ASSESSING THE CREDIT APPRAISAL SYSTEM OF CO-OPERATIVE

CREDIT BANKS- A CASE STUDY OF SAINT PETER’S

CO-OPERATIVE CREDIT UNION.

BY

APPIAH-KUBI JEMIMAH (B.Ed. Psy.)

A THESIS SUBMITTED TO THE SCHOOL OF BUSINESS, KWAME

NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY (KNUST) IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF

MASTER

OF

(BUSINESS ADMINISTRATION-FINANCE)

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF ART AND SOCIAL SCIENCES

KNUST SCHOOL OF BUSINESS

MAY 2015

i
 DECLARATION

I hereby declare that this submission is my own work towards the MBA and that, to

the best of my knowledge, it contains no material previously published by another

person nor material which has been accepted for the award of any other degree of the

university, except where due acknowledgement has been made in the text.

Appiah-Kubi Jemimah……………………… ………………………

(PG 9600113) Signature Date

Certified by:

Mr. Kwasi Poku ……………………………… ………………………

(Supervisor) Signature Date

Certified by:

K.O. Appiah (PhD) …………………………… ………………………

(Head of Department) Signature Date

ii
 DEDICATION

This work is dedicated to my significant other, Daniel Kwadwo Wireko for his love

and support throughout the two years. It is also dedicated to all single mothers who

toil and invest in their children‟s education.

iii
 ACKNOWLEDGEMENT

I owe first a debt of gratitude to the Almighty God who by His Grace has seen me

through this MBA program successfully. I wish to register my deepest appreciation to

my supervisor, Mr. Kwasi Poku of KNUST School of Business for his careful

reading through the manuscript, the valuable suggestions and insightful comments I

received from him. You have really transformed me in this area of academic training.

I am very grateful, sir.

I also thank my siblings (Isaac, Abigail and Peterkin) for their immense contribution

and support throughout this activity and Master Eric Koduah (Culcha) for helping in

administering questionnaires. And to all researchers both in academia and institutional

the world over, whose works served as a foundation and reference point for this work,

I say thank you and well done.

I owe a considerable debt of gratitude to my grandmother, Madam Comfort Afranie

whose words of encouragement and inspiration has brought me this far and to all my

direct and indirect benefactors and benefactresses.

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 ABSTRACT

Credit Unions are member-owned and governed institutions that exist for the good of
those using their services (WoCCU).They have the responsibility to their members to
run daily operations with regards to credit proposals in a responsible and acceptable
manner that protects member deposits and the integrity of the institutions. The main
objective of this study was to assess the appropriateness of the credit appraisal
processes used by Saint Peter‟s Co-operative Credit Union (SPeCCU). The survey
approach, through the use of questionnaires was used to collect the primary data from
the three main branches of SPeCCU sin the Ashanti Region. Descriptive analysis was
done to help achieve the objective of the study. The study established that the loan
facility mostly accessed by members was the normal loan and the credit appraisal
system of SPeCCU follow acceptable best practices such as formalizing the loan
contract processes and using the guarantor system and the demand for collateral. Also,
high administrative charges, high interest on loans, and delays in loan processing
procedures were some of the challenges facing members in accessing credit. The
study concluded that, the loan policies and procedures of SPeCCU follow acceptable
best practices in granting credit facilities for members by formalizing the loan
application procedure for applicants, the demand for collateral and valid documents
from applicants, meeting the loan committee members one-on-one, signing the
guarantor forms and both pre-sanction and post-sanction activities of loan officers, as
well as clearance and valuation reports have a positive influence on the credit
appraisal system of co-operative credit banks in Ghana, given the outcome of the
study on SPeCCU. And also High administrative charges, higher interest on loans,
bureaucratic tendencies and delays in loan processing activities was identified as
some challenges facing members in accessing credit from SPeCCU.

