Lending activities continue to be a central aspect of the banking sector, a fact that is particularly pronounced in emerging economies like Ghana, where the development of capital markets is still in its infancy. In such environments, the effective management of credit risk in financial institutions, especially Credit Unions, is of paramount importance for the survival and expansion of small and medium-scale enterprises. This research aims to delve into the credit risk management practices employed by Credit Unions in Ghana’s Western Region and evaluate the efficacy of these practices in managing their credit risk exposures.
To achieve this objective, the study adopted a quantitative methodology, utilizing survey questionnaires to gather data from 26 Credit Unions within the Western Region. This approach allowed for a focused examination of the specific region’s Credit Unions. The primary data collected was then rigorously analyzed using the Statistical Package for the Social Sciences (SPSS).
The findings from this study highlight that Credit Unions in the Western Region of Ghana have implemented various credit risk management strategies, and these strategies have proven to be highly effective. Moreover, these strategies positively impact loan performance, indicating their practical utility in the real-world context of these financial institutions. However, the study also uncovered that adherence to the Basel Committee standards was not consistently stringent among the Credit Unions surveyed.
Consequently, the study recommends that, based on these findings, there is a significant need for enhanced compliance with the Basel Committee standards. Adhering to these standards would improve the minimum requirements for credit risk management, thus aiding in the mitigation of credit risk and other associated risks, thereby bolstering the stability and growth potential of these vital financial institutions.
Keywords: Credit Risk Management, Credit Risk, Credit Union, Default Loan
INTRODUCTION
Financial institutions (FIs) play a vital role in any economy, akin to the arteries in the human body that distribute blood. They are essential for pumping financial resources from depositories to areas where they are needed most for economic growth (Shanmugan and Bourke, 1990). Commercial banks, a major type of FIs, are crucial providers of financial resources, especially in emerging economies like Ghana where capital markets are less developed. They have a pivotal role in promoting economic growth or, conversely, in stunting it due to their operational effectiveness or lack thereof (Greuning and Bratanovic, 2003; Barth et al., 2004).
Commercial banks are exposed to a range of risks—financial, operational, and strategic—with credit risk (CR) being a significant element. The severity of CR can be so substantial that it may lead to bank failures (Chijoriga, 1997; Cornett and Saunders, 1999). The rising frequency of banking issues in both mature and emerging economies over the years has drawn attention to various contributing factors, with weaknesses in credit risk management (CRM) being a notable reason for these challenges (Santomero, 1997; Brown and Harvey, 1998; Kimei, 1998; Basel, 1999, Basel, 2004).
Loans, which often represent a large proportion of CR, are crucial in the banking business. A slight deterioration in loan quality can have significant implications, particularly in developing countries where the problems often start at the loan application stage and escalate through the loan approval, monitoring, and controlling stages. This is especially true when CRM guidelines are either nonexistent or inadequately defined (Brown Bridge, 1998; Liuksila, 1996).
Lending is not only central to the banking business but also poses various challenges, more so in transitioning economies like Ghana. Here, the controversy stems from a disparity between the demand for credit by businesses and the stringent lending criteria set by banks, which leads to a high incidence of non-performing loans (Richard, 2006). This highlights the necessity for banks to establish effective CRM systems to minimize loan losses and manage CR efficiently (Santomero, 1997; Basel, 1999).
Risk management has gained increased importance in the business sector as companies strive for greater market share, thereby encountering heightened risks. This is particularly evident in the financial sector, given the series of financial crises over the past two decades. The Basel Committee, an international banking supervisory body, identifies credit risk as the most significant source of serious banking issues, emphasizing the need for effective credit risk management in financial institutions (Waring & Glendon, 1998; Galindo & Tamayo, 2000; Brady, 2002; Tillman, 2000).
This research is motivated by the critical need to understand and enhance credit risk management practices, especially in financial institutions in Ghana, focusing on Credit Unions in the Western Region. The aim is to investigate the current credit risk management practices and assess their effectiveness in managing credit risk exposures, which is vital for the survival and growth of these institutions. The study also seeks to address the higher levels of perceived risks due to specific client characteristics and business conditions that banks, particularly in emerging markets, typically encounter.
