Effect of credit risk on the profitability of rural banks in Ghana: A case of Atwima Kwanwoma Rural Bank Limited

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AUGUST, 2015
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Rural banks including Atwima Kwanwoma Rural Bank Limited are faced with the credit risk of losing part or the entire loan including the interest receivable on such loans. This negatively affects the bank and reduces its financial strength to meet its financial obligations to customers. It is on this basis that the current study employs a mixed approach to investigate the effect of credit risk on the profitability of AKRBL. The study employed a questionnaire to gather data from 40 staff of AKRBL. The result of the study showed that the credit facilities of the rural 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. The study further showed that to reduce the level of risk associated with the loans granted to customers, a set of criteria is employed to appraise prospective clients. The criteria includes appraising the applicants character, applicants extent of involvement in the business, experience in credit utilisation, profit and loss statement, security, ability to pay and borrowers repayment history. Notwithstanding, the rural 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 and loan loss provisions on the profitability of the bank. However, the loans and advances, liquidity and the capital adequacy ratio of the rural bank have positive relationship with the profitability of the rural bank. The major strategy employed by the rural bank in managing credit is the provision of incentive for prompt payment of acquired loans. Despite these strategies to reduce the level of credit risk, the rural 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. Based on these findings, the study recommends the provision of training programmes for credit officers, the need for adequate loan management educational programmes and the need for effective follow up of credit on continuous basis from disbursement to full payment.
A thesis submitted to Department of Accounting and Finance Kwame Nkrumah University of Science and Technology School of Business in partial fulfilment of the requirements for the degree of Master of Business Administration (Finance-Option) ,