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 TABLE OF CONTENTS

TABLE OF CONTENT
CONTENT PAGE
DECLARATION .......................................................................................................ii

DEDICATION ..........................................................................................................iii

ACKNOWLEDGEMENT ........................................................................................ iv

ABSTRACT ............................................................................................................... v

TABLE OF CONTENTS .......................................................................................... vi

CONTENT PAGE .................................................................................................. vi

LIST OF TABLES .................................................................................................... ix

LIST OF FIGURES ................................................................................................... x

CHAPTER ONE .......................................................................................................... 1

INTRODUCTION ..................................................................................................... 1

1.1 BACKGROUND OF THE STUDY .................................................................... 1

1.2 PROBLEM STATEMENT. ................................................................................. 4

1.3 RESEARCH OBJECTIVES ................................................................................ 6

1.4 RESEARCH QUESTIONS ................................................................................. 6

1.5 SIGNIFICANCE OF THE STUDY..................................................................... 7

1.6 THE SCOPE OF THE STUDY ........................................................................... 8

1.7 LIMITATIONS OF THE STUDY....................................................................... 8

1.8 ORGANIZATION OF THE STUDY .................................................................. 9

CHAPTER TWO ....................................................................................................... 10

LITERATURE REVIEW ........................................................................................ 10

2.0 INTRODUCTION ............................................................................................. 10

2.2 POWER THEORY OF CREDIT ....................................................................... 10

2.3 CO-OPERATIVE DEFINED ............................................................................ 11

2.4 CREDIT AND THRIFT CO-OPERATIVE ...................................................... 11

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 2.5 BRIEF HISTORY OF CO-OPERATIVES ....................................................... 12

2.6 CO-OPERATIVE BANKS ................................................................................ 13

2.7 CREDIT AND TYPES OF CREDIT ................................................................. 14

2.8 UNDERSTANDING CREDIT RISK- CREDIT RISK DEFINED ................... 16

2.11 CREDIT RISK MANAGEMENT PROCESS ................................................. 21

CHAPTER THREE ................................................................................................... 32

METHODOLOGY AND ORGANIZATIONAL PROFILE ................................... 32

3.0 INTRODUCTION ............................................................................................. 32

3.1 RESEARCH DESIGN ....................................................................................... 32

3.2 DATA COLLECTION INSTRUMENTS ......................................................... 32

3.2.1 Questionnaire .................................................................................................. 33

3.2.2 Interviews ........................................................................................................ 33

3.3 POPULATION OF THE STUDY ..................................................................... 33

3.4 SAMPLE SIZE AND SAMPLING TECHNIQUE ........................................... 34

3.5 DATA ANALYSIS ............................................................................................ 34

3.6 PROFILE OF SAINT PETER‟S CO-OPERATIVE CREDIT UNION

(SPeCCU). ......................................................................................................... 35

3.6.1 Mission and Core Values of SPeCCU. ........................................................... 35

3.6.2 Products and Services of SPeCCU ................................................................. 36

3.7 BACKGROUND OF THE STUDY AREA ...................................................... 36

CHAPTER FOUR ...................................................................................................... 38

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS ...... 38

4.0 INTRODUCTION ............................................................................................. 38

4.1 DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS ..................... 38

4.2 ANALYSIS OF TYPE OF LOANS ACCESSED BY MEMBERS OF SAINT

PETER‟s COOPERATIVE CREDIT UNION (SPeCCU). ............................... 40

4.3 ANALYSIS OF LOAN ACCESSIBILITY PROCEDURES OF SPeCCU ...... 43

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 4.4 ANALYSIS OF SOME CHALLENGES RELATED TO ACCESSING LOAN
FACILITIES AT SAINT PETER‟S CO-OPERATIVE CREDIT UNION ...... 52

4.5 CHALLENGES FACED BY CREDIT OFFICERS IN APPRAISAL OF

LOANS .............................................................................................................. 53

CHAPTER FIVE ....................................................................................................... 55

SUMMARY OF FINDINGS AND POLICY RECOMMENDATIONS ................ 55

5.0 INTRODUCTION ............................................................................................. 55

5.1 SUMMARY OF FINDINGS ............................................................................. 55

5.2 CONCLUSION .................................................................................................. 56

5.3 POLICY RECOMMENDATION ...................................................................... 56

5.4 SUGGESTION FOR FURTHER RESEARCH................................................. 58

REFERENCES ........................................................................................................... 59

