Causes and effects of loan defaults in the banking sector: (A case study of Okomfo Anokye rural bank Ltd)

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JULY, 2015
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A lot of improvement has been made since the first rural bank was established in 1976 at Agona Nyarkrom.In as much as deposits have been mobilized, as well as loans been granted, the habit of savings and thrift have been inculcated in the minds of our rural dwellers, as well as jobs also been created for our rural people. The study was therefore aimed at addressing the following issues: identifying the causes and effects of loan defaults, determining ways of reducing loan defaults in the banking industry and identifying the category of clients who default to enable banks take decisions on how to reduce the incidence of bad loans. The use of both self-administered well-designed paper questionnaires and interviews of some respondents after thorough explanation of the objectives of the study are the main techniques of primary data collection. SPSS and Eview were the main statistical software’s used. Frequency tables and graphs were used to draw data where applicable and analyzed adequately with the view of making financial sense from the data collected. Other statistical methods like the Categorical Regression, Linear Regression, Chi-Square Analysis, Analysis of Variance, among others were all employed to answer various research questions. The results of the study showed that, the major causes of loan default according to Bank Officials were diversion of loan, under financing, ineffective monitoring, poor weather conditions, marketing problems, lack of managerial know-how and terms of the loan whiles high interest rate, high processing fees, delayed in loan disbursement, short term of loan repayment and size of loans all accounted to defaults from the views of clients. From the study it was established that high rate of loan defaults affected the asset quality of the bank as well as reduction of profit of financial institutions. The following recommendations were made to reduce loan default by clients: Being due diligence and having prudent credit analysis to scrutinise prospective loan applicants of the Bank, regular monitoring of loans by Credit Officers, it is recommended that loans granted to customers should be well secured in terms of adequacy of the collateral provided and also ensure that proper legal documentation is put in place
A Thesis submitted to the Department of Accounting and Finance, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirements for the degree of Master of Business Administration (Finance Option).