apply?
The researcher employs a pluralistic research approach, combining qualitative and quantitative data collection through questionnaires and statistical analysis via SPSS.
What topics are discussed in the main body of the research?
The main body reviews literature on credit standards, analyzes survey results regarding customer loan experiences, and discusses findings related to reasons for default and the effectiveness of existing mitigation efforts.
Which keywords best characterize the research?
Key terms include Credit Risk Management, SMEs, Loan Default, Collateral Security, Relationship Banking, and Banking Policy.
How do Ghanaian banks typically approach SME lending according to the findings?
The research reveals that while banks utilize formal credit policies, many are shifting towards relationship banking to better monitor the SME sector and minimize risks.
What role does collateral play in the lending process in Ghana?
Collateral is standard requirement to ensure security, though the study suggests that over-reliance on it may hinder small businesses that lack high-value assets for security purposes.
Why do SME customers often struggle to repay loans?
Common reasons include poor sales, international competition, diversion of funds for unintended purposes, and a lack of formal managerial or financial control.
- Arbeit zitieren
- Michael Nyarko-Baasi (Autor:in), 2012, Credit Risk Management in Ghanaian Commercial Banks, München, GRIN Verlag, https://www.grin.com/document/212151