LITERATURE REVIEW: EXAMINING CREDIT RISK MANAGEMENT TRENDS AND PRACTICES
Credit Risk: Definition, Dynamics, and Implications in Financial Institutions
According to Greuning (2009), credit risk is characterized as the probability that a debtor or issuer of a financial instrument, whether an individual, corporation, or nation, will not fulfill their obligations of repaying the principal and other related cash flows as stipulated in a credit agreement. In the realm of banking, this risk implies potential delays or complete failures in repayments, precipitating significant cash flow or liquidity challenges. This aspect is particularly crucial given that a considerable portion of a bank’s assets is often composed of customer loans, thereby subjecting it to a heightened degree of credit risk. The risk materializes when borrowers fail to meet their repayment obligations on the loans extended by the bank, which can lead to direct financial losses or a devaluation in the loan portfolio due to either actual or perceived deterioration in credit quality, not necessarily culminating in outright default.
Credit risk is essentially comprised of two fundamental elements: the quantity of risk and the quality of risk. The quantity of risk denotes the outstanding loan balance at the point of default, adjusted by any recoveries that might be possible in such a scenario. Conversely, the quality of risk relates to the extent of loss, determined by the likelihood of default and incorporating potential recoveries in the event of a default. Therefore, credit risk is effectively a synthesis of Default Risk and Exposure Risk. Key components of credit risk include portfolio risk, which consists of Concentration Risk, Intrinsic Risk, and Transaction Risk. Within an organization, particularly in treasury and credit departments, credit ratings are instrumental in assessing credit risk at the transaction level. These ratings facilitate the identification of risk concentrations, as well as provide insights into default or migration statistics and recovery data. It is critical to note that default is typically not a sudden event but rather a gradual erosion of a borrower’s creditworthiness, referred to as migration. Default represents the extreme end of this credit migration process. While Financial Institutions (FIs) can mitigate certain individual firm-specific credit risks, systematic credit risk, which is associated with wider economic or macroeconomic conditions affecting all borrowers, cannot be diversified away in the same manner.
Analyzing the Root Causes of Credit Risk in Banking Sector
The various causes that bring about credit risk can be categorized into internal and external sources. Poor governance and management control, unsuitable laws, limited institutional capacity, unsuitable credit policies, unstable interest rates, insufficient capital and liquidity levels, directed lending, massive licensing of banks, bad loan underwriting, irresponsible lending, bad credit assessment, negligence in credit assessment, poor lending practices, government interference and insufficient supervision by central bank are the main sources of credit risk (Nijskens and Wagner, 2011). Kithinji (2010) identified the main causes of credit risk which include, the absence of adequate institutional capacity, improper credit policies, volatility of interest rates, low capital, insider lending, weak judicial systems, poor management, low capital, and liquidity levels, massive licensing of banks, reckless lending, the poor credit assessment, poor lending practices, government interference and inadequate supervisory and regulatory responsibilities. Credit risk is often considered as a consequence of systemic risk derived from the larger viewpoint. The majority of financial problems are represented by systemic risk which invariably is caused by the inability of financial market players to meet obligations for repayment of extensions of credit (Fukuda, 2012). It is a systemic problem because the inability of one participant to pay eventually may lead to an inability of other participants to meet their credit obligations. This effect was evident during the mortgage crisis of 2009 in the market (Giesecke and Kim, 2011). Financial institutions’ credit risk could also emanate from internal factors such as the financial incentives provided to the employees of the bank. There is a strong affinity to opportunism and moral hazards by credit and lending managers lending to customers with poorly performing records and persons with questionable credit records.