APPENDICES ............................................................................................................ 64

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 LIST OF TABLES

Table 2.0: Loan disbursement by type and amount……………………………….. 17

Table 2.1: Loan repayment by type and amount………………………………… 17

Table 2.2: Different approaches to the credit evaluation process………………. 22

Table 4.0: Demographic characteristics of respondents…………………………. 43

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 LIST OF FIGURES

Figure 4.0: Accessing loan facilities at Saint Peter‟s Co-operative Credit Union

(SPeCCU)………………………………………………………………………… 44

Figure 4.1: Loan Facilities accessed by members of Saint Peter‟s Co-operative

Credit Union…………………………………………………………………… 46

Figure 4.2: Formal applications for loans………………………………………… 47

Figure 4.3: Signing of guarantors form…………………………………………. 48

Figure 4.4: The Pre-sanction visit by credit officers……………………………… 49

Figure 4.5: Title clearance reports………………………………………………... 50

Figure 4.6: Valuation reports of properties……………………………………….. 51

Figure 4.7: Documentations and submission of collateral……………………….. 52

Figure 4.8: Approval of loans by loans committee……………………………… 53

Figure 4.9: Post-Sanction activities ……………………………………………… 54

Figure 4.10: Challenges related to accessing loan facilities…………………….. 56

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 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The basic activity of all types of banks and even some of the non-bank financial

institutions is the same. They accept receipts and grant credit. Credit creation is thus

pivotal to the operations of these institutions since it is the main revenue producing

program for the banks. However, this program contains enormous uncertainties to

both the bank and the customer. The uncertainty of a transaction counterpart not

accomplishing their commitment as contain in the agreement on maturity date can

seriously endanger the even running of bank‟s operation.

Credit has been defined differently by different authors. According to Lidger Wood

(1993), the term credit originated from a Latin word „credre‟ meaning „believe‟. Thus,

Wood defines credit as an expression of belief in a person‟s ability and willingness to

repay a loan. But Miller and Van Horne (1993) considered credit from two

perspectives. First, it is an asset and secondly a liability. To them, credit represents

future receipts to the lender and an obligation to the borrower in the future. They

therefore defined credit as a transfer of title to real goods and services. Lidger Wood

summarized it all by defining credit as borrowed funds with specified terms for

repayment.

Based on the above definition and explanation of credit, it can be inferred that credit

is the process of making loans or offering some advances under specified repayment

terms and conditions by a bank to its customers with the conviction that such loans

will be repaid as agreed. In general, financial institutions face a number of risks in

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their day-to-day operations notable among them and central to this study is credit risk.

To be able to lend, these institutions accept deposits from the general public and

extend/provide loans and other forms of advances. It is in the execution of this

function that they experience credit risk. The provision of loans therefore represents

the major source of credit risk to these institutions but the Basel Committee on

Banking Supervision ( BCBS) observed that banks are exposed to credit risk (or

counterparty risk) in various financial instruments and services other than loans,

including acceptances, interbank transactions, trade financing, foreign exchange

transactions, financial futures, swaps, bonds, equities, options, and in the provision of

commitments and guarantees, and the settlement of transaction. The committee

therefore defined credit risk as the potential that a bank borrower or counterparty will

fail to meet its obligations in accordance with agreed terms.

The Financial Institutions (Non-Banking) Act 1993, PNDC 328, defined a Credit

Union as a financial co-operative formed to mobilize savings from and lend to its own

members. The Act recognizes Credit Unions as non-deposit-taking financial

institutions which require GH$ 1 million as minimum start-up capital. O n the other

hand, Business Rules governing non-deposit-taking institutions drafted by the

Department of Non-Bank Financial Institutions of the Bank of Ghana (BoG) makes it

clear that Credit Unions are co-operative societies, mutually owned organizations

formed by homogenous groups or interests for the mobilization of savings from

members for meeting their credit needs. The umbrella body of Credit Unions in

Ghana, the Ghana Co-operative Credit Unions Associations (CUA) also throws light

on the Credit Union concept as people with common interest who come together in a

society, mobilize funds regularly so that after six months when a needy member

2
applies for a credit facility he/she would be offered with a minimum interest rate

payable within a period of time.

