Professional Documents
Culture Documents
Lartey Odame Edward - M
Lartey Odame Edward - M
by
(PG 4124210)
SEPTEMBER, 2012.
i
DECLARATION
I hereby declare that this submission is my own work towards the Commonwealth
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.
Certified by:
S. T. Osei-Tutu
Certified By:
Prof. I. K. Dontwi
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
I also wish to express my whole hearted gratitude to Mr. Seth Tuffour Osei-Tutu
Also to all the lecturers of CEMBA (KNUST) Koforidua center for encouraging
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
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
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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
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
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,
v
TABLE OF CONTENTS
DECLARATION i
DEDICATION ii
ACKNOWLEDGEMENT iii
ABSTRACT iv
CHAPTER ONE
TITLES PAGES
1.0 Introduction 1
vi
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction 7
2.12. Supervision 19
2.16. Summary 22
vii
CHAPTER THREE
METHODOLOGY
3.2. Population 24
CHAPTER FOUR
4.0 Introduction 29
viii
CHAPTER FIVE
5.0. Introduction 48
5.2. Conclusion 49
5.3. Recommendations 50
ix
LIST OF TABLES
TABLE PAGES
x
Table 15: The use of Guarantees as a measure of 47
xi
LIST OF FIGURES
FIGURES PAGES
Figure 4: A pie chat showing customers who have taken loan from the Bank. 35
xii
CHAPTER ONE
INTRODUCTION
bank financial institutions. At the helm is the Bank of Ghana which has the
part of the financial system and have been established as unit banks to provide
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
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
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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
The head office of the bank is located at Nankese which is a town in the Suhum
Suhum and later opened other agencies in Koforidua on 8th October, 1993 and
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
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
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
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
Since its inception, the South Akim Rural Bank has been very influential in
support for the setting up of micro enterprises, empowering women and/or other
As indicated in the background of the study, the South Akim Rural Bank has
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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
problems of determining the interest rate on loans to cover cost and at the same
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
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.
1. Assess the qualification standards of customers for loans at the South Akim
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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. What qualify customers for loans at the South Akim Rural Bank?
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?
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
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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.
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,
The study consists of five chapters. The first chapter focuses on the
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
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,
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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
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
definitions of credit, forms and importance of credit, risks associated with the
in lending, loan policy, credit analysis appraisal, loan review and evaluation, 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.
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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
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
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
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
The Bank of Ghana’s Credit Manual for rural banks stipulates that, credit
community (BOG Manual, 2009). According to the manual, credit facilities may
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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
Affirming this stance, Rose and Kora (1999) touch on the significant
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
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
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.
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
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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.
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
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
3. Credit risk – Because the majority of finance company funds are allocated as
loans, customers who borrow from such companies usually exhibit a moderate
higher than that of other lending financial institutions. However, this higher
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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
economic conditions.
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
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
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
means of lending to borrowers. However, such banks have to deal with some
introduces information asymmetry. To ensure that credit will be repaid and for
that matter reduce the problems associated with information asymmetry, banks
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function effectively, staff, depositors and borrowers need to be provided with
mostly originating in the urban environment and the rural borrowers who are
and obligation do not reach small producers particularly when they are
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
to credit and liquidity constraints are related but distinct issues for rural
finance. Stieglitz and Weiss (2004) opine that because of transaction costs and
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
is willing to pay the prevailing interest rate. A firm or household has a liquidity
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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
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,
credit programme does not necessarily imply that a liquidity constraint was
previously binding. Reduced cost of credit with increased access will relax a
income transfer and reduced cost for consumption of goods could each alleviate
borrowing.
to fail mainly because it is diverse and continually changes. Stoner and Freeman
xxv
controlling the work of organisational members and using all available
handling these risks in a way best suited to the financing or investment objectives
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
the bank.
