credit risk assessment report

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CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF THE STUDY

The Ghanaian financial system comprises several financial institutions, instruments and

operators. At the apex of the financial institutions is the central bank which is the Bank of

Ghana. The bank of Ghana (established on the eve of independence in 1957) ensures that the

financial system is safe and sound. There are other regulatory bodies such as the Securities and

Exchange Commission (SEC) and the National Insurance Commission (NIC).

The other institutions are Commercial Banks, Merchant Banks, Development Banks, the Rural

Banks and Non-Banking Financial Institutions such as the Discount Houses, the Leasing

Companies, Finance Houses and Forex Bureau. Others include Social Security and National

Insurance Trust (SSNIT), the GET Fund, the Stock Exchange and the various dealers on the

market.

The commercial banks form the nucleus of the financial system and account for the bulk of total

institutionalized savings within the system. Commercial banking in Ghana pre-dates Central

banking and laid the foundation of the Ghanaian Financial System as far back as the late

nineteenth century. Financial companies when dominated the early banks established in the

Gold Coast from 1896. They became local institutions when the Banking Act of 1970 was

passed.


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Commercial Banks are the nations most important financial institutions. Commercial banks are

unique in the performance of services and are distinguished from other forms of financial

institutions or intermediaries because of the functions they perform, which are mobilization of

Deposits from the public at the rectal end, lending as well as money transmission.

While commercial banks have faced difficulties over the years for a multitude of reasons. The

major cause of serious banking problems continues to be directly related to lax credit standards

for borrowers, poor portfolio risk management or a lack of attention to changes in economic or

other circumstances that leads to a deterioration of the bank credit standing.

The Basel Committee Report defines credit risk as the potential that a bank borrower or

counterparty will fail to meet its obligation in accordance with agreed terms. The goal of credit

risk management is to maximize a banks risk adjusted rate of return by maintaining credit risk

exposure within acceptable parameters. Thus banks need to ensure that credit risk inherent in

the entire portfolio as well as the risk in individual credit or transactions is well managed.

It is also imperative for banks to consider the relationship between credit risk and other risks.

The effective management of credit risk is therefore, a critical component of a comprehensive

approach to risk management and essential to the longterm success of any banking

institution.

For most banks, including commercial banks, loans are the largest and most obvious source of

credit risk; however it is worth nothing that banks are increasingly facing credit risk (or

counterparty risk) in various financial instruments other than loans, including acceptance


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interbank transactions, equities and in the extension of commitments guarantees and the

settlement of transactions.

Since exposure to credit risk continues to be the leading source of problem in banks world-

wide, Sound Credit Risk Management System is deemed to be crucial and that spells the focus

of my study. Obviously, the yields of employing sound or effective credit management system

by the financial concerns cannot be over emphasized.

1.1. PROBLEM STATEMENT

Exposure to credit risk continues to be the leading source of problems in financialinstitutions and banks for that matter worldwide. For example banking institutions

would have to as a way of mitigating default risk spend quality time and resources trying

to assess credit worthiness and credibility of borrowers and counterparties.

Further, a situation where banks have a long list of credit defaulters, defaults as regardstrade financing etc tends to negatively impact the liquidity position of the bank and

consequently affects the economy.

However, one can also admit that it has constructively created the awareness of theneed for the financial institutions such as commercial banks for that matter to take a

sectional look at the importance of not just having efficient and effective credit risk

system in place but making it work.


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1.2. PURPOSE OF THE STUDY

To deal with the problem of credit risk phenomenon in the Ghana Commercial Bank, the focus

of the study therefore is to create awareness among financial banks of the need to identify,

monitor and control credit risk as well as determination of holding adequate capital against the

risk and that they are adequately compensated for risk incurred.

Hence, the purpose of the study is to ascertain the following;

The appropriateness of credit risk environment since the board of directors should havethe responsibility for approving and periodically reviewing the credit risk strategy and

significant credit risk policies of the bank.

The credit granting process. The administration measurement and monitoring process. Controls over credit risk.

1.3. RELEVANCE OF THE STUDY

The study seeks to assess and analyze the credit risk management system of commercial bank

and make available to management findings regarding the operations of the credit risk system

and if there could be the need to appraise the soundness, adequacy and application of the

system.

Although, the study will benefit Ghana Commercial Bank limited as a corporate entity and its

management. Its conceptual basis should be useful to other financial institutions which offer


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credit. In addition, the study hopes to provide additional information for effective credit risk

management. Further, it is a contribution in terms of providing basis for further research into

the area of study and adding to the academic knowledge.

1.4. RESEARCH QUESTIONS

Questions worth considering have to do with the following;

How does the appropriate risk environment enhance the safety of credit and the extentof its reliability?

How efficient and pragmatic is the credit granting process in mitigating credit riskexposures?

How effective and reliable is the credit administration measurement and monitoringprocess?

How do the banks ensure adequate controls over credit risk and how do they ensurethat credit risk exposure is maintaining within parameters set?

1.5 LIMITATION

During this research work, I envisaged a number of factors that are likely to hamper my

progress and affect the precision of my finding. The major limiting factors may be:

Limited period within which to complete research work;

Other academic work competing with the time for a research work; Financial constraint;


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Unwillingness on the part of resource persons to provide complete informationneeded for the work;

Unavailability of appropriate resource persons.Despite these limitations, efforts were made to thoroughly collect, analyze and present

a very good research work.

1.6 OPERATIONAL DEFINITIONS

This section explains basis concepts as used in the research study. Such concepts are

operational in the research and will be very useful. They are credit risk and credit.

