MANAGEMENT OF CREDIT RISK; THE CASE OF SOUTH AKIM

RURAL BANK LIMITED, KOFORIDUA

by

LARTEY ODAME EDWARD

(PG 4124210)

A Thesis submitted to the Institute of Distance Learning, Kwame

Nkrumah University of Science and Technology in partial fulfillment
of the requirements for the degree of

COMMONWEALTH EXECUTIVE MASTER OF BUSINESS

ADMINISTRATION

SEPTEMBER, 2012.

i
 DECLARATION

I hereby declare that this submission is my own work towards the Commonwealth

Executive Master of Business Administration (CEMBA) and that, to the best of my

knowledge, it contains no material previously published by another person nor

material which has been accepted for the award of any other degree of the

University, except where due acknowledgement has been made in the text.

Edward O. Lartey (PG 4124210)

Student Name &ID signature Date

Certified by:

S. T. Osei-Tutu

Supervisor (s) Signature Date

Certified By:

Prof. I. K. Dontwi

Dean, IDL Signature Date

ii
 DEDICATION

I humbly dedicate this work to my sister Dorothy Danquah and the husband Mr. S. Y. Larbi

who gave me their support and other resources to accomplish this research work

successfully. Also to my wife Mrs. Sarah Odame Lartey and my Children for having

patience and encouragement during my absence at home most often. May the good Lord

bless them all for whatever they have invested in this research work.

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 ACKNOWLEDGEMENT

My sincere gratitude goes to the almighty God for his guidance and infinite wisdom

and protection though out the entire master’s programme.

I also wish to express my whole hearted gratitude to Mr. Seth Tuffour Osei-Tutu

whose supervision has seen this great work.

Also to all the lecturers of CEMBA (KNUST) Koforidua center for encouraging

and supporting me.

My warmest gratitude also goes to the staff of South Akim Rural Bank Limited and

their customers for assisting me with the necessary materials and vital information

needed to complete this work.

I also express my appreciation and profound gratitude to my wife Mrs. Sarah

Odame Lartey, my two children Edward Odame Lartey Jnr. and Paa Yaw Odame

Lartey, my sister Comfort Akyeabea and my parents for their support and

encouragement.

Finally, my sincere thanks goes to all who contributed in diverse ways towards the

success of this work. May the good Lord bless us.

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 ABSTRACT

The research was on an examination of the management of credit risk at the South

Akim Rural Bank in Koforidua. Descriptive survey was used and the purposive and

the systematic methods of sampling were used to select the study units. A

questionnaire was used for the employees while the Branch Manager, and the other

staff purposively selected were interviewed in addition to responding to

questionnaires. The study revealed that most customers were familiar with the

processes for granting loans and they mentioned some of these; the qualification

requirements for loans are only sometimes made known to potential loan applicants;

most customers have taken loans from the bank but when it comes to the repayment

of such loans, most of them default mainly as a result of failures of the businesses

they invest in. The study revealed that the most often used measure of credit risk

reduction is through the use of collateral security, guarantees and stringent

management practices. The study concluded that the management of credit risk is a

big issue at the South Akim Rural Bank in Koforidua and though there were some

measures in place at the bank for the reduction of the risks associated with credit,

such measures did not seem to be very effective.

v
 TABLE OF CONTENTS

DECLARATION i

DEDICATION ii

ACKNOWLEDGEMENT iii

ABSTRACT iv

TABLE OF CONTENTS vii

LIST OF TABLES viii

LIST OF FIGURES xvi

CHAPTER ONE

TITLES PAGES

1.0 Introduction 1

1.1 Background to the study 1

1.2 Problems Statement 3

1.3. Research objectives 4

1.4 Research questions 5

1.5 Relevance of the study 5

1.6 Scope/limitations of the study 6

1.7 Organisation of the thesis 6

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction 7

2.2 Definitions of Credit 7

2.3 Forms and importance of Credit 8

2.4. Risk associated with lending 9

2.5. Credit risk management 13

2.6. Procedures involved in lending 14

2.7. Loan Policy 15

2.8. Credit analysis appraisal 16

2.9. Loan review and evaluation 16

2.10. The regulatory framework of rural bank 18

2.11. Registration of rural bank 18

2.12. Supervision 19

2.13. The credit function of rural bank 19

2.14. Lending procedures in rural banks 21

2.15. Credit life time 21

2.16. Summary 22

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 CHAPTER THREE

METHODOLOGY

3.1. Research design 23

3.2. Population 24

3.3 Sample and sampling procedures/techniques 26

3.4 Data collection tools/procedures 27

3.5. Data analysis/presentation process 28

CHAPTER FOUR

RESULTS AND DISCUSSIONS

4.0 Introduction 29

4.1. Bio-Data of respondents 29

4.3. Qualification Requirement of Customers for Loans 33

4.4. Credit risk factors and problems of Loan recovery 37

4.5. Measure of Loan recovery and credit risk reduction 41

viii
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.0. Introduction 48

5.1. Summary of findings 48

5.2. Conclusion 49

5.3. Recommendations 50

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 LIST OF TABLES

TABLE PAGES

Table 1: Employee and departmental break down of the 26

South Akim Rural Bank.

Table 2: Distribution of respondents by Gender – Bank Staff. 30

Table 3: Distribution of respondents by Gender – Customers. 31

Table 4: Age Distribution of respondents. 33

Table 5: Frequency of Communication of the bank’s Lending. 35

Table 6: Customer who have taken loans from the Bank. 35

Table 7: Customer reasons for Loans re – payment default. 37

Table 8: Loans granted to Customer from 2008 to 2010. 40

Table 9: Categories of staff that credit is advanced. 41

Table 10: The use of compensating balance as a measure of 43

Loan recovery and credit risk reduction.

Table 11: The use of collateral security as a measure of 43

Loan recovery and credit risk reduction.

Table 12: The use of stringent management as a measure of 44

Loan recovery and credit risk reduction.

Table 13: The use of Law suits as a measure of 45

Loan recovery and credit risk reduction.

Table 14: The use of credit insurance as a measure of 46

Loan recovery and credit risk reduction

x
Table 15: The use of Guarantees as a measure of 47

Loan recovery and credit risk reduction.

Table 16: The use of syndication and participation as a measure 48

Of loan recovery and credit risk reduction

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 LIST OF FIGURES

FIGURES PAGES

Figure 1: A pie chat showing the distribution of gender – Bank Staff 30

Figure 2: A pie chat showing the distribution of gender – Customers 31

Figure 3: A pie chat showing the age distribution of respondents. 33

Figure 4: A pie chat showing customers who have taken loan from the Bank. 35

Figure 5: A pie chat showing reasons for loan re-payment default. 37

xii
 CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The financial system of Ghana is made up of a number of banks and non-

bank financial institutions. At the helm is the Bank of Ghana which has the

responsibility to advice central government on financial matters. Rural banks are a

part of the financial system and have been established as unit banks to provide

financial intermediation and other services of financial orientation in the rural

communities where they are located. According to Miller and Van House

(1993), rural banks were introduced into the country to overcome the poor savings

habit of most rural folks in order to turn around this problem, and boost their

savings habit of rural dwellers and to make loans accessible to them to support their

economic activities. Rural banks are thus financial institutions established among

others, to provide banking services to small businesses as well as rural

entrepreneurs.

A major rural bank that is involved in the provision of credit facilities to the

rural folk is the South Akim Rural Bank Limited The bank was established on 25th

August,1984 and was commissioned on 2nd November, 1984 with a staff strength

of five (5). By the end of December 2010, the staff strength had increased to one

hundred and five (105). Subsequent recruitments have since been made.

