Credit Risk and Bank Performance in Ghana
Chapter One
Objectives of the Study
The general objective of the research is to evaluate the effect of credit risk on the performance of banks. However, specifically the study seeks to:
- Identify the major forms of credit risk of banks in Ghana;
- Evaluate the influence of credit uncertainties on the profitability of the bank;
- Identify the measures adopted to manage the bank’s credit risk; and
- Discuss the challenges of the credit risk management practices of the bank.
CHAPTER TWO
LITERATURE REVIEW
Introduction
The chapter examines pertinent academic research in the fields of credit risk and bank profitability. The chapter examines Ghanaian banking, risk definition, and various banking issues. Risk management, credit risk management in banks, credit risk management policy or philosophy, credit risk management methods, and banks’ credit culture are all covered in this chapter. The chapter also analyzed empirical research on the profitability and credit risk management concepts.
Recent Development in the Ghanaian Banking Sector
There are currently 26 banks with universal business licenses, 15 of which are controlled by foreign entities, and 7 of which trade on the Ghana Stock Exchange. The supervision and control of the activities of the banks are the responsibilities of Ghana’s central bank, the Bank of Ghana (BOG). The Bank of Ghana Act 2002 (Act 612), the Banking Act, 2004 (Act 673), the Financial Institutions (Non-Bank) Law 1993, the PNDC Law 328, the Companies Code (Act 179, 1963), and the Bank of Ghana Notices, Directions, Circulars, and Regulations make up the regulatory and legal framework in Ghana within which banks, non-bank financial institutions, as well as forex bureaux, operate (Salami & Lamie, 2013). The BOG of the 136 rural/community banks is Apex Bank.
The Bank of Ghana has abandoned the three-pillar model of banking, which consisted of commercial banking, investment/merchant banking, and development banking, in favor of a new platform known as universal banking since 2003. All forms of banking can now be done by banks with a license thanks to the enactment of the Universal Banking Law. Its implementation leveled the playing field and allowed for intense rivalry, the development of new products, and the admission of new banks (Amidu & Hinson, 2006).
The Bank of Ghana’s Banking Supervision Department employs a Risk Based Supervisory Approach for its on-site supervision with regard to risk management. Dosoo (2006) claimed that the New Basel Capital Accord’s implementation coincided with the trend toward risk-based supervision (Basel II) which includes operational risk. This emphasized market discipline, which borders on transparency and full disclosure of financial information, and the supervisory review procedure even more. They were designed to give a clear foundation for managing risks effectively and allocating resources to do so in order to create safe and sound banking organizations. The risk-based strategy improves a thorough and in-depth evaluation of the banks’ risk profile and risk management.
The banking sector in Ghana has seen numerous changes recently. Interestingly, in 2008, it was claimed that all banks will disclose their financial results in conformity with IFRS (IFRS). Also, the year saw an increase of bank branches with the goal of bringing banking to clients’ doorsteps. To improve the electronic payment and settlement mechanism, E-zwich was also created. The Borrowers and Lenders Act (Act 773) was one of four laws passed by parliament to ensure high level disclosure in creditor and borrower transactions. The Non-Bank Financial Institution Act (Act 774) intends to provide a framework for effective prudential regulation and supervision of the diverse spectrum of nonbank financial institutions. It seeks to clarify lending conditions and the rights and obligations of lenders and borrowers; Home Mortgage Finance Act (Act 770) – to regulate home mortgage financing and applies to transactions between financial institutions and their clients (mortgagors) to finance the construction, purchase, completion, extension, or renovation of residential property for ownership, sale, or rental; and Anti-money Laundering Act (Act 749) – it aims to prohibit money laundering and establish a Financial Intelligence Centre. According to the Act, someone who intentionally converts, hides, distorts, transfers, takes possession of, or uses property that is a component of the proceeds of illegal activity commits money laundering (PwC & GAB, 2009).
Ten of the 14 foreign banks operating in the nation in 2009 were successful in meeting the capital requirement of GH60 million. The Ghana Inter-Bank Payment and Settlement Systems introduced the “cheque code-line clearing system” to the banking sector as well (GhIPSS). This approach helps to clear all checks across the nation within 48 hours rather than the standard three days. Moreover, banks and insurance firms collaborated to develop specialized solutions to deal with client responsibilities (PwC & GAB, 2010).
