CREDIT RISK MANAGEMENT AND PROFITABILITY IN SELECT SAVINGS AND LOANS COMPANIES IN GHANA

The thesis was submitted to the Canara Bank School of Management Studies, Bangalore University, India as part of the requirements for the award of the degree of doctor of philosophy in Management. The broader objective of the study was to find out the type of risk, which is prevalent in the daily operations of the Ghanaian savings and loans companies in Ghana, and also to understand the relationship between credit risk management indicators and profitability measured by ROA and ROE. Seven Savings and Loans Companies and 254 respondents were sampled for the study. Both primary and secondary data was used in the study. The secondary data was analysed using multiple regression whereas the primary data was analysed using principal component analysis. The results from the analysis of the secondary data indicated that NPL ratio, which is a measure of assets quality, related negative and significant with both return on assets and return on equity. CAR was found to relate negative, insignificant with ROA but related positive, and significant with ROE. Although Liquidity (LTDR) had insignificant relationship with both measures of profitability (ROA and ROE), the relationship with ROA was positive whiles with ROE, it was negative. Bank size though insignificantly related with both measures of profitability, the relationship with ROA was negative whereas in with ROE, it was positive. The results from the analysis of the primary data indicated that credit risk was the most occurring risk experienced by the savings and loans companies. Inadequate loan screening, inexperienced loan officers, insufficient disposable income, repayment frequency, the sector of the customer’s business, loan size and multiple borrowing were the main cause of NPL in the S&L companies. The consequences of high rate of loan default were found to include stagnation of staff salary, increase in provision, reduction in profit, and decrease in working capital of the S&L companies. It was also found that demanding for personal guarantor, ensuring regular monitoring, taking collateral security, insuring the loans and checking the credit history of loan applicants were the most effective credit risk management culture practiced by the S&L companies. The findings further revealed that the most difficult situations the S&L companies encounter during loan recovery were pursuit of legal action against defaulters, disposing off collateral and the use of recovery agencies. It was recommended to the management of the S&L Companies to strengthen and improve upon their risk management strategies in order to remain in business. A recommendation went to the Central Bank of Ghana to strengthen their supervision mandate to keep the S&L on check.