The key promoters of the bank were the late Major (Rtd) Samuel Boadi

Gyasi, one time Managing Director of the Produce Buying Company (PBC). He

xiii
together with the lChief of Nankese Nana Ayim Gyasi II, Nana Adarkwa Yiadom

Odikro of Nankese, Mr. Godfred Daniel Asante, all deceased, and Mr. Benjamin

Atta Koranteng promoted the bank. Some of the initial directors were Mr. M. N. A.

Afrifa-Gyasi, the late Chief Farmer of Nankese Nana Kwabena Donkor Yirenkyi,

Mr. F. N. Gyasi (deceased), Mr. A. B. Asante, Mr. George Diabene Agyakwa and

Mr. Adams Henaku. These people, together with several other shareholders, helped

to establish the bank.

The head office of the bank is located at Nankese which is a town in the Suhum

Kraboa-Coaltar District. In September, 1987 the bank extended its operations to

Suhum and later opened other agencies in Koforidua on 8th October, 1993 and

Asamankese on 3rd February, 1995. The Adoagyiri Agency was commissioned on

6th November, 2006 while the Osenase Agency was also officially opened on 26th

August, 2010. Full-scale banking services are provided at all these agencies and

continuing efforts are being made to computerise and network all the agencies.

The bank’s vision is “to be among the leading banks in the country” and its

mission is to become the leading rural bank and market mover in the Eastern

Region, as well as to be ranked among the best five (5) rural banks in Ghana.

Among the pronounced corporate values of the bank are efficiency through team

work, customer satisfaction, profit maximisation and community development.

The bank provides services to a large number of salaried workers who are

paid by the Controller and Accountant General and other employers as well as to

educational institutions, religious bodies, social organisations and district

assemblies. The bank also provides services to other people in its catchment areas

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 who are mostly engaged in farming specifically in cocoa, food crops and vegetable

farming as well as in rural industries such as distilling of liquor, charcoal

production, basket weaving, transportation, logging and timber production and also

stone quarrying.

The bank gives commercial loans, agricultural loans, salary advance and

workers’ loans. In addition the bank operates a ‘golden account’ which is a special

account for a variety of customers both individuals and companies whose desire is

to operate a current account and earn interest which otherwise would not have been

possible. To join the scheme, the individual must be a person who earns monthly or

periodic income. There are many benefits from joining the scheme; it serves as an

investment account for the current account customer, it helps the customer to

build a handsome balance that paves the way for that customer to secure a

loan from the bank and it also makes it possible for the customer to be placed

in the bank’s valued customers’ bracket.

Since its inception, the South Akim Rural Bank has been very influential in

poverty reduction, the creation of employment and income opportunities through

support for the setting up of micro enterprises, empowering women and/or other

disadvantaged groups as well as reducing the rural families’ dependence on drought

prone crops through the diversification of income generating activities.

1.2 Problem statement

As indicated in the background of the study, the South Akim Rural Bank has

operated successfully since its incorporation through the provision of excellent

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 banking services to its numerous customers. However, according to Kohn (1993), a

number of common problems appear to inhibit the operations of rural banks and

these include the cost of mobilising savings from the widely dispersed rural

dwellers most of whom live below the poverty line, absence of the required

collateral security to support commercial lending, difficulty in loan recovery,

problems of determining the interest rate on loans to cover cost and at the same

time make the loans attractive to customers, inappropriate credit management

policies and inadequate information to potential bank service users.

The South Akim Rural Bank in Koforidua, which is the focus of this

investigation, appears to have its fair share of the problems highlighted above. The

researcher therefore seeks to examine the above issues at the bank in Koforidua in

order to ascertain how the nature of the credit management practices influence the

overall operations of the bank.

1.3 Research objectives

The main objective of the study was to examine the nature of credit risk at

the South Akim Rural Bank in Koforidua and how the bank’s credit risk

management policies and procedures influence the overall operations of the bank.

Specifically, the study sought to:

1. Assess the qualification standards of customers for loans at the South Akim

Rural Bank in Koforidua;

xvi
 2. Examine the bank’s processes for granting loans;

3. Identify the problems encountered in loan recovery from the bank’s customers;

and

4. Examine measures in place to enhance loan recovery and credit risk reduction at

the bank.

1.4 Research questions

The study addressed the following questions:

1. What qualify customers for loans at the South Akim Rural Bank?

2. What processes are used in granting loans to customers?

3. What problems are encountered by the bank in its attempt to recover loans

from customers?

4. What are the measures used by the bank to enhance loan recovery and reduce

credit risk?

1.5 Relevance of the study

A study on credit risk management will contribute to existing knowledge

and literature on the subject under investigation. In that regard, it is hoped that the

study will provide data related to problems associated with credit risk management

at the South Akim Rural Bank in Koforidua so that remedial action, especially in

xvii
 the area of providing information for enhancing policies and procedures on credit

risk management at the bank, could be taken by the management of the bank.

1.6 Scope/limitations of the study

Koforidua was the study area and the focus of the study was on the South

Akim Rural Bank in order to examine in some detail, the credit risk management

activities at the bank. Though the research could have been extended to cover some

other rural banks as a way of getting a broader coverage and extended findings,

time and financial constraints made this a problem.

1.7 Organisation of the thesis

The study consists of five chapters. The first chapter focuses on the

background of the study, problem statement, research objectives, research

questions, relevance of the study, scope/limitations of the study and the organisation

of the thesis. Chapter two contains a review of literature relevant to the study. The

literature covered the definitions of concepts, principles and other necessary

information on understanding credit risk management from various textbooks,

management reports and other secondary data sources. The methodology used in

this study is also set out in chapter three. It discusses the research design,

population, sample and sampling procedures/techniques, data collection

xviii
 tools/procedures, and the data analysis/presentation procedures. Chapter four entails

the presentation of results and its discussion. Chapter five is made up of the

summary of findings, conclusions arrived at and the recommendations made.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents a review of literature covering topics like the

definitions of credit, forms and importance of credit, risks associated with the

provision of credit or lending, credit risk management, general procedures involved

in lending, loan policy, credit analysis appraisal, loan review and evaluation, the

regulatory framework of rural banks, registration of rural banks, supervision, the

credit function of rural banks, lending procedures in rural banks and the credit life

time. These will be examined and discussed from textbooks and other publications

on the topic.

2.2 Definitions of credit

Credit has been given varied definitions by different authors. The

International Dictionary of Management (2003) refers to it as borrowing up to a

xix
 certain limit by a bank to an individual or a company. According to Wood (1988),

credit is derived from a Latin word ‘credere’ which means ‘believe’. From this, he

defines credit as an expression of belief in a person’s ability and willingness to

repay a loan.

Miller and Van Horne (1988) considered credit from two dimensions.

Firstly, they see it as an asset and secondly as a liability. To them, credit represents

a future receipt to the lender and a future obligation to the borrower. They therefore

define it as a transfer of title to real goods and services.

Maller, et al (1998) consider credit to mean transactions in which goods are

sold, services are rendered or money is given out in exchange for a promise to pay

back at some future date. James et al. (2002), define credit as a liability acquired

when we borrow funds.

From the above definitions credit can be defined as making or offering some

advances under specific repayment terms by a bank to its customers under the belief

that such loans shall be repaid as agreed.

2.3 Forms and importance of credit

The Bank of Ghana’s Credit Manual for rural banks stipulates that, credit

facilities may be granted for the purpose of conducting or carrying on developing or

improving farms, fishing, industrial and commercial operations to benefit the

community (BOG Manual, 2009). According to the manual, credit facilities may

also be extended to maintain the efficiency of eligible borrowers in connection with

their health, education and sustenance.

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 Writing on the importance of the lending functions, Crosse and Hempel

(1998) argue that traditionally, the foremost obligation of a bank is to supply the

credit needs of business enterprises including farm operations.

Affirming this stance, Rose and Kora (1999) touch on the significant

quatitative contribution of lending to rural banks’ income as well as the important

role this plays in the social functions that the banks perform in the economy.