The World Council of Credit Unions (WoCCU), stipulates that Credit Unions are

financial co-operatives that provide savings and lending products to their members

and each member is required to be a shareholder in the organization. It further

describes them as democratic, member-owned and governed sustainable financial

intermediaries that serve a broad base of members from all income and wealth levels.

Unlike most other financial institutions, Credit Unions do not issue stock or pay

dividends to outside stockholders. Instead, earnings are returned to members in the

form of lower loan rates, higher interest on deposits and lower fees (WoCCU, Inc.).

These definitions suggest that Credit Unions carry out similar, if not the same, core

business as the conventional commercial banking system. The creation of credit is

common in both cases. Therefore credit risk management is fundamental to the

sustenance of Credit Unions. Adequately managing credit risk in financial institutions

is critical for the survival and growth of such institutions. The same can be said about

Credit Unions since they have customized financial products that severely expose

them to default risks. Credit risk is critical since the default of a small number of

important customers can generate large losses, which can lead to insolvency (Bessis,

2002). Base on their structure, function and regulations Credit Unions have in-built

systems, credit risk management processes, procedures and strategies that aim at

reducing the incidence of non-performing loans and possible insolvency. It is against

this background that this research assesses the credit appraisal systems, procedures

and credit policies of non-bank, non-deposit-taking financial institutions using the

Saint Peter‟s Co-operative Credit Union as a case study.

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1.2 PROBLEM STATEMENT.

Credit Unions are member-owned and governed institutions that exist for the good of

those using their services (WoCCU).They have the responsibility to their members to

run daily operations with regards to credit proposals/ credit risk control in a

responsible and acceptable manner that protects member deposits and the integrity of

the institutions. Best practices in operational standards include adherence to generally

accepted accounting principles (GAAP), transparency in accounting and operations

and implementation of internal control systems and procedures that protect the

institutions against employee and member risks. Financial management standards,

which include credit risk management activities and practices, are essential to the

operational success, efficiency and effectiveness of a Credit Union (WoCCU).

Though Credit Unions operate in the same retail banking market as conventional

banks, they are often exempted from the State regulation of banking performance

because of the differences in their structure and activities. Internal procedures for

credit union credit risk management also differ from those in commercial banks.

Market laws which define the value of capital (shares) do not affect credit unions as

they have a limited number of member-owners and since their shares are not traded in

the market. Increasing competition in the retail banking sector raises the question of

whether Credit Unions, operating in the same retail banking sector, should enjoy such

exemptions and or should have the same standards of risk management as

conventional banks (Kaupelyte D. and McCarthy O.,2006). Given these conditions,

this study intends to examine the regulatory framework within which Credit Unions

appraise loan applications.

4
While there have been many studies on credit management in finance literature,

previous research attempts have concentrated on the mainstream commercial banks

and there is a scanty study on the subject in the non-bank financial institutions such as

a credit union and that we do not fully understand the parameters within which credit

unions approve loan proposals. This thesis therefore aims at filling the research gap in

the area of credit risk management. The study is thus motivated by the general need

for empirical research into the credit risk management methods of these classes of

financial institutions.

Whereas other Credit Unions annual accounts show a reduced loan book coupled with

a reduction in interest income, increased write-offs and dramatically increasing

delinquency, increased provision for loan losses due to higher than anticipated loan

defaults (Kurt Kelly, 2015), the accounts of SPeCCU recorded impressive increases in

loan applications (From GH¢2,897,572.87 in 2013 to GH¢ 7,008,404.14 in 2014) and

corresponding increases in interest accruing from loans. “Due to prudent measures put

in place by the Board of Directors (BoD), management and the relentless efforts by

the loans committee, members have seen the need to pay back” (SPeCCU Annual

Report). A delinquency rate of less than 2% of the total loans granted was recorded

leading to a reduction in the provision for loan losses from GH¢106,078.16 in 2013 to

GH¢33,939.04 in 2014 (SPeCCU Annual Report). Given the analysis of the annual

accounts of the union, there is the urgent need to conduct a scientific study to assess

the approaches used by the union to appraise its loans. A number of authors/articles

have analyzed and suggested various loan appraisal methods but they focus on the

traditional commercial banks to the neglect of the credit cooperative financial

institutions - an equivalent analysis/investigation remains to be conducted on the

Credit Union setup in particular, with regard to credit risk management .This study is

5
consequently worthwhile as it will add to finance literature and expand credit risk

management knowledge.