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
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
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4. Frequently monitoring critical project dimensions with the goal of catching
and eliminating problems in their early stages, before they cause extensive
damages.
daily report, intensified weekly reviews and sanctioning of delinquent staff will
promote measures which should improve the quality of portfolio growth. (Business
and organising of all available bank resources in order to grant credit in a highly
that profitability and the economy’s ultimate security of the bank’s assets are not
sacrificed.
Fraser and Korari (1989) maintain that failure is normally the result of
(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
bank directors and management. They intimate that before establishing a loan
policy, the institution needs to be concerned about how individual applications are
evaluated.
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2.7 Loan policy
Rose and Korari (1995) outline the following components that should be a
provide Directors with the opportunity to evaluate the role of the bank in the
2. Trade Areas: Both primary and secondary areas should be designed to instruct
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
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
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
5. Credit Standard: Loan policy should indicate both desirable and undesirable
lending is prohibited. The quality and liquidity of collateral must be verified and
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maximum loan collateral value ration should be applied before a secured loan is
6. Loan Authorisation and approval: The policy should establish lending for all
loan officers and for a combination of officers and loan committees (Hempel,
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
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
much effort to expend trying to distinguish between customers who will pay and
Hempel, Simonson and Coleman (1994) suggest that every loan policy
should require diligence on the part of loan officers. They identify certain indicators
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to aid loan officers in the detection of problems associated with loans. These
include insufficient deposit balance and the occurrence of overdraft, late payments
statements.
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
1. Capacity: The customer’s ability to meet obligations out of operating cash flows.
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
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
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.
Various statutes, regulations and the common law control the formal and
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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
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
commence business from the register general office. This certificate empowers rural
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
General’s Office and regular visits by Bank of Ghana’s officials. Rural banks are
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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
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,
demonstrate. The applicant must appear to be physically and mentally sound and
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
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
directors of rural banks, such applications shall be referred to the Bank of Ghana for
are cultivating land allocated for the cultivation of vegetables and staple crops, the
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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
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
allocation priorities set in the guidelines established by the Bank of Ghana. The
industry 30% approximately, trade and transport 20% maximum. The project
officer is responsible for studying all applications and arranging for an appraisal or
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
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According to Mwine (1995), rural banks have the following credit periods.
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
credit, forms and importance of credit, risks associated with lending, credit risk
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.
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CHAPTER THREE
METHODOLOGY
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
descriptive survey ‘permits the asking of the same set of questions often in the form
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
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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
Branch Manager
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
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3.2 Population
was the management staff of the South Akim Rural Bank in Koforidua and
Table 1 depicts the employees and the departmental breakdown of the study
organisation.
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
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The South Akim Rural Bank in Koforidua has eight departments. The
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 list of management staff at the South Akim Rural Bank in Koforidua
Purposive and random sampling methods were used to select the sample for
the study. The Branch Manager, Human Resource Officer, Accountant, Internal
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
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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
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,
recover loans from customers and Section E had questions on the measures used by
Pre-testing was carried out to test the validity and reliability of the
questionnaires designed for data collection. The pre-testing was done using
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.
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To facilitate the data collection, a letter of introduction was obtained from
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
various respondents and one week was used to collect the entire data.
A structured interview guide was also used for the Branch Manager, Human
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 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
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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
CHAPTER FOUR
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.
A study of the bio data of respondents revealed the following details which
Sex Frequency
Percentage
Male 6 75.0
Female 2 25.0
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Total 8 100.0
follows:
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
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The distribution by gender of the other respondents in the sample is shown
in Table 3.
Sex Frequency
Percentage
Male 77 64.2
Female 43 35.8
35.8% as indicated in Table 4 for respondents who were customers and the above
Customers
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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.
(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
Equivalent
10 - 19 4 3.1 11.3
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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
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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
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
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4.3 Qualification requirements of customers for loans
questions that follow were asked the customers totalling 120 only and the responses
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
Respondents were also asked to indicate how often the bank communicates
its lending rate to customers. The responses obtained are shown in Table 5.