Many definitions of risk depend on specific application and situational contexts.

Generally, risk is related to the expected losses which can be caused by a risky event and

to a profitability of this event, the harsher the loss the more likely the event, the greater

the overall risk.

Credit risk is therefore, defined as the potential that a bank borrower or counterparty

will failed to meet its obligations in accordance with agreed terms.

1.7 ORGANIZATION OF STUDY

The study is organized into five main chapters. The first chapter considers the problem

for the study and comprises the background of the study, statement of the problem,

purpose of the study, relevance of the study, scope of the study, operational definitions

and organization of the study.


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The chapter two is the literature review, which has to do with the theoretical concepts,

practical assertions made by professional on effective management of credit risk in

financial institutions. It outlines the principles governing credit administration and

measurement and monitoring process as well as ensuring adequate controls over credit

risk.

The chapter three examines the methodology employed in the assessment of the credit

risk management system in the financial institutions.

The chapter four deals with the analysis and interpretations of data and the responses

from respondents. The chapter also looks at detail analysis of credit risk management

system and its possible effect on the operations of Ghana Commercial Bank. It also

brings to the core, the findings and discussions of the topic.

The final and last chapter considers the summary of the findings, conclusion and

recommendation.

1.8 HYPOTHESIS

The credit risk faced by Ghana Commercial Bank for that matter may stems from

inadequate credit administration, measurement and monitoring process.

Ghana Commercial Bank also has efficient credit management to determine their reliability.


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CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION

This looks at the methods that would be employed in order to achieve the objectives of the

research. It primarily examined the sources and techniques used in collection of the data and

its analysis. Case study method was used for the research. Robson (1993) has defined case

study as the development of detailed intensive knowledge about a single case or small number

of related cases.

3.1 SOURCES OF DATA

Both primary and secondary data were collected for the purpose of the research in order to

obtain an understanding of the assessment of credit risk management of Ghana Commercial

Bank, Agona Swedru branch and give factual recommendations thereafter.

3.1.1 Primary Source of Data

In generating the primary data, three methods of data collection were used.

Personal Observation Personal Interview Administration of interview questionnaire

3.1.2 Secondary Source of Data


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Zikmund (1984), defines secondary data as data gathered and recorded by someone prior to

(and for the purpose other than) the current needs of the researcher . For this reason

secondary data is gathered from text books on credit risk management, journals, manuals,

dictionary, and information on the internet.

3.2 POPULATION

3.2 SAMPLE SIZE

It would be practically difficult to cover all the customers of the bank hence sampling

techniques were chosen. The sample size included staff of the credit department and the

management of Ghana Commercial Bank, Swedru branch.

3.3. SAMPLE PROCEDURE

According to Zikmund (1984), sampling involves any procedure that uses a small number of

items or part of a population to make a conclusion regarding the whole population. To make

the exercise more flexible, forty-two (42) questionnaires will be given to credit beneficiaries

and five staff from the credit department of the bank would be interviewed.

3.4 RESEARCH INSTRUMENT

To obtain primary data, customers (individuals and corporate bodies) would be identified and

distributed with questionnaires to reflect information. For quicker response, straight forward


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open-ended questions as well as close-ended questions would be asked. Also, data would be

obtained from the banks website and finally from the banks annual financial statements and

reports over the years. These include income statements, cash flow, notes to the accounts and

provisions for bad and doubtful debts, which were used as proxy due to inaccessibility to the

relevant data.

3.5. TOOLS FOR DATA ANALYSIS

Various statistical methods would be used to analyze the data. They include frequency

distribution tables and graph showing facts and figures and percentages. Descriptive methods

will also be employed.

3.6 ORGANIZATIONAL PROFILE

Since there are a considerable number of financial institutions in the country the research will

concern itself with Ghana Commercial Bank Limited. However, the research reviews the entire

credit system to reflect the focus of the study.

Essentially, I will limit my research to the Swedru Branch for data collection considering the

number of branches it operates throughout the country. Hence, the data machinery covers

areas such as the credit department and also includes credit customers of the banks.

Ghana Commercial Bank Limited (GCB) at a glance


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Ghana Commercial Bank Limited, established in May 1953 for Ghanaian entrepreneurs is the

largest indigenous Bank with 139 branches nationwide. Ghana Commercial Banks objective

among others is to support the private sector and facilitate the nations economic growth.

As part of the banks bid to achieving customer-driven banking, it has developed multiple

products and services that are geared towards making banking easier and convenient for its

cherished customers. There are Personal Banking, Investment Services, Small and Medium

Scale Enterprises, Corporate Services and Money Transfer Services.

The Ghana Commercial Banks Personal Banking includes Savings Account, Current Account,

Kudi Nkosuo Account, Flex Save Account, Save and Prosper Account, Overdrafts and Loans and

Ready Cash ATM.

Investment Services include Call Accounts, Treasury Bills, Fixed Deposit Account and Stock

Market. Small and Medium Enterprise (SME) has to do with Business Advisory Services and

Business Development.

Corporate Services include International Trade Finance and Corporate Accounts.

Money Transfer Services are fast International Money Transfer, International Services.


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UNIVERSITY COLLEGE OF MANAGEMENT

STUDIES

Topic:

ASSESSMENT OF CREDIT RISK MANAGEMENT. A study of

Ghana Commercial Bank (Agona Swedru Branch)

NAME: AGNES ABA APPOH

INDEX NO: AC/07-2/DS/1064

BSc. BANKING AND FINANCE

LEVEL 400

Supervisor: Mr. Isaac Arthur


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credit risk assessment report

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