In 2010, The Bank of Ghana published regulations for the registration and operation of the Credit Bureau under the Credit Reporting Act 2007 (Act 726), which is presently supporting the credit risk management of the sector. The Ghanaian central bank has implemented a number of steps in an effort to slow down the depreciation of the Ghana Cedi. For instance, the BOG’s Monetary Policy Committee lowered the Net Open Position (NOP) limitations while concurrently raising the policy rate (PwC & GAB, 2012). This was done to make cedi assets more appealing and boost the market’s supply of foreign currency. Second, the BOG reinstated the Treasury Bills with maturities of 30, 60, and 270 days in order to support monetary activities. In accordance with the Credit Reporting Act 2007 (Act 726), which is currently supporting the sector’s credit risk management, the Bank of Ghana published regulations for the registration and operation of the Credit Bureau.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This part looks at the philosophy utilized in the present study. Besides, this segment inspects the configuration of study, the objective populace and the example size and the examining technique. The part additionally looks at the information accumulation strategies and the information gathering techniques and system for information investigation. The last area of the part talks about the unwavering quality and legitimacy of the utilized builds of the study.
Research Design
As indicated by Polit et al. (2001:23), the outline of the study “is a general arrangement for leading the study keeping in mind the end goal to answer the examination address.” The configuration of the study characterizes the strategies followed in directing the study. The utilized a blended methodologies, which included both subjective and quantitative techniques. Amaratunga et al. (2002) give in their article that subjective and quantitative exploration can be utilized as a part of mix. Amaratunga et al. (2002: 15) further clarifies that “subjective and quantitative approachs are not antithetic rather they concentrate on the distinctive measurements of the same wonder.” They additionally stress that quantitative and subjective examination can be consolidated in a manner that one can cover the shortcomings of the other. The subjective methodology included assembling the suitable information to analyze the exercises and henceforth blueprint, classify, depict, and inspect technique for gathering information (Hyde, 2000). It likewise utilizes realistic instruments, for example, bar and pie diagrams to help with simple perception of the dissemination of the information. The quantitative way to deal with this study included numerical figuring through the reception of monetary execution measurements.
The study likewise received a contextual investigation way to deal with inspect the impact of danger of given credits on Consolidated Bank Ghana’s benefit level. The study additionally utilized the contextual investigation way to deal with study just the situation of the banks in Ghana. As indicated by Yin (1994:61), a contextual investigation is “an experimental enquiry that explores a contemporary wonder inside of its genuine setting, particularly when the limits in the middle of marvel and connection are not obviously clear’ and it ‘depends on numerous wellsprings of confirmation.” Case study approaches by and large utilize information accumulation instruments including perception, meeting, poll, and substance examination.
Population of the Study
According to Saunders (2009: 101), a population “is a group of individuals, persons, objects, or items from which samples are taken for measurement.” All the group of persons or items about which the study desires to gather information on is termed as the target population. To undertake a significant study, there is the need to be precise with regard to the sample size and the setting of your targeted population. Based on this, the targeted population for this research comprised the entire Credit Officers in the Credit departments of the six (6) branches of the Consolidated Bank Ghana Ashanti region. The Consolidated Bank Ghana has 32 credit officers in the six branches and 19 mobile bankers.
CHAPTER FOUR
PRESENTATION AND DISCUSSION OF RESULT
This chapter presents and discusses the result of the study in an attempt to address the specific objectives of the study. The major areas the chapter discusses include respondent’s background, the forms of credit risk in the banking sector; the strategies employed to manage credit risk of banks in Ghana; the effects of credit risk on the bank’s profitability, and the challenges encountered by the bank in credit risk management practices.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
This chapter presents a summary of the findings of the study, draws conclusions based on the key findings and also makes recommendations and suggests areas for further research.
Summary of Findings
The study sought to assess the identify the major forms of credit risk of Consolidated Bank Ghana, examine the effect of credit risk on the banks profitability, identify the measures adopted to manage credit risk at the bank, and identify the challenges of the credit risk management practices of the bank. With regard to these earmarked objectives, the findings are discussed in paragraphs.
The Consolidated Bank Ghana gives varying types of credit to clients including micro-credit, personal loans and commercial loans. The credit facilities of the bank are associated with several forms of risk including debtor’s insolvency, financial loss resulting from changes in the level of credit spreads, debt uneconomical to pursue and when debtor abscond.