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Table 5: Frequency of communication of the bank’s lending rate
Response Frequency
Percentage
Often 8 6.6
Sometimes 87 72.5
Seldom 20 16.7
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’
loans
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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
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
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
Others 5 4.2
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
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
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
staff above when interviewed mentioned that the bank supports the agricultural,
provides various forms of personal loans and is also into micro financing. In all
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
When the question was asked about the eligibility requirements for loans
from the bank, the responses obtained from all the 8 respondents suggested the
2. The applicant must have a minimum amount of thirty-three percent (33%) of the
3. The applicant must submit an application letter in writing and this must be
lii
5. Applicants who have overdue accounts with the bank are not eligible for new
loans.
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.
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
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
Others 5 0.0
Total 8 100.0
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
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.
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,
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
Often 0 0.0
Sometimes 8 100.0
Seldom 0 0.0
Total 8 100.0
balance is only sometimes used by the bank as a measure of loan recovery and
Table 11: The use of collateral security as a measure of loan recovery and
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Response Frequency
Percentage
Often 4 50.0
Sometimes 0 0.0
Seldom 0 0.0
Total 8 100.0
collateral security is very often used by the bank as a measure of loan recovery and
indicated that collateral security is often used by the bank as a measure of loan
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
Response Frequency
Percentage
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Often 7 87.5
Sometimes 0 0.0
Seldom 0 0.0
Total 8 100.0
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
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
On the issue of whether loan repayment defaulters are sent to court for
13.
Table 13: The use of law suits as a measure of loan recovery and credit risk
reduction
Response Frequency
Percentage
Often 0 0.0
Sometimes 8 100.0
Seldom 0 0.0
lviii
Not at all 0 0.0
Total 8 100.0
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
discourages most potential customers from transacting businesses with the bank.
Views were also sought on whether the Management of the bank uses
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
Often 0 0.0
Sometimes 8 100.0
Seldom 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
Often 0 0.0
Sometimes 0 100.0
Seldom 0 0.0
Total 8 100.0
lx
Source: Field survey, 2012
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
bank uses syndication and participation as a measure of loan recovery and credit
Response Frequency
Percentage
Often 0 0.0
Sometimes 8 100.0
Seldom 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
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
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
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
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-
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
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
and participation, by far, the most often used measure of credit risk reduction is
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
5.4 Recommendations
Based on the findings of the study and the conclusions drawn from it,
lxiv
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
As venture failures was noted to be the key problem that often created the
of experts who would take up the responsibility of advising and guiding potential
REFERENCES
lxv
Gup F. and Korari (1989). Commercial Bank Management . New York: John
McGraw – Hill.
Hemple G. Hetel (1994). Bank management, New York, Johnson Willy and Sons.
Jerry G.
Kohn (1993). Money banking and Financial Market. New York: the Dryden Press.
book Company.
Miller R. L. and Van House D. D. (1993). Modern money and Banking. New York:
Magazine, Uganda.
Rose and Kolari (1995). Loan polices and Forms of credit to Rural Banks.
Chicago Irwin.
lxvi
South Akim Rural Bank Brochure.
APPENDIX A
This is a study on the management of credit risk and your bank has been selected as
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
1. Name of
Department............................................................................................................
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 [ ]
why......................................
.......................................................................................................................................
........
Yes [ ] No [ ]
8. If you answered ‘no’, state below the reasons why your application was not
successfully.
lxviii
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
..........................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
..........................
Yes [ ] No [ ]
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
...................................
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 [ ]
lxix
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.
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
....................................
Yes [ [ No [ ]
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?
.......................................................................................................................................
.......................................................................................................................................
lxx
.......................................................................................................................................
.......................................................................................................................................
..................................
20. If you answered ‘yes’ to question 18, state the problems encountered by the bank in
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
...........................
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
Compensating
balance
Collateral
security
Stringent
lxxi
management
Strict
enforcement of
restrictive
covenant
Law suits
Credit insurance
Guarantees
Syndication and
Participation
lxxii