Strategies and Best Practices in Credit Risk Management
EY (2017) defined credit risk as loss as a result of borrower or counterparty failure or limited willingness to repay loan facility. As part of managing risk holistically, credit risk management has become the agenda of the day for the banking industry. According to Kithinji (2010) managing credit risk is based on effective assessment of risk arising due to possibility of customer or counterparty not paying loan advancement. As part of effective measures for credit risk management, there is a need for financial institutions to perform sound credit analysis by recognizing their customers as a strategy aimed at minimizing or eliminating credit risk (BCBS, 2006).
In banking, credit risk is taken for granted as a fundamental feature of the institutions. If an organization refuses to acknowledge the inherent risk, it is not in the lending industry. Wherever risk survives, its enemy, risk management, will also exist and fight against it. Credit risk management is simply the procedures implemented by organizations with the aim of diminishing or avoiding credit risk. Credit risk management has been a hot topic of debate as it is one of the fastest evolving practices thanks to institutional developments in the credit market, diversification of financial institutions participating in the lending business and modern technologies. (Caouette et al. 2018). As also discussed by the four authors above, credit risk management lies in an expert analysis system, whose objective is to “look at both the borrower and the lending facility being proposed and to assign a risk rating” (Caouette et al., 2018). Among the evaluated data, financial ratios are perceived to be very important. The philosophy that Caouette et al (2018) presents is that credit risk management is a form of engineering in which “models and structures are created that either prevent financial failure or else provide safeguards against it”. The emphasis of these four authors’ book “Managing Credit Risk” is credit risk models. However, most of the models are for enterprises in general. For financial institutions or banks, perhaps the credit analysis system is of much larger help. Banking credit risk management in the eyes of Crouhy et al. (2006) can be divided into retail and commercial credit risk management.
Credit risk management based on portfolio management is highlighted for both retail and commercial. This means that the customers are categorized into different portfolios, each of which is homogenous in several characteristics. Instead of managing every single client, the bank will handle them in groups and therefore usually saves time, and effort and cuts costs. For retail banking, the bank introduces a credit scoring model that is customized for personal banking. Commercial lending, on the other hand, will utilize the helpfulness of an internal risk rating system established based on the rating system of professional credit rating agencies such as Moody’s, Fitch Ratings, or Standard and Poor’s. Either the credit scoring or internal rating is based upon financial and non-financial assessment. Several credit models and credit derivatives are also presented as new approaches to, respectively, measure and mitigate credit risk management. (Crouhy et al., 2006,).
SAS (2012) is of the view that implementation of an effective credit risk management framework may initially be an essential encumbrance to the financial institutions when the existing systems upgrading transition. Managing credit risk impacts the magnitude of NPA’s hence driving loan portfolio performance and in turn determining the success of financial institutions (Jacinta and Otieno, 2016).
Evaluating Credit Risk: Methods and Criteria in Financial Assessment
In advancing loans in the banking industry credit analysis is regarded as an essential system in decreasing the credit risk on a loan solicitation. This includes determining the financial strength of the borrowers, assessing the likelihood of default, and diminishing the risk of non-reimbursement to an acceptable level. As part of credit analysis Lawrence et al (1992) identified five C’s that apply to credit analysis in the banking industry and they include; Character, Capacity, Capital, Collateral, and Conditions. The borrower is assessed based on character, capacity, capital, collateral and condition. These factors can assess the creditworthiness and overall repayment ability and provide the basis to decide whether to issue loans or in what way, what kind of conditions to issue loans. The character assesses the reputation, responsibility, and credit record history of the borrower to repay the loan; condition assesses the operating condition under which the borrower’s enterprise thrives; capacity assesses the borrower’s business ability to make a profit and pay back the loan; capital is also the financial strength to cover business risk and collateral is the borrower’s ability to produce additional securities to cover the value of loans. Gestel and Baesens (2009). They also use third-party-provided intelligence. Companies like Standard & Poor’s, Moody’s Analytics, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Horcher (2005) recognized seven tools for the management of exposures related to credit risk. They include delegation of credit risk tasks, diversification of possible likelihood outcome, demand payment mechanisms of accuracy, the capability of assessment, application of netting when necessary, collateral consideration as alternative and possible limitation of outstanding contract.