The incentive to undertake empirical research in this subject is also grounded on the

fact that the loans/credit market in Ghana, aside the commercial banks, is flooded

with many competing firms including financial service firms which usually become

financially distressed and some fold up. Notwithstanding the intense competition in

the market the Credit Unions seem to be thriving and performing financially. New

ones are being formed every now and then. The question therefore is “what is it that

they do differently with regards to credit risk management that has enabled them

withstand the competition? This warrants empirical investigation into the operational

activities of the unions.

1.3 RESEARCH OBJECTIVES

The main objective of this study is to assess the appropriateness of the credit appraisal

processes used by Saint Peter‟s Co-operative Credit Union (SPeCCU).Specifically the

study seeks:

1. To identify the type of loans most preferred by borrowers.

2. To determine whether credit appraisal procedures of SPeCCU follow

acceptable best practices.

3. To find out challenges members face in accessing credit facilities from

SPeCCU.

1.4 RESEARCH QUESTIONS

This research aims at finding answers to the following questions.

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 1. What type of loans do members/borrowers of Saint Co-operative Credit Union

(SPeCCU) prefer most?

2. Do the credit policies and procedures follow regulatory best practices?

3. What are the challenges members of SPeCCU face in accessing credit

facilities?

1.5 SIGNIFICANCE OF THE STUDY

Credit risk is one of the issues that is so important to financial institutions and

banking regulators. This is because it can easily prompt institutional failure.

Therefore, credit risk management needs to be a robust process that enables financial

institutions to proactively manage facility portfolios in order to minimize losses and

earn an acceptable level of returns for shareholders. The purpose of this study is to

examine the criteria used in the credit appraisal system of Saint Peter‟s Co-operative

Credit Union (SPeCCU) and the repayment of loans.

The study seeks to add to finance literature in the subject of cooperative lending by

focusing on Saint Peter‟s Co-operative Credit Union (SPeCCU) where the subject is

virtually unexplored. Thus, the available literature on co-operative lending will be

built on and improved upon with this research as well as serving as basis for further

research work. It will also enable the Board of Directors (BoD), management and the

loans Committee gain an understanding and appreciation of the need to redesign and

formulate appropriate policy for the operations of SPeCCU.

It is envisaged that the study will provide empirical framework and the guiding

principles for new entrants in the credit union business for designing their credit

policies and procedures so as to avoid or reduce the incidence of bad debts. It is hoped

that the recommendations that will be provided will further guide management on

7
how to evaluate and recoup credit facilities granted union members. There have been

limited studies on SPeCCU credit practices. The research provides additional work on

its activities in Kumasi. The study is also significant to upcoming scholars as

reference material for collected work assessment for further research in the area of

credit appraisal in co-operative banks.

1.6 THE SCOPE OF THE STUDY

This research work focuses on the assessment of the credit appraisal processes of co-

operative credit banks using the Saint Peter‟s Co-operative Credit Union as case

study. The study covers all the branches of SPeCCU within the Kumasi Metropolis.

Coverage of the study also includes the review of relevant topical themes, concepts

and definitions, the general overview of the Saint Peter‟s Co-operative Credit Union

(SPeCCU) and the empirical studies conducted by earlier researchers on the topic will

be taken care of.