For a full realisation of the above benefits, rural banks give loans and

overdrafts. According to Rose and Kora (1999), an overdraft is the amount a

customer is allowed to withdraw over and above his or her normal deposit with the

bank. Interest is charged only on the excess amount over the deposit. Overdrafts are

normally granted to current account holders.

Valentine and McCarthy (2001) observe that discounting bills is a third form

of credit. When a holder of a bill wants money from his bank, the money the holder

of the bill collects is less than the face value of the bill. The difference is a fee

charged by the bank called a discounting charge for performing such services.

2.4 Risks associated with lending

Like all other investments, lending cannot pass without some level of risk.

Risk is defined as any event that can lead to a credit made available to a customer of

a bank being lost or leaving the repayment impaired (Harington, 2003).

xxi
 According to Brealey et al. (2006), finance companies, like other financial

institutions, are exposed to three types of risks. These are liquidity risk, interest rate

risk and credit risk. Brealey et al. explain the risks as follows:

1. Liquidity risk – Finance companies generally do not hold accounts that could

be easily sold in the secondary market. Thus, if they are in need of funds, they

have to borrow. However, their balance sheet structure does not call for much

liquidity. Virtually, all of their funds are from borrowing rather than deposits.

Consequently, they are not susceptible to unexpected deposit withdrawals.

Overall, the liquidity risk of finance companies is less than that of other

financial institutions.

2. Interest rate risk – Both liabilities and assets maturity of finance companies

are short-term. Therefore, they are not as susceptible to increasing interest

rates. Finance companies can still be adversely affected, however, because their

assets are typically not as rate sensitive as their liabilities they can shorten their

average asset life or make greater use of adjustable rate if they wish to reduce

their interest rate risk.

3. Credit risk – Because the majority of finance company funds are allocated as

loans, customers who borrow from such companies usually exhibit a moderate

degree of risk. The loan delinquency rate of finance companies is typically

higher than that of other lending financial institutions. However, this higher

xxii
default level may be more than offset by the higher average rate charged on

loans. Again, because their loan entails both relatively high returns and high

risk, the performance of finance companies can be quite sensitive to prevailing

economic conditions.

Harington (2003) posits that there is credit risk where a firm’s

customers and the parties to which it has lent money to will delay or fail to

make promised payments. Most firms face some credit risk for accounts

receivable. The exposure to credit risk is particularly large for financial

institutions such as commercial banks that routinely give out loans that are

subject to risk of default by borrowers. When firms borrow money, they expose

lenders to credit risk (i.e. the risk that the firm will default on its promised

payments). As a consequence, borrowing exposes the firm’s owners to the risk

that the firm will be unable to pay its debts and thus be forced into bankruptcy

and the firm generally will have to pay more to borrow money as credit risk

increases. The extent of risk of default in the rural sector has deterred most

banks from supporting that sector.

In financial markets, banks earn profit to sustain their operations by

means of lending to borrowers. However, such banks have to deal with some

amount of risk because information on borrowers raises uncertainty and

introduces information asymmetry. To ensure that credit will be repaid and for

that matter reduce the problems associated with information asymmetry, banks

enter into contractual agreements with borrowers. For financial institutions to

xxiii
function effectively, staff, depositors and borrowers need to be provided with

relevant and reliable information on timely basis.

Moreover, Padman (1988) notes that small rural producers especially

are reluctant to approach formal financial institutions for assistance for a

number of reasons. There is a perceptible cultural gap between formal lenders,

mostly originating in the urban environment and the rural borrowers who are

accustomed to a different way of borrowing money. More importantly,

information relating to various credit schemes and their associated formalities

and obligation do not reach small producers particularly when they are

illiterate. Since formal education has always contributed to moulding, shaping

and fashioning out culture, for the illiterate folk assessing credit in formal

institutions, the situation is not a difficult one but it is one issue where

diametrically opposed cultural values collide explaining the phenomenon of a

cultural lag rooted in a traditional set up that is moving towards modernity.

According to Winter, Nelson and Anna (2002), credit rationing, access

to credit and liquidity constraints are related but distinct issues for rural

finance. Stieglitz and Weiss (2004) opine that because of transaction costs and

asymmetric information, lenders are generally unwilling to distribute credit

based on price alone. Credit markets are therefore subject to credit rationing, in

which suppliers lend less than they could at the prevailing interest rates and

allocate credit based on some non-price consideration. Under credit rationing,

a potential borrower may be unable to borrow a desired amount even if she/he

is willing to pay the prevailing interest rate. A firm or household has a liquidity

xxiv
 constraint when it lacks the finance from any source to undertake an investment

that is profitable at the prevailing input factor and output prices. A liquidity

constrained agent may have access to some credit but not be able to borrow as

much as optimally under the given terms and price, or may face terms that are

inconsistent in timing with the investment. Thus, households with access to

credit may or may not be liquidity-constrained. The same is true for

households with no access to credit at all. An agent with no access to credit

who also has no investment needing finance is not liquidity constrained but an

agent with an investment opportunity and no access to finance may be. Finally,

a household that is not liquidity constrained at the prevailing price is likely to

wish to borrow at a subsidised rate. Demand for participation in a low-cost

credit programme does not necessarily imply that a liquidity constraint was

previously binding. Reduced cost of credit with increased access will relax a

liquidity constraint. Improved financial services that facilitate savings, direct

income transfer and reduced cost for consumption of goods could each alleviate

a liquidity constraint without influencing access to credit or the cost of

borrowing.

2.5 Credit risk management

Hetel (1994) contends that any attempt to define management is deemed

to fail mainly because it is diverse and continually changes. Stoner and Freeman

(1995) define management as the process of planning, organising, leading and

xxv
controlling the work of organisational members and using all available

organisational resources to reach stated goals.

Financing involves risks which have to be managed by the bank. The

management of risk involves determining what risks exist in an investment and

handling these risks in a way best suited to the financing or investment objectives

(Mwime, 1995). The management of credit must be guided by regulation in order

that a bank will be protected in its management of the various risk factors involved

in the granting of an advance. The legal requirements for credit risk management do

not only operate at the time of financing the loan but also must be given a

consideration and properly effected even before an applicant becomes a customer to

the bank.

According to Stellenson (2007), Risk is inherent in projects. They relate to

the occurrence of events and can leave undesirable consequences, such as delays,

increased cost and inability to meet technical specification. In some instances, there

is the risk that an event will occur that will cause a project to be terminated.

Although careful planning can reduce risk, no amount of planning can eliminate

chance events due to unforeseen or uncontrollable circumstances. Stellenson further

suggests that the probability of the occurrence of a risk event is highest near the

beginning of a project and highest near the end. He therefore stated that good credit

risk management curtails the following:

1. Identifying the risk;

2. Analysing and assessing those risks;

3. Working to minimise the probability of their occurrence; and

xxvi
 4. Frequently monitoring critical project dimensions with the goal of catching

and eliminating problems in their early stages, before they cause extensive

damages.

It is expected that, the increased level of monitoring with newly introduced

daily report, intensified weekly reviews and sanctioning of delinquent staff will

promote measures which should improve the quality of portfolio growth. (Business

and Financial Times, 2008).

To sum up, credit risk management could be seen as a systematic planning

and organising of all available bank resources in order to grant credit in a highly

professional manner by directing such credit to various sections of the economy, so

that profitability and the economy’s ultimate security of the bank’s assets are not

sacrificed.