Most lenders employ these models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher-risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property. Credit scoring models also form part of the framework used by banks or lending institutions to grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above). Credit risk has been shown to be particularly large and particularly damaging for very large investment projects, so-called megaprojects. This is because such projects are especially prone to end up in what has been called the “debt trap,” i.e., a situation where – due to cost overruns, schedule delays, etc. – the costs of servicing debt become larger than the revenues available to pay interest on and bring down the debt.
The Role of Credit Policies in Effective Risk Management Strategies
In credit risk management, formal policies are always of great importance because lending or financing activity is, most of the time, routine and structured. Well-established policies and procedures will enhance handling speed and eliminate unnecessary repeated work. In the banking business, two main types of policies directly influence the way the banks operate and manage credit risk: Regulatory external policies and the bank’s internal policies. By policies here, the researcher means any kind of written documents issued to guide credit risk management practices. They are laws, decrees, decisions, strategies, policies, procedures, guidelines, or manuals. Banks fall under strict regulations set by governments and international organizations. The most famous international legislation worldwide is the Basel Accords. Basel II is currently effective but Basel III is on the way to take over it. Credit risk is extremely concern by regulators in the Basel Committee on Bank Supervision. The first pillar of the Basel Accords deals with minimum capital requirements which help facilitate the bank to deal with credit risk and two other types of risk. (Crouhy, et al. 2016). Currently, Basel II requires a capital adequacy ratio of 8% but it is subject to increase to 14% according to Basel III. This results from the recent financial crisis that hit the world hard in 2008 and 2009. (Wall Street Journal 2010). At present Basel Committee has only 27 members, which means banks in 27 countries are following Basel II. In other countries, the governments and central banks will issue legislation regarding banking practices, specifically credit activities. Central banks also oversee the implementation of those legislations in every member bank. The regulations often include:
Limitations on the single customer: the maximum permitted exposure to a single client, related group, or an economic sector (Greuning and Bratanovic 2009).
Provisions for loan losses: the reserves that the bank keeps to deal with potential losses from the loan-making activity.
For the regulatory policies, the banks have no choice but to rigidly follow. Any non-compliance with the laws may lead to severe punishments.
Internal Regulatory Frameworks: Guiding Principles for Credit Risk Control
If external policies aim at limiting exposures, the bank’s own policies are designed to reduce credit risk and maximize returns. There can be a wealth of formal written policies related to credit activity but the most important is the lending policy (or procedure). The first and foremost requirement for successful credit risk management is a clear and well-structured lending policy. A lending policy should specify how loans are organized, approved, supervised, and collected. It should also contain the following fundamental points:
Lending authority and limits for each credit approver
Duties of each credit person or sub-unit
Assessment process and approval criteria
Regulation on a complete loan application document – Loan pricing (risk-based) and maturities
Post-approval supervision and collections control
Overdue debts and recovery
Processing time
Credit Risk Management Practices in Credit Unions
Previous research in the field of credit risk management within financial institutions has validated a variety of strategies employed to mitigate this risk. Afende’s 2014 study on Kenyan commercial banks highlighted several practices including comprehensive loan appraisals, collateral requirements, and examining borrowers’ credit history. Moreover, the banks employed tactics like covenants, credit rationing, loan securitization, and syndication for risk management. The study underscored the importance of a clearly defined credit policy, robust credit administration systems, top management support, and efficient communication of credit guidelines. Regular screening of potential borrowers, training staff, constantly reviewing borrowers’ liquidity, and employing supportive technology in credit analysis were also identified as crucial to the effectiveness of a credit risk management system. Additionally, internal performance measures such as adherence to Basel II criteria and various profitability metrics like return on equity, assets, and investment were found to be significant.
Kolapo et al. (2012) in their research on the correlation between credit risk and bank performance in Nigeria observed that a significant increase in non-performing loans drastically reduces profitability. They recommended that Nigerian banks should strengthen their credit analysis and loan administration capabilities while regulatory authorities should ensure compliance with the Banking and Financial Institution Act (1999) and prudential guidelines. Concurrently, Gakure et al. (2012) and Fan and Zou (2014) conducted studies that pointed to the substantial impact of credit risk management on the profitability of commercial banks in their respective regions.