1.7 LIMITATIONS OF THE STUDY

The main limitations of this research are time and financial resource constraints. The

limited time span to complete this study as well as financial challenges, the study is

confined to the Saint Peter‟s Co-operative Credit Union (SPeCCU). Other credit

union institutions in the Metropolis should have been studied to make the results of

the study more representative. The study is also limited by the lack of adequate

empirical work on the subject as pertaining in credit co-operative banks/ credit

unions. This will limit the scope of coverage of the literature review. The main

sources of data collection for this study are interviews and questionnaires. There are

bound to be challenges with this form of data collection with regards to responses of

human subjects. Some respondents were at a point reluctant to help complete certain

items on questionnaires with the notion that the information given may expose their

8
business and answers provided may be used against them when they apply for loans in

future. Notwithstanding these weaknesses, the outcome of the study will provide

significant grounds for filling the research gap and make commendations that credit

unions can use to better perform in credit management

This study did not use regression analysis, which could have helped to explore the

statistical significance / properties of the sample responses revealed in the survey, as

outlined by Akila and Padmavathy in India on similar work.

1.8 ORGANIZATION OF THE STUDY

This study is arranged into five main chapters. Chapter one deals with the introduction

of the study and it involves a discussion of the background of the study, the problem

statement, research objectives and research questions. Other topics covered by this

chapter are the relevance of the research, the coverage and limits of the research and

the organization of the study. In Chapter two, related literature relevant to the study is

thoroughly reviewed. Relevant sub themes are selected from books and journals. The

full description of the methodology used to collect data is captured in chapter three.

The sources of date, target population, sample size and sampling procedure are dealt

with in this chapter. Chapter four covers presentation and analysis of data, the

discussion of the information and responses from respondents. Chapter five presents

the findings, conclusions and recommendations for policy implementations. It also

addresses the challenges encountered during the collection and analysis of data and

the opportunity for future research on the topic.

9
 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter reviews related relevant literature on the subject of credit appraisal

processes pertaining to co-operative credit banks (credit unions) in the Kumasi

Metropolitan area. The first section of this chapter provides a general discussion of

the theories of credit, concept of co-operatives and its types, the history of co-

operative banks and the credit appraisal procedures used by credit unions. The second

section presents the review of empirical studies that earlier authors have done on the

subject.

2.1 INFORMATION THEORY OF CREDIT

Information Theory of credit stipulates that the volume of lending available to

business entities and individuals would be larger if lenders (financial institutions)

could better estimate the probability of repayment by the borrowers. Public or private

credit bureaus that provide avenue for information sharing on the settlement pattern of

prospective customers are critical for strengthening financial intermediation process.

Disclosures that counterparties bring to a loan contract would significantly affect the

pattern of loan transaction. The theory posits that financial institutions extend more

credit when they know more about their customers and their borrowing pattern, they

are not scared about the risk of funding risky ventures, (Stiglitz et al 1981).

2.2 POWER THEORY OF CREDIT

This hypothesis of credit stresses that business bodies are eager in extending loan

facility when they know, in situations of nonpayment, they could easily enforce

agreements by compelling settlement or relinquishing surety. Volume of loans in a

10
nation would be determined by regulations that shields the lender on measures that

results in settlement. If creditors are able to ensure settlement, seize surety or even

gain control of the firm, lenders are eager to grant loans (Djankov et al, 2005).

2.3 CO-OPERATIVE DEFINED

Generally, a co-operative is a union of individuals who put their assets together on

mutual basis to find panacea for definite socio-economic challenges, which may

include revenue producing events. A co- operative may also be regarded as a scheme

that offer assistance to individuals and groups in an institution. These associations

may be formed by either producers or consumers. This ingenuity in the formation of

these associations normally comes about through a person or group of persons. The

pioneers become promoters who then sign up more persons to join. Usually, the

pioneers become the main initiators of the venture and earn the resulting profits as

administrators of the initiative. There are several types of co-operative societies.

These include multipurpose co-operative societies; marketing co-operative societies;

consumers‟ co-operative societies; processing co-operative societies; industrial co-

operative societies; supply/purchasing co-operative societies and credits and thrift co-

operative societies.

