Credit Risk Management Practices: A Comparative Study between Commercial Banks and Microfinance Institutions
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Date
2021
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KNUST
Abstract
Background: The financial sector has witnessed astronomical growth in the last two decades both worldwide and locally as well; it is evidenced by the increment in the number of financial institutions in Ghana. This observation could be partly attributed to the enabling environment created through the enactment of laws and the liberalization of the financial sector making it very competitive. Most studies conducted in this field in Ghana have documented credit risk management practices either in a commercial bank or a microfinance institution but none has tried to look at a comparative study of the credit risk practices in the commercial banks and microfinance institutions in Ghana.
Aim: The aim of the study was to compare the credit risk practices between commercial banks and microfinance institutions.
Methods: Convenience sampling was used for selecting commercial banks and MFIs whereas the selection of participants, workers involved in credit management processes, was done by simple random sampling. The instrument used for data collection was closed-ended questionnaire. STATA version 14 and Microsoft Excel were employed in analysing the data.
Results: Generally, the highest educational level of the credit management officials in commercial banks and MFIs was adequate with the lowest being level being HND. The area of risk identification needs a lot of improvement as the results showed low mean practice scores in both commercial bank and MFIs. MFIs reportedly were lacking in the areas of risk monitoring and reporting, risk assessment and analysis, risk management practices, and understanding risk and risk management. Credit culture was the constraint that was reported the most among both commercial bank and MFI officials. On the other hand, inadequate education, training and number of staff for the credit department among commercial bank respondents whereas inadequate number of staff for the credit department among were the least reported constraints.
Conclusion: Highly qualified and well-trained individuals are needed to properly scrutinize loan applications. Therefore, it is of great importance to employ personnel who have adequate educational qualification and equip them with analytical skills through training. In addition, scheduling a routine assessment carried out by an external team to address the personal biases of credit managers as well as the creation of an early detection system to alert credit managers of non-performing loans for action to be taken will go a long way to improve credit risk management practices. The major constraint identified by both respondents of commercial banks and microfinance institutions. Therefore, further studies could be conducted to find out what credit culture(s) seem to be bothering the staff of the credit departments.
Description
A Thesis submitted to the Department of Accounting and Finance College of Humanities and Social Sciences in partial fulfilment of the requirements for the degree of MSc accounting and finance (idl)