In Zimbabwe, Nyamutowa and Masunda (2013) found that despite credit risk being a primary cause of bank failures, the agricultural division of commercial banks, which constitutes a significant portion of the loan portfolio, relied predominantly on traditional credit management techniques rather than modern frameworks. A heavy emphasis on collateral led to poor asset quality and increased exposure for banks. Wachira (2017), in a Kenyan context, found that all commercial banks had rigorously implemented and followed their credit policies, though few utilized quantitative credit scoring models. The study concluded that credit risk management practices do indeed impact loan performance in commercial banks.
Kessey (2015) noted that factors contributing to loan defaults included ineffective loan monitoring and poor credit appraisal. He also pointed out the communication delay of new credit policies across bank departments and concluded that commercial banks generally comply with international standards in their credit risk management policies. However, implementation challenges have adversely affected the quality of loan portfolios.
Agyepong (2015) assessed the credit risk management practices at ADB Bank Ltd, highlighting that loan applicants were evaluated based on capacity, character, capital, conditions, and collateral – the five C’s of credit. Meanwhile, Afriyie et al. (2018) emphasized that effective credit risk management is contingent on the strategic approaches employed by banks. Brhane (2016) identified several challenges in credit risk management practices in commercial banks, including deviations in board responsibilities, lack of reliable information systems, limited risk control techniques, and poor departmental integration.
METHODOLOGY
The study focused on credit unions in Ghana’s Western Region that are officially licensed by the Bank of Ghana. The chosen methodology for sampling was purposive sampling, a deliberate selection process utilized to pick credit managers from these credit unions. This technique was specifically employed due to the inherent nature of credit risk, which requires management by individuals with extensive knowledge, skills, and the ability to meticulously follow credit risk procedures.
For the collection of primary data, structured closed-ended questionnaires were administered. These were directed towards specifically chosen credit management practices, aligning with the purposive sampling method. The analysis and presentation of the gathered data were conducted using descriptive statistics. This analytical approach was selected primarily for its ability to effectively describe the characteristics pertinent to credit risk management practices. It enables the statistical description, aggregation, and presentation of key constructs of interest, as well as the relationships and associations among these constructs, thereby providing a comprehensive overview of the study’s findings.
RESULTS AND CONCLUSION
Formal Credit Risk Management Practices
The analysis revealed that about 60% of the respondents agreed that they have in place a formal system of credit risk management while 40% strongly agree to the presence of a formal system.
Figure 1 Formal System of Credit Risk Management
Effectiveness of Credit Risk Management Practices
The majority of the respondents (70%) of the study participants agreed to the fact that training forms an integral part of credit management in the credit unions while 30% affirmatively indicated that they strongly agree. Concerning risk diversification about 20% of the respondents indicated they had no opinion on this strategy while the majority (70%) indicated the implementation of risk diversification in their various credit unions. And 10% of the respondents strongly agree with the presence of this strategy. In the area of risk mitigation, 30% of the credit officers sampled remained passive, indicating they had no opinion on this strategy, while about 60% agree that they have the risk mitigation strategy in place and 10% of the respondents strongly agree to have this strategy in place. The results also showed that half of the respondent (50%) indicated they agreed with the operation of this strategy in their respective credit unions while 50% strongly disagreed with having credit strategies in their institutions.
Figure 2: Credit Management
Effective use of Credit risk management strategies has a negative effect on loan performance
The analysis revealed that about 50% of the respondents confirmed they strongly disagreed with the assertion effective use of Credit risk management strategies has a negative effect on loan performance while 40% were indifferent and 10% of the respondents disagreed.
Figure 3: Effective use of Credit risk management strategies has negative effect on loan performance
Periodic Review and Approval of Control process
Analysis from Figure 4 shows that about 80% of the respondents confirmed that their institution performs periodic review and approval of control processes while few of the respondents 10% had no opinion but 10% strongly agreed that periodic review and approval of control processes are in place.