2.6 Procedures involved in lending

Fraser and Korari (1989) maintain that failure is normally the result of

reckless lending, lack of diversification or both. Hempel, Simonson and Coleman

(1994) support this view but add that effective organisation and control of the

lending function are vital to the profitability and solution to every bank. Rose and

Conrail (1995) recommend the formulation and implementation of sound handling

policies and so considered these to be among the most important responsibilities of

bank directors and management. They intimate that before establishing a loan

policy, the institution needs to be concerned about how individual applications are

evaluated.

xxvii
2.7 Loan policy

Rose and Korari (1995) outline the following components that should be a

part of a loan’s policy:

1. Objectives: This involves the development and a re-examination of the loan to

provide Directors with the opportunity to evaluate the role of the bank in the

community’s economic development.

2. Trade Areas: Both primary and secondary areas should be designed to instruct

loan officers of the bank on geographic priorities. According to Crosse and

Hampel (1980), the bank should define the areas to service routinely by each

bank officer.

3. Loan Mix: The mix of credit that the bank is to emphasise on and what might

be the appropriate balance of each type of loan in the portfolio needs to be

specified. Such specification should be made with regards to the demand of the

local economy as well as the size of the bank and expertise of its management

(Rose and Korari 1995).

4. Loan Pricing: An important issue concerning how to adjust the rate charged as

perceived risk of the loan varies, one possibility is to group the loan into risk

category (Rose and Korari 1995).

5. Credit Standard: Loan policy should indicate both desirable and undesirable

types of collateral. It should further indicate circumstances in which unsecured

lending is prohibited. The quality and liquidity of collateral must be verified and

xxviii
 maximum loan collateral value ration should be applied before a secured loan is

approved. (Hempel, Simonson and Coleman 1994).

6. Loan Authorisation and approval: The policy should establish lending for all

loan officers and for a combination of officers and loan committees (Hempel,

Simonson and Coleman 1994).

2.8 Credit analysis appraisal

According to Maness (1998), credit analysis is the process of deciding

whether or not to extend credit to a given customer. The mission of the credit

manager is to set out the terms for credit, grant credit to customers, monitor

payment made by customers and apply the necessary measures to maintain or

reduce the average collection period. The second activity of the credit manager is

the granting of credit. Maness outlines certain individual traits that must be used

for such analysis namely the five C’s that is character, capacity, collateral, capital

and condition of the customer to support the granting of good loan, easy recovery as

well as minimising the risk associated with lending.

Wethersfield (1996) opines that in granting credit, a firm determines how

much effort to expend trying to distinguish between customers who will pay and

customers who will not pay.

2.9 Loan review and evaluation

Hempel, Simonson and Coleman (1994) suggest that every loan policy

should require diligence on the part of loan officers. They identify certain indicators

xxix
 to aid loan officers in the detection of problems associated with loans. These

include insufficient deposit balance and the occurrence of overdraft, late payments

of principal and interest and delays in the submission of periodic financial

statements.

According to Wethersfield (1996), there are no magical formulas for

assessing credit risk and the probability that a customer will not pay a loan.

Wethersfield also suggests that the classic five (5) C’s of credit are the basic factors

to be evaluated and he discusses these factors as follows:

1. Capacity: The customer’s ability to meet obligations out of operating cash flows.

2. Capital: The customer’s financial reserves.

3. Collateral: Assets pledged by the customer for security in case of default.

4. Character: The customer’s willingness to meet credit obligation.

5. Condition: General economic conditions with customer’s line of business.

According to Kerr (2002), firms may be given line credit. This allows such

firms to finance temporally cash needs. Line credit is usually established on year-to-

year basis between a bank and its customers. The line credit is an agreement

whereby the bank sets out a maximum amount it allows the firm to owe at anytime

depending on an assessment of the firm’s credit worthiness. Kerr (2002) adds that

credit provision involves the exchange of money or money’s worth for a promise to

repay in future. This is not straight forward because borrowers know more than

lenders about their debt settlement prospects. For lenders, the challenge is to access

the value of that promise to repay. This involves two distinct but equally important

steps. First is the collection of information about the person covering proof of

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 identity, age and proof of income, current commitment and other relevant details for

the assessment of ability to repay the loan. This information is collected and held by

the lender. Some of the information is required for loan assessment purposes, some

for what Akerlof et al. (2001) referred to as privacy forum and other statutory

purposes related to lending.

Akerlof et al. (2001) further state that there is the need to check the credit

history of the applicants to see what record they have of managing credit

responsibility in the past. Kerr (2002) also mention that a person is deemed

creditworthy when confidence is established about his ability and willingness to

honour a promise to repay. Credit reporting is one of the few examples of co-

operation between lenders. The fact that lenders are in competition with one

another limit the information they share. The information provided by credit

reporters must be relevant to lenders information and its value must be dependent

on its reliability.

2.10 The regulatory framework of rural banks

Various statutes, regulations and the common law control the formal and

functioning of rural banks.These include the following:

1. Companies Code of 1963, Act 179.

2. Banking Act of 1970, Act 339.

3. The banking Regulatory of 1973.

2.11 Registration of rural banks

xxxi
 With the completion of the acquisition of capital, business premises and

drafting of the regulation, rural banks are to register in accordance with section 14

of the company’s code. Upon registration, the registrar will issue a certificate of

incorporation with its inclusive evidence that all the requirements of the code in

respect of registration have been complied with and that the rural bank has been

duly registered under the code.

After the incorporation, the promoters of the bank apply for a banking

license from the Bank of Ghana in fulfillment of the requirements under Section

2(1) of the Banking Act of 1970 (Act 339). Rural banks are required under Section

27 of the Ghana Companies Code of 1963 (Act 179) to obtain a certificate to

commence business from the register general office. This certificate empowers rural

banks to start operations.

2.12 Supervision

In the course of business, rural banks are subjected to the Bank of Ghana’s

supervision. The Ghana Companies Code 1963 (Act 179) and the Banking Act of

1970 (Act 339) empower the Bank of Ghana to supervise the activities of the rural

banks in the form of demanding periodic submission of returns to the Registrar

General’s Office and regular visits by Bank of Ghana’s officials. Rural banks are

expected to submit a weekly statement of reserves, assets and deposits, liabilities,

balance sheet and quarterly returns on loans and overdrafts.

2.13 The credit function of rural banks

xxxii
 Rural banks are obliged to grant credit for viable projects within the

community in which they operate. Aside this, the Bank of Ghana’s credit manual

for rural banks outlines other objectives of the rural banks. The manual further

specifies certain requirements that must be fulfilled by applicants. According to

Miller and Van Horne (1993), these objectives are savings mobilisations, profit

mobilisation and plans to raise the standard of living of the rural folks.

In the first place, the applicant must be a customer of the bank for at least

six months, holding either a savings or a current account. The personal traits of the

applicant must be accessed before being given credit. Such traits include honesty,

integrity and reputation of the applicant in the community.

The next is the progressing competence which the applicant must

demonstrate. The applicant must appear to be physically and mentally sound and

posses an unquestionable history regarding debt payment.

Finally, the applicant must show actual need for credit through a convincing

description of the purpose for which the credit facility is required, the actual amount

and the period the facility is needed must be specified. The applicant is also

expected to explain the sources from which repayment shall be made.

For group loans, the lender must satisfy the above requirements and the rest

who do not possess an account must open a savings account together with the loan

application of the group. For government agencies and members of board of

directors of rural banks, such applications shall be referred to the Bank of Ghana for

clearance. For an agricultural loan, a farmer or an organised group of farmers who

are cultivating land allocated for the cultivation of vegetables and staple crops, the

xxxiii
 acreage under cultivation should not exceed ten acres and hundred respectively. In

the case of an industrial loan, the applicant must be an operator of a rural based

industry and producing those goods and commodities which have a ready market

within or outside the community. In the case of commercial overdraft, the applicant

should be a retailer or a wholesale merchant known in the community and operating

a current account with the rural banks.

The manual provides that, land or other fixed assets such as building or a

private vehicle not to be used for the benefit of the community should not be

financed by a rural bank credit as well as luxury goods.