2.4 CREDIT AND THRIFT CO-OPERATIVE

The co-operative and thrift society is sometimes referred to as the credit and thrift co-

operative or the thrift and loans co-operatives. All such co-operatives carry out

functions that are virtually related. The core function is to improve access to credits at

critical moments or more briefly, financial intermediation. Primarily, such co-

operatives aim at making it easier for people (especially people with low income) to

save, thereby increasing the amount of money available for lending to members.

Loans and credits are provided to members at much more conventional and easier

11
conditions than the methods adopted by commercial banks and other financial

institutions (Otto, 2006). The thrift and credits co-operative is the earliest form of co-

operatives to have been formed worldwide.

2.5 BRIEF HISTORY OF CO-OPERATIVES

The origin of co-operatives in the ecosphere may be traced to the eighteen century

England. Co-operatives were created to curb social miseries and squalor all through

the industrial upheaval in England. The collective concerns of the revolution were

pronounced and generally affected the ordinary people whose living conditions had

worsened drastically to an inhuman level. Whilst employers reaped abnormal profits,

employees were paid insufficiently lower wages in the mist of high living expenses

(Ukpere, 2010). The wellbeing of employees was affected adversely (Bryce, 1996).

The outcome of these events led Robert Owen to conceive the idea of forming the co-

operative society. Owen is therefore regarded as the father of the co- operative

movement. Owen‟s pacesetting scheme served as a model that became a blue print for

“Rochdale Pioneers (a group of workers)” who formed an association based on self-

help and group activities (Abia, 2000). On the other hand, Taylor (1974) traces the

international history of thrifts co-operative to the credits society created by Herman

Schulge – Delitzsch in 1851 which provided credit services to debt ridden subsistence

farmers in Germany.

In Ghana, the first co-operative credit union was established at Jirapa in the Upper

West region in 1955 by Canadian Catholic missionary. This then grew to 141 parish-

based credit unions in the northern part of the country in 1960. By 1968, they were

brought under legislation and the Ghana Co-operative Credit Unions Association

(GCCUA) was formed as an apex body to supervise and regulate the activities of the

unions (Adjei J. K., 2010). The total number of credit unions at the time was 254 with

12
a membership of 60,000 (Adjei J. K.). Today, there are 451 registered credit unions in

Ghana with a total membership of 532,348 (CUA, 2013). Credit Unions in Ghana are

registered by the Registrar of Co-operatives.

2.6 CO-OPERATIVE BANKS

Co-operative banks are small-sized financial institutions that operate in the co-

operative sector in both urban and non-urban regions. Conventionally, they focus on

communities, localities and employees and they basically provide credit facilities to

undersized borrowers and entities. The term Urban Co-operative Banks (UCBs)

may be defined as primary cooperative banks situated in urban and semi-urban areas.

Thus, Urban Cooperative Banks offer banking services to urban and semi-urban

inhabitants. Until 1996, these banks lent to members who borrowed for non-

agricultural purposes. Whereas the co-operative banks in rural areas mostly support

agricultural bias projects such as farming, cattle, fishing, poultry, hatchery as well as

small scale enterprises and self-employed workers, the co-operative banks in cities

largely finance a variety of individuals who are mostly into self-employment,

industries, small scale units and home finance. They render services such as savings

and current accounts, safe deposit lockers, loan or mortgages to private and corporate

entities. Even though they are not superior to private banks with regards to services

rendered, competitive interest rates charged. The criteria for accessing credit facilities

from UCB are less rigorous than that of a private financial institution. Chandni D.

(2011) identified two main types of members in a co-operative. These are nominal

members and regular members. But SPeCCU uses the terms dormant and active

members to refer to the same classes of membership.

13
2.7 CREDIT AND TYPES OF CREDIT

The Global Association of Risk Professionals (GARP) defines a loan as a contractual

agreement that outlines the payment obligation from the borrower to the bank which

may be secured with either collateral or payment guarantees to ensure a reliable

source of secondary repayment in case the borrower defaults. It maintains that loans

are often written with covenants that require the facility to be repaid immediately if

certain adverse conditions exist, such as a drop in income or capital. Bank credit

refers to loans and overdrafts extended to enterprises by formal banking institutions.

Bank credit is among the most useful sources of finance for business