Figure 4: Periodic Review and Approval of Control processes
Availability of a system for assessing borrower’s credit standing quantitatively
The results in Table 1 impressively show that credit unions in the Western region of Ghana have a system for quantitatively assessing borrower’s credit standing. About 80% of the respondents agree to this while a few (10%) of the respondents strongly agree but 10% of the respondents however, had no opinion on the issue being addressed.
Table 1: Availability of a system for assessing borrower’s credit standing quantitatively
Response
Frequency
Percent
Strongly Disagree
0
0
Disagree
0
0
No Opinion
1
10
Agree
8
80
Strongly Agree
1
10
Total
10
100
Frequency of measuring credit risk
General observation from the figure indicated that there is a high response for “no response” for daily, weekly, quarterly, and yearly periods suggesting that the measurement of credit risks is done more monthly. The results revealed majority (60%) of the respondents agreed and strongly with measuring credit risk on a monthly basis.
Figure 5: Frequency of measuring credit risk
Extent to which Credit Risk Management policy is promulgated at administrative level
As observed, the figure explains that promulgation of credit risk management policy at administrative level is skewed towards the Chief Executive Officer/Board. This is because high level of “no response” was recorded for other administrative levels. On the other hand, 60 % of respondents indicated CEO/Board while 40% of the respondents were indifference.
Figure 6: Extent to which Credit Risk Management policy is promulgated at administrative level.
Availability of a System for Managing Problem Loans
The analysis revealed that 70% of respondents agreed that there is availability of a system for managing problem loans while 20% of the respondents strongly agreed that there is availability of a System for managing problem loans but 10 % of the participants were neutral.
Table 2: Availability of a System for Managing Problem Loans
Response
Frequency
Percent
Strongly Disagree
0
0
Disagree
0
0
No Opinion
0
0
Agree
7
70
Strongly Agree
2
20
No response
1
10
Total
10
100
Model for predicting credit risk
The analysis revealed that about 70% of credit unions have no model in place for predicting credit risk while 20% of the credit unions have a model in place for managing credit risk.
Figure 7: Model for predicting credit risk
Authority for implementing credit risk management policy
The analysis shows that while about 70 of the respondents) are largely in charge of implementing credit risk management policies, some are done by senior management representing 10% but 20% of respondents indicate that implementation is done by other authorities (board of directors and management respectively).
Figure 8: Authority for implementing credit risk management policy
Cross tabulations
Table 3 presents a cross-tabulation of the type of credit union and credit risk management practice that is effective in most credit unions. Workplace credit unions have the most effective management practice with a total of 5 persons representing 50% of the sample responding positively. Out of a total of 4 persons from the community credit unions, 1 agreed to the presence of effective management practice with 2 confirming they strongly agree. 1 person however did not respond. Only 1 person from the parish credit union agrees to having an effective credit risk management practice.
Table 3: Cross-tabulation of Type of Credit Union and Credit Risk Management practice is effective in my Credit Union
Strongly Disagree
Disagree
No Opinion
Agree
Strongly Agree
No response
Total
Type of Credit Union
Workplace
0
0
0
2
3
0
5
Parish
0
0
0
1
0
0
1
Community
0
0
0
1
2
1
4
Total
0
0
0
4
5
1
10
It is expected that credit unions with a system for managing problem loans certainly have an effective credit risk management practice. This expectation is confirmed in Table 4. Out of a total of 7 persons who agree to have a system for managing problem loans, a total of 6 confirmed credit risk management is effective with 1 person not responding at all. In addition, 2 persons who strongly stated they have in place a system for managing problem loans have effective credit risk management practices.