2.14 Lending procedures in rural banks

The Bank of Ghana’s credit manual contains the mandatory sectarian

allocation priorities set in the guidelines established by the Bank of Ghana. The

breakdown is as follows: Agriculture; a maximum of 50% of total credit, cottage

industry 30% approximately, trade and transport 20% maximum. The project

officer is responsible for studying all applications and arranging for an appraisal or

implementation visit. Completing the application and appraisal report constitutes

the investment feasibility report. Recommendations as to whether an application

should be considered or not then follows. The approval process is the responsibility

of the bank manager if the amount is within the authorised limit. If it exceeds the

limit, he forwards it to the loans committee or board at a meeting.

2.15 Credit life time

xxxiv
 According to Mwine (1995), rural banks have the following credit periods.

1. Operational period: This period is when actual monitoring has to be done

until the loan or overdraft has been fully recovered.

2. Review period: The manager, at least once in a month, has to go through

the loan and current account to make sure that payment is recorded. He must

observe the progress of the undertaking or the project financed by the banks.

In case of default, the manager has to take action (Bank of Ghana Manual,

2006).

2.16 Summary

The researcher examined credit risk management at the South Akim Rural

Bank in Koforidua. A major source of bank revenue is loan interest from customers.

When loans are given out especially to the bank’s customers, economic activities

are facilitated. Ways in which loans are given out, associated risk and the influence

on economic activities were discussed in the literature through a description of

credit, forms and importance of credit, risks associated with lending, credit risk

management, procedure involved in lending, the regulatory framework of rural

banks, registration of rural banks, supervision, the credit function of rural banks and

lending procedures among others. It was noted that when loans are given out timely

and in the required quantum and loan interests are paid when due, the giving and re-

payment of loans keep enough money in the system and therefore connect to boost

economic activities.

xxxv
 CHAPTER THREE

METHODOLOGY

3.1 Research design

The research design that was used in this study was a descriptive survey. In

a descriptive survey, samples are drawn from the population of interest and based

on a description of variables of interest with respect to the research topic and

respondents’ responses, guided generalisations are made about the population. A

descriptive survey ‘permits the asking of the same set of questions often in the form

of written questionnaires to a large number of respondents either by mail, telephone

or in person’ (Fraenkel and Wallen, 2002: 11). Descriptive survey was used by

asking the respondents of the South Akim Rural Bank in Koforidua the same set of

questions on credit risk management and related issues. This was meant to facilitate

the achievement of the research objectives.

1. Profile of study organisation

xxxvi
 The South Akim Rural Bank in Koforidua was selected for the study. The

bank is one of the traditional rural banks in the country and a major player in the

industry with the mother bank having agencies spread all over the Eastern Region

of Ghana and beyond. Again, the bank has operated successfully over the years and

has won several awards. The Koforidua branch of the bank was selected for the

study because it has all the various departments that will make it possible to get

respondents from all areas of the bank’s operations.

The organisational structure of the bank is as follows.

Branch Manager

General Procument Human Accounts Interna Marketing Project/

ICT
Admin Resource Dep Audit Dept Loans
Dept. Dept Dept
Dept Dept Dept

Figure 1: Organisational structure of the South Akim Rural Bank

Source: South Akim Rural Bank, 2012

The organisational chart shows the relationships that exist among the employees as

well as the directional flow of communication at the South Akim Rural Bank in Koforidua.

Policy issues emanate from the Branch Manager to the departments and feedback on the

extent of implementation is reported from the departments to the Branch Manager.

xxxvii
3.2 Population

According to Agyedu, Donkor and Obeng (1991), population refers to the

complete set of individuals, objects or events that have common observable

characteristics in which a researcher is interested. The population for this research

was the management staff of the South Akim Rural Bank in Koforidua and

customers of the bank.

Table 1 depicts the employees and the departmental breakdown of the study

organisation.

Table 1: Employees and departmental breakdown of the South Akim

Rural Bank

Employees No.

General Administration 11
Human Resource 2
Accounts 3
Internal Audit 2
Marketing 2
Project/Loans 2
ICT 3
Procurement 2

Total 27

Source: South Akim Rural Bank, 2012

xxxviii
 The South Akim Rural Bank in Koforidua has eight departments. The

departments and the breakdown of employees, in brackets, are as follows: General

Administration (11), Human Resource (2), Accounts (3), Internal Audit (2),

Marketing (2), Project/Loans (2), ICT (3) and the Procurement Departments (2).

The total strength of employees at the branch is twenty-seven (27). Out of this

number, the Branch Manager (1), Human Resource Officer (1), Accountant (1),

Internal Auditor (1), Marketing Officer (1), Project Officer (1), ICT Officer (1) and

the Procurement Officer (1) constitute the Management team.

3.3 Sample and sampling procedures/techniques

The list of management staff at the South Akim Rural Bank in Koforidua

and the customers of the bank constituted the sampling frame.

Purposive and random sampling methods were used to select the sample for

the study. The Branch Manager, Human Resource Officer, Accountant, Internal

Auditor, Project/Loans Officer, Marketing Officer, ICT Officer and the

Procurement Officer were purposively selected for the study because their roles at

the bank put them in a position to provide certain information required to achieve

the research objectives. The other respondents included in the sample were one

hundred and twenty (120) and they were selected from the customers of the bank

numbering approximately eight hundred and forty (840) through the method of

systematic sampling. The researcher positioned himself at the entrance of the bank

and picked each seventh customer who entered between 9.00 am and 12.00pm as a

xxxix
 respondent for the study. February 27th to March 9th, 2012 was set aside for this

exercise because it was a peak period where most customers came to withdraw

salaries and do other transactions. The eight (8) Management staff purposively

selected and the one hundred and twenty (120) customers chosen through

systematic sampling and totalling one hundred and twenty-eight (128) were used as

respondents for the study.

3.4 Data collection tools/procedures

Questionnaires and a structured interview guide were used as the tools for

the collection of data. The questionnaires were divided into five sections; A, B, C,

D and E. Section A comprised of questions on the bio data of the respondents.

Section B focused on the qualification requirements of customers for loans. Section

C dwelt on issues relating to the processes used in granting loans to customers.

Section D had questions on the problems encountered by the bank in an attempt to

recover loans from customers and Section E had questions on the measures used by

the bank to enhance loan recovery and reduce credit risk.

Pre-testing was carried out to test the validity and reliability of the

questionnaires designed for data collection. The pre-testing was done using

management and customers of the bank at Nankese as the researcher was on an

assignment there. The responses received were consistently close to or same as

those anticipated. The questionnaires were therefore considered valid and reliable

for data collection and the pre-test samples were also included in the final samples.

xl
 To facilitate the data collection, a letter of introduction was obtained from

the Institute of Distance Learning, Kwame Nkrumah University of Science and

Technology and visits were made to the South Akim Rural Bank in Koforidua to

inform the Management about the data collection exercise. A date was scheduled

and a suitable time agreed upon for explaining the essence of the research to

respondents. In the process, respondents were assured about the confidentiality of

the exercise. The researcher personally administered the questionnaires to the

various respondents and one week was used to collect the entire data.

A structured interview guide was also used for the Branch Manager, Human

Resource Officer, Internal Auditor, Project/Loans Officer, Marketing Officer, ICT

Officer, Logistics Officer and the Accountant because of their work schedule. The

questions focussed on the research objectives and research questions. The questions

were read out to the respondents and the responses given were ticked accordingly.

The interview ended with an examination of some documents on credit risk

management from the bank.

3.5 Data analysis/presentation procedure

The data from the respondents was first edited. Individual items on the

questionnaires were edited in line with the responses given. The raw data was then

organised bearing in mind the research questions for which the instruments were

designed. Analysis of the data involved the coding of items in the questionnaires

and feeding them into a computer for analysis. Descriptive statistics in the form of

xli
 frequencies and percentages were used in presenting the data and these were

combined with tools from the Statistical Product and Service Solutions (SPSS)

software to analyse the data gathered. Pictorial representations were also used to

make the descriptions more vivid.