To reduce the level of risk associated with the loans granted to customers, a set of criteria is employed for the applicants to appraise. The criteria includes appraising the applicants character, applicants extent of involvement in the business, quality as an entrepreneur, experience in credit utilisation, profit and loss statement, security, ability to pay, borrowers repayment history, and business profitability. Irrespective of these appraisal criteria for credit applicants, between the periods of 2008 and 2014, the bank has witnessed an average amount of default of GH¢6,142.9 and default rate of 6.9%.
The study revealed negative relationship between the level of non-performing loans (NPL) and loan loss provisions (LLP) on the profitability of the bank. However, the loans and advances (LA), liquidity (LR) and the capital adequacy ratio (CAR) of the bank have positive relationship with the profitability of the bank. Therefore, it is imperative for the bank to reduce non-performing loans and loan loss provisions through the appropriate credit risk strategies.
The bank has laid down procedures and policy to manage credit risk. The major strategy employed by the bank in managing credit is the provision of incentive for prompt payment of acquired loans.
In the phase of these strategies to reduce the level of credit risk, the bank is still confronted by several challenges in the management of credit risk including the diversion of loans, customer business failure, inadequate appraisal, inadequate monitoring, inadequate credit staff, inadequate security, staff attitude and staff influence.
Conclusions
In the vigorous granting of micro credit to customers, the Consolidated Bank Ghana is confronted by several credit risks including debtor’s insolvency financial loss resulting from changes in the level of credit spreads, debt is uneconomical to pursue, when a debtor absconds, and when debtor is convicted. All these forms of credit risk persist irrespective of numerous credit applicant appraisal criterias. The bank thoroughly appraises all loan applicants in terms of their character, their extent of involvement in the business, quality of an entrepreneur, experience in the utilisation of credit, profit and loss statement and many others in attempt to reducing the extent of non-performing loans and increases the profit level of the bank. in the phase of the bank’s laid down procedures and policies in granting loans to applicants, and the employment of the strategy of incentive for prompt payment, the bank still witnessed an average amount of default of GH¢6,142.9 and default rate of 6.9%. This implies that there are still lapses in the credit risk management strategies employed by the bank and hence the need to introduce new strategies.
The major lapses or challenges recognized in the credit risk management practices of the Consolidated Bank Ghana included diversion of loans, customer’s business failure, loans for social purpose, inadequate appraisal, inadequate monitoring, inadequate credit staff, inadequate security and many others. All these revealed challenges have immense influence on the profitability of the bank. These challenges often lead to an increasing level of non-performing loans, loan loss provisions that both negatively influence the profitability of the bank. Therefore, for Consolidated Bank Ghana to make substantial profit from its operations there is the need to adopt appropriate and effective credit risk management strategies to reduce the current level of the loan default rate and hence non-performing loans. This can be achieved through effective and appropriate recommendations that are made in the subsequent section.
Recommendations
Based on the findings of the study, several recommendations are made in this section of the study in attempt to ensure effective and appropriate credit risk management of Consolidated Bank Ghana
Training programmes should be provided for the credit officers and mobile bankers to ensure effective and efficient credit monitoring. This could also ensure effective credit applicant appraisal bereft of any form of biases and prejudice.
There is the need for the bank to provide adequate loan management educational programmes for clients. Such educational programmes would inform clients not to misappropriate loans by using them for purposes other than what they were granted for. This form of education is essential to reduce the level of non-performing loans attributed to diversion of loans.
For customers to abide by their debt obligations and use acquired loans efficiently to avoid sudden collapse of business that would increase the level of non-performing loans or bad debt, there is the need for the bank to provide financial, accounting and technical advice to its numerous business clienteles.
The bank should ensure effective follow up of the credit on the continuous basis from disbursement to full repayment of principal and interest. Staff in the credit department and the audit team should regularly visit branches of the bank to ensure compliance to approved loans. Also, all necessary information needs to be acquired on the loanee’s capacity to produce satisfactory flow of cash to repay the loan. The bases of such information could be other financial institutions working with the client. Semiannual financial records could be visited by the Bank so as to be able to examine creditworthiness of the client. The client should further be constantly visited to ensure the obtained information are accurate.
The importance of the Collateral security as a subordinate mode of repayment should all the time be considered during the retrieval procedure. This could affect the business character of the bank and inputs in manning security-associated factors in loan organizing based on worth, kind, superiority, assurance, certification deferral and faultlessness and others. Reliant on the thinking of the domestic marketplace, the real procedure of discharging collateral would have to be started to inspire, impend or persuade repayment.
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