Table 4: Cross-tabulation of The Credit Union has in place a system for managing problem loans and Credit Risk Management practice is effective in my Credit Union
Strongly Disagree
Disagree
No Opinion
Agree
Strongly Agree
No response
Total
The Credit
Union has in
place a system
for managing problem loans
Strongly Disagree
0
0
0
0
0
0
0
Disagree
0
0
0
0
0
0
0
No Opinion
0
0
0
0
0
0
0
Agree
0
0
0
3
3
1
7
Strongly
Agree
0
0
0
1
1
0
2
No response
0
0
0
0
1
0
1
Total
0
0
0
4
5
1
10
Table 5 finds out the extent to which various credit management strategies have a positive effect on loan performance. The cross-tabulation shows that generally, all the credit management measured in this research work strategies have a positive effect on loan performance. It therefore suggests that the effective combination of these strategies will likely produce the desired output in credit risk management.
Table 5: Cross-tabulation of Credit management strategies and Effective use of Credit risk management strategies has a positive effect on loan performance
Agree
Strongly Agree
No response
Total
Credit management strategies in place in your Credit Union: Training
Training
Agree
4
3
0
7
Strongly Agree
0
2
1
3
Total
4
5
1
10
Risk Diversification
No Opinion
1
1
0
2
Agree
3
4
0
7
Strongly Agree
0
0
1
1
Total
4
5
1
10
Risk Mitigation
No Opinion
1
2
0
3
Agree
3
3
0
6
Strongly Agree
0
0
1
1
Total
4
5
1
10
Credit Reminder
Agree
3
2
0
5
Strongly Agree
1
3
1
5
Total
4
5
1
10
Credit Criteria (e.g. character)
No Opinion
0
1
0
1
Agree
2
1
0
3
Strongly Agree
2
3
1
6
Total
4
5
1
10
Table 6 below shows a cross-tabulation of credit management strategies and whether their effective uses harm loan performance. The results presented are directly opposite to observations made in Table 5. Generally, respondents indicate that none of the strategies have a negative effect on loan performance.
Table 6: Cross-tabulation of Credit management strategies in place in your Credit Union and Effective use of Credit risk management strategies has a negative effect on loan performance
Strongly Disagree
Disagree
No Opinion
Total
Credit management strategies in place in your Credit Union: Training
Training
Agree
3
0
4
7
Strongly Agree
2
1
0
3
Total
5
1
4
10
Risk Diversification
No Opinion
1
0
1
2
Agree
3
1
3
7
Strongly Agree
1
0
0
1
Total
5
1
4
10
Risk Mitigation
No Opinion
1
1
1
3
Agree
3
0
3
6
Strongly Agree
1
0
0
1
Total
5
1
4
10
Credit Reminder
Agree
3
0
2
5
Strongly Agree
2
1
2
5
Total
5
1
4
10
Credit Criteria
(e.g. Character)
No Opinion
1
0
0
1
Agree
2
0
1
3
Strongly Agree
2
1
3
6
Total
5
1
4
10
CONCLUSION
Administering loans within credit unions is notably complex, particularly in the context of the varying levels of credit risk involved. The study arrives at a significant conclusion that the strategies employed for credit risk management have been markedly effective. This effectively addresses the concern that credit risk intensifies at various stages – namely loan approval, monitoring, and control, especially when the existing guidelines for credit risk management, including policies, strategies, and procedures, are either underdeveloped or inadequately enforced.
The study also notes that credit unions in Ghana’s Western Region have established robust systems for managing problematic loans. This observation confirms the presence of effective credit risk management practices within these unions. Notably, the implementation of credit risk management policies is largely undertaken by specialized credit departments. This departmental approach is preferred over individual-based management, as it facilitates a collaborative and more systematic environment for policy implementation and monitoring, contributing to a more thorough and efficient management of credit risk.
Another key observation from the study is that the assessment of credit risk within these unions is conducted predominantly on a monthly basis, ensuring a regular and up-to-date evaluation of credit portfolios. Furthermore, the analysis reveals that the credit unions in the Western Region have instituted systems for the quantitative assessment of borrowers’ creditworthiness. This is a crucial aspect of credit management as it ensures a rigorous and objective evaluation of credit risk, thereby enhancing the overall effectiveness of loan administration practices in these financial institutions.
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