CHAPTER FOUR

RESULTS AND DISCUSSION

4.1 Introduction

This chapter presents the results and discussion of the data collected from

respondents on credit risk management at the South Akim Rural Bank in Koforidua.

The analysis and discussion of the results focused on the objectives of the study.

4.2 Bio data of respondents

A study of the bio data of respondents revealed the following details which

relate to their gender and age.

Table 2: Distribution of respondents by gender – Bank staff

Sex Frequency

Percentage

Male 6 75.0

Female 2 25.0

xlii
Total 8 100.0

Source: Field survey, 2012

The above information can be presented in the form of a pie chart as

follows:

Figure 1: A pie chart showing the distribution of respondents by gender –

Bank Staff

Table 3 and the pie chart in figure1 indicate that of the total number of bank

staff who were chosen as respondents, male employees were 75.0% as against

25.0% who were female employees.

xliii
 The distribution by gender of the other respondents in the sample is shown

in Table 3.

Table 3: Distribution of respondents by gender – Customers

Sex Frequency

Percentage

Male 77 64.2

Female 43 35.8

Total 120 100.0

Source: Field survey, 2012

Similarly, male respondents were 64.2% and female respondents totalled

35.8% as indicated in Table 4 for respondents who were customers and the above

information is presented in the form of the pie chart that follows:

Figure 2: A pie chart showing the distribution of respondents by gender –

Customers

xliv
 In response to the employment status of customers, it came to light that

48.0% were employed in the formal sector while 52.0% were engaged in the

informal sector.

Questions were asked about the level of education of the respondents

(customers) and the responses obtained showed that 23.0% had tertiary education,

46.0% had SHS level education, 9.0% basic and JHS level education and 12.0% had

non-formal education and 10.0% had no education at all. The respondents therefore

generally have a level of education that is adequate to enable them appreciate

simple bank transactions.

Table 4 also indicates the ages of respondents.

Table 4: Age distribution of respondents

Age (Years) Frequency Percentage Degree

Equivalent

10 - 19 4 3.1 11.3

xlv
 20 – 29 12 9.4 33.8

30 – 39 17 13.3 47.8

40 – 49 63 49.2 177.2

50 – 59 18 14.1 50.6

60 – 69 11 8.6 30.9

70 - 79 3 2.3 8.4

-----------------------------------------------------------------------------------------------------

-------

Total 128 100.0 360

-----------------------------------------------------------------------------------------------------

-------

Source: Field survey, 2012

The ages as shown in Table 4 above was at respondents’ last birthday and

these ranged from between 10 to 79 years. The details presented in Table 5 cover all

the respondents – both the bank staff and customers.

An examination of the age distribution shows that the age range 40 – 49

years has 63 respondents (49.2%) an indication that most of the customers of the

bank have more years of work life and unless they change banks, would help

sustain the operations of the bank.

The above information is presented in the form of a pie chart as follows:

Figure 3: A pie chart showing the age distribution of respondents

xlvi
4.3 Qualification requirements of customers for loans

To obtain and analyse responses on qualification standards for loans, the

questions that follow were asked the customers totalling 120 only and the responses

obtained have also been analysed as appropriate.

In response to whether the customers selected as respondents were familiar

with the processes of obtaining loans from the South Akim Rural Bank in

Koforidua, 69.0% said yes while 31.0% responded in the negative. Those who had

some knowledge were further asked to indicate what these processes are and they

mentioned that the applicant has to be a worker or customer of the bank, must have

a required minimum deposit in his account, submit an application letter and must be

properly appraised before the loan is approved.

Respondents were also asked to indicate how often the bank communicates

its lending rate to customers. The responses obtained are shown in Table 5.

xlvii
Table 5: Frequency of communication of the bank’s lending rate

Response Frequency

Percentage

Very often 5 4.2

Often 8 6.6

Sometimes 87 72.5

Seldom 20 16.7

Not at all 0 0.0

Total 120 100.0

Source: Field survey, 2012

As indicated in Table 5, 72.5% representing the majority stated that the bank’s

lending rate is only sometimes communicated to them while 16.7% stated that the

communication is only seldom and 10.8% said the bank ‘very often’ to ‘often’

communicate its lending rate to customers.

Table 6: Customers who have taken loans from the bank

Response No. of respondents Percentage (%)

Have taken loan (s) 97 75.8

Have not taken 23 24.2

loans

Total 120 100.0

Source: Field survey, 2012

xlviii
 From Table 6, it is noted that 75.8% of respondents indicated that they have

benefitted from some form of credit from the bank before and 24.2% had not taken

any loans from the bank before. This is an indication that the bank advances credit

to its customers and lots of customers benefit from such loans.

The above details are shown in the pie chart below.

Figure 4: A pie chart showing customers who have taken loans from the bank

The fact that the bank gives loans to a variety of customers is supported by

Miller and Horne (1993) who intimate that where loan administration is properly

handled by the management of a financial institution, it is able to rake in adequate

loan interest to support its development objectives and also remain very competitive

in the industry.

xlix
 Respondents were asked to give reasons why they sometimes default in the

repayment of loans and their responses are captured in Table 8.

Table 7: Customers reasons for loan re-payment default

Response No. of respondents Percentage (%)

Venture failure 89 74.2

Family problems 11 9.2

Misappropriation of funds 7 5.8

Sheer reluctance 8 6.6

Others 5 4.2

Total 120 100.0

Source: Field survey, 2012

From Table 8, it is noted that a number of factors account for loan payment

defaults. However, from the responses obtained, the most pronounced is venture

failure with a percentage of 74.2%. Maness (1990) suggests that ill-advice, wrong

choice of jobs, unskilled and lazy staff and the inability to attract and retain

customers are all factors that might result in business failures.

The information above is represented in the pie chart in figure 6.

l
Figure 5: A pie chart showing reasons for loan re-payment default

Though some of the loan beneficiaries were quick to indicate that controls

for the granting of loans by the bank were strict, such measures could still be

improved upon and that a higher level of efficiency could be brought about in the

bank’s operations in the area of loans administration. Mwime (1995) suggests that

where a bank has strict controls for the giving of loans to customers and these are

complied with, it reduces how much goes into bad debts.

4.4 Credit risk factors and problems of loan recovery

The Manager, Human Resource Officer, Accountant, Internal Auditor,

Loans/Projects Officer, Marketing Officer, ICT Officer and the Procurement

Officer were also asked to provide some responses on issues on processes for

granting loans, credit risk factors and problems encountered in loans recovery effort

li
together with measures for loan recovery and credit risk reduction. Their responses

are discussed below. The manager and the seven other

staff above when interviewed mentioned that the bank supports the agricultural,

construction, manufacturing and service sectors with

loans. In addition to these sectors, the bank also supports commerce,

provides various forms of personal loans and is also into micro financing. In all

these sectors, credit is extended to both salaried and non-salaried customers.

The responses of the staff further indicated that the bank gives short-term,

medium-term and long-term term loans with the short-term loans usually given for

a period of up to three months, the medium-term from three months to one year and

the long-term from one year to three years and above.

When the question was asked about the eligibility requirements for loans

from the bank, the responses obtained from all the 8 respondents suggested the

procedures outlined below:

1. The applicant must be a worker and customer of the bank.

2. The applicant must have a minimum amount of thirty-three percent (33%) of the

required loan in his or her account.

3. The applicant must submit an application letter in writing and this must be

signed or thumb printed.

4. The applicant must be properly appraised by the loans/project officer on the

information gathered through credit investigation.

lii
5. Applicants who have overdue accounts with the bank are not eligible for new

loans.

6. The applicant must fill the required loan form fully.

An important document that was perused at the end of the interview was the

bank’s annual reports from 2008 to 2010. It contained the loans granted to various

sectors in these years and provided a very useful insight for the study.

Table 8: Loans granted to customers from 2008 to 2010

Sectors Year 2008 Year 2009 Year 2010

Agriculture 98,721 106,533 166,626

Commerce 1,902,165 2,007,909 2,245,035

Transport 222,039 290,799 380,556

Cottage Industries 18,372 5,022 2,257,458

Miscellaneous 1,181,829 1,471,119 64,023

Total 3,423,126 3,881,382 5,113,698

Source: South Akim Rural Bank, Annual Reports 2008, 2009 and 2010

As shown in Table 8, the bank extends most of its loan facilities to sectors

comprising of agriculture, commerce, transport, cottage industries and others. In the

year 2008, 2009 and 2010, the highest amount of loans went to commerce with

percentages of 55.6%, 51.7% and 43.9% respectively and though the figures keep

reducing from one year to the other, loans to that sector still remained highest. In

the case of the cottage industries sector, it started with the least percentage (0.5%)

of loans in 2008, but ended up in 2010 with the highest percentage (44.1%) a

situation which appears to suggest an increase in the level of activity in this sector.

liii
 The study also sought to ascertain the categories of customers that loans are

granted to. Their responses are captured in Table 9.

Table 9: Categories of customer that credit is advanced to

Response No. of respondents Percentage (%)

Current Account Holders 7 87.5

Savings Account Holders 1 12.5

Fixed Deposit Holders 0 0.0

Treasury Bills Customers 0 0.0

Others 5 0.0

Total 8 100.0

Source: Field survey, 2012

From Table 9, one staff mentioned that savings account holders could be

given loans. This represents 12.5%. All the 7 remaining respondents or 87.5%

interviewed suggested that most of the time salaried earners or those who save at

the bank and could provide collateral against loans were often given loans.

In response to the question about how long a customer of the bank had to

wait in order to qualify for a loan, all the 8 respondents agreed that up to six months

of opening especially a current account with the bank, a customer could be granted

a loan.

liv
 On the question of whether the bank has a system of screening loan

applicants before loans are given to them, the 8 respondents answered in the

affirmative and went ahead to indicate that the most common screening method was

an evaluation of the nature of the applicant’s job in order to ascertain if he has a

regular income which is sustainable. All the loan applicants are then evaluated

through a system of credit rating and ranked for qualification. Depending on how

much deposit each individual has in his account, they are given a loan that is

proportional to it.

The respondents who are employees of the bank were also asked to identify

the most common credit risk factors or specify problems that they encounter in the

bank’s effort to recover loans from the loan beneficiaries and their responses are

discussed below:

When the respondents were asked if they faced problems with the customers

in terms of loans repayment, all of the 8 respondents stated that they sometimes do.

Some of the problems stated include locating the debtors after they have taken the

loans, misapplication of the loans or in some cases, failures of the businesses for

which the loans are obtained. The interview also reviewed that the bank has laid

down procedures for granting credit and the procedures are reviewed every five

years.

4.5 Measures of loan recovery and credit risk reduction

The employees were also asked to indicate measures of loan recovery and

credit risk reduction and their responses are discussed below. Specifically, the

lv
respondents were to indicate how often compensating balance, collateral security,

stringent management, strict enforcement of restrictive covenant, law suits, credit

insurance, guarantees and syndication and participation were used as measures of

loan recovery and credit risk reduction and their responses are discussed below.

Table 10: The use of compensating balance as a measure of loan recovery and
credit risk reduction

Response Frequency

Percentage

Very often 0 0.0

Often 0 0.0

Sometimes 8 100.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

Source: Field survey, 2012

As evident in Table 10, all the 8 respondents indicated that compensating

balance is only sometimes used by the bank as a measure of loan recovery and

credit risk reduction.

Table 11: The use of collateral security as a measure of loan recovery and

credit risk reduction

lvi
Response Frequency

Percentage

Very often 4 50.0

Often 4 50.0

Sometimes 0 0.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

Source: Field survey, 2012

As evident in Table 11, 4 respondents representing 50.0% indicated that

collateral security is very often used by the bank as a measure of loan recovery and

credit risk reduction. The remaining 4 respondents also representing 50.0%

indicated that collateral security is often used by the bank as a measure of loan

recovery and credit risk reduction.

To obtain, analyse and discuss whether stringent management is a measure

of loan recovery and credit risk reduction that used at the bank, responses were

required of the Management staff used in the study. What they provided is indicated

in Table 10 below.

Table 12: The use of stringent management as a measure of loan recovery and

credit risk reduction

Response Frequency

Percentage

Very often 1 12.5

lvii
Often 7 87.5

Sometimes 0 0.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

Source: Field survey, 2012

Table 12 shows that 100.0% of the respondents agreed that ‘very often’ and

‘often’, stringent management practices are used by the Management of the bank to

reduce credit risk.

Respondents were asked to indicate if the strict enforcement of restrictive

covenant is used by the bank as a measure of loan recovery and credit risk

reduction and their responses suggested that Management does not use restrictive

covenants in their loan recovery and risk recovery drive.

On the issue of whether loan repayment defaulters are sent to court for

prosecution, what was obtained as respondents’ responses are presented in Table

13.

Table 13: The use of law suits as a measure of loan recovery and credit risk
reduction

Response Frequency

Percentage

Very often 0 0.0

Often 0 0.0

Sometimes 8 100.0

Seldom 0 0.0

lviii
Not at all 0 0.0

Total 8 100.0

Source: Field survey, 2012

Sending loan re-payment defaulters to court for prosecution seems to be one

of the last measures that most banks use to recovery loans. For this reason, it was

not very surprising when all the 8 respondents agreed that Management only

sometimes use law suits to recover loans. According to Caprio and Klingebel

(1996), the use of courts to recover money that has been given out as loans is

lawful. However, where such use is frequent, continuous or persistent, it

discourages most potential customers from transacting businesses with the bank.

Views were also sought on whether the Management of the bank uses

credit risk insurance as a measure to protect the money usually advanced to

customers as loans and the responses obtained have been put together in Table 14.

Table 14: The use of credit insurance as a measure of loan recovery and credit
risk reduction

Response Frequency

Percentage

Very often 0 0.0

Often 0 0.0

Sometimes 8 100.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

lix
Source: Field survey, 2012

Table 14 shows that all the 8 respondents were unanimous in stating that

credit insurance is not a popular arrangement used by the bank as a measure for the

recovery of loans and the reduction of credit risk. Probably because insurance

schemes are not generally likeable by the citizenry mostly because of issues of

claims payment, banks also find it not very attractive to dabble in it to any large

extent.

The issue of the use of guarantees for credit risk management was also

examined and the responses obtained have been presented in Table 15.

Table 15: The use of guarantees as a measure of loan recovery and credit risk

reduction

Response Frequency

Percentage

Very often 8 0.0

Often 0 0.0

Sometimes 0 100.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

lx
Source: Field survey, 2012

All the 8 respondents representing 100.0% responded that very often

guarantees are used to limit the risk involved in advancing loans to customers. To

them, the usual practice is for a loan applicant to arrange to get two people who are

also customers of the bank to assent to the loan request by signing a column on the

loan application form.

Respondents were further requested to indicate whether Management of the

bank uses syndication and participation as a measure of loan recovery and credit

risk reduction. The responses obtained are presented in table16.

Table 16: The use of syndication and participation as a measure of loan

recovery and credit risk reduction

Response Frequency

Percentage

Very often 0 0.0

Often 0 0.0

Sometimes 8 100.0

Seldom 0 0.0

Not at all 0 0.0

Total 8 100.0

lxi
 Source: Field survey, 2012

As evident in Table 16, all the 8 respondents mentioned that the bank only

sometimes uses syndication as a measure of loan recovery and credit risk reduction.

From all the responses obtained from the respondents on the measures of loan

recovery and credit risk reduction, it came to the fore that the use of collateral,

stringent management and guarantees are the measures that are very often used by

the bank for loans recovery and the management of credit risk.

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter presents a summary of the study. It covers the major findings,

conclusions arrived at and the recommendations made. The study examined credit

risk management at the South Akim Rural Bank in Koforidua by focusing on four

main objectives. Descriptive survey was used for the research and a sample of one

lxii
 hundred and twenty-eight (128) was selected for the study through the purposive

and systematic sampling methods.

5.2 Summary of findings

The study dealt with four specific objectives. The first and second objectives

were on the assessment of the qualification standards of customers for loans and the

bank’s processes for granting loans. The key findings are:

Most of the customers (69.0%) were familiar with the processes for granting

loans and they mentioned some of these to include that the applicant had to be a

customer of the bank, must have an expected minimum deposit in his current

account, must submit an application letter and must be properly appraised before

the approval of his loan.

Another key finding was that the qualification requirements for loans are

only sometimes made known to potential loan applicants. This is supported by the

72.5% responses from the respondents. This notwithstanding, the study showed that

80.8% of customers have taken loans from the bank but when it comes to the re-

payment of such loans, most of them default.

The third objective that was addressed by the study was the problems

encountered in the bank’s attempt to recover loans from customers. With respect to

this objective, the study revealed that most current account holders and a very few

savings account holders are usually given short-term, medium-term and long-term

loans of substantial sums however, most of such customers default in loan re-

payment mainly as a result of failures of the businesses they invest in together with

lxiii
 other subsidiary reasons such the misappropriation of the loans and sheer reluctance

to pay back to the bank.

The fourth objective was to examine the measures in place to enhance loan

recovery and credit risk reduction at the bank. With respect to the objective, the

study found out that though the South Akim Rural Bank in Koforidua uses

compensating balance, collateral security, stringent management, strict enforcement

of restrictive covenant, law suits, credit insurance, guarantees as well as syndication

and participation, by far, the most often used measure of credit risk reduction is

through the collateral security, guarantees and stringent management practices.

5.3 Conclusions

The management of credit risk is a big issue at the South Akim Rural Bank

in Koforidua. With respect to the processes for loan application customers indicated

adequate familiarity with these but the same customers were not completely

familiar with the requirements that could qualify one for a loan. A number of

problems were identified for customers’ reluctance to repay their loans and the most

outstanding was the issue of venture failures and though there were some measures

in place at the bank for the reduction of the risks associated with credit, such

measures did not seem to be very effective,

5.4 Recommendations

Based on the findings of the study and the conclusions drawn from it,

certain issues need to be addressed.

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 Management has to hold frequent meetings to review qualification standards

for loans and these must be well communicated from time to time to customers.

Again the processes for granting loans must be reviewed periodically and in

doing this, the input of key customers must be solicited. When done information

should be passed on to customers especially using the bank’s notice board.

As venture failures was noted to be the key problem that often created the

greatest risk of non-payment of loans, Management could set up an advisory board

of experts who would take up the responsibility of advising and guiding potential

loan beneficiaries about appropriate investment opportunities that assure a

reasonable return so that the risk of non-payment of loans could be minimised.

REFERENCES

Bank of credit Manual for Rural bank (2006).

Brealey, Allen, Myers, Principles of Corporate finance (8, ed)(2006), McGraw –

Hill Higher Education.

Crosse H. Hambel G. (1980). Management policies and Commercial Banks. New

York: Prentice Hall Inc.

lxv
 Gup F. and Korari (1989). Commercial Bank Management . New York: John

Willey and sons Publishers.

Harrington Neithans, Risk Management and Insurance (2, ed) (2003).Irwin /

McGraw – Hill.

Hemple G. Hetel (1994). Bank management, New York, Johnson Willy and Sons.

International Dictionary of Management (2003). (2, ed) by Hanno Johnannes and

Jerry G.

Kohn (1993). Money banking and Financial Market. New York: the Dryden Press.

Maness (1990). Credit Analysis and Appraisals.

Manness T. S. (1998). Introduction to Corporate Finance. New York: McGram Hill

book Company.

Miller R. L. and Van House D. D. (1993). Modern money and Banking. New York:

McGram Hill book Company.

Mwime F. (1995). “Wrestle with Rural credit borrowers, African farmers

Magazine, Uganda.

Rose and Kolari (1995). Loan polices and Forms of credit to Rural Banks.

Rose P. S. and Kolari, J. W. (1999). Financial Institute understanding service:

Chicago Irwin.

Simpson and Coleman (1994). (2, ed) Financial Management.

lxvi
 South Akim Rural Bank Brochure.

Stoner and Freeman (1995). Management of the Bank.

APPENDIX A

QUESTIONNAIRE AND INTERVIEW GUIDE

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

INSTITUTE OF DISTANCE LEARNING

This is a study on the management of credit risk and your bank has been selected as

an access institution because of the assistance it provides to customers in its catchment

areas. A number of issues have been identified and your candid responses will be duly

lxvii
appreciated. You are assured that this is purely for an academic exercise and your

responses and records will be treated confidentially.

SECTION A: Bio data

(Please provide the required answer(s) or tick [ ] as appropriate).

1. Name of

Department............................................................................................................

2. Sex: Male [ ] Female [ ]

3. Age (As at last birthday).

4. Highest academic qualification:

SECTION B: Qualification requirements for loans at the South Akim Rural Bank

5. Have you applied for a loan from the South Akim Rural Bank before?

Yes [ ] No [ ]

6. If you answered ‘no’, to question 5, please provide reasons

why......................................

.......................................................................................................................................

........

7. If you answered ‘yes’ to question 5, were you given the loan?

Yes [ ] No [ ]

8. If you answered ‘no’, state below the reasons why your application was not

successfully.

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 .......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

..........................

9. How does one qualify to obtain a loan from the bank?

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

..........................

10. Do you think the qualification requirements are satisfactory?

Yes [ ] No [ ]

11. Give reasons for your choice of answer in question 10.

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

...................................

SECTION C: Processes used for granting loans to customers of the bank

12. What categories of customers are given loans by the bank?

13. How long must one be a customer to qualify for a loan facility?

14. Does the bank has a system for screening loan applicants?

Yes [ [ No [ ]

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 15. If you answered ‘yes’ to question 14, please indicate what applicants are screened

for

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

....................................

16. Specify the processes that are used in granting loans to customers.

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

....................................

17. Are interest rate values communicated to potential loan applicants?

Yes [ [ No [ ]

SECTION D: Problems encountered by the bank in its loan recovery effort

18. Does the bank encounter any problems in its attempt to recover loans from

customers?

Yes [ [ No [ ]

19. If you answered ‘no’ to question 18, what factors account for this?

.......................................................................................................................................

.......................................................................................................................................

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 .......................................................................................................................................

.......................................................................................................................................

..................................

20. If you answered ‘yes’ to question 18, state the problems encountered by the bank in

its attempt to recover loans from customers.

21. Which of the problems do you think are most pronounced?

.......................................................................................................................................

.......................................................................................................................................

.......................................................................................................................................

...........................

BANK STAFF ONLY

SECTION E: Measures used by the bank to manage credit risk

22. How is credit risk managed at the South Akim Rural Bank?

23. Indicate how often the following credit risk management measures are used by the

South Akim Rural Bank.

Items/Responses Very often Often Sometimes Seldom Not at all

Compensating

balance

Collateral

security

Stringent

lxxi
management

Strict

enforcement of

restrictive

covenant

Law suits

Credit insurance

Guarantees

Syndication and

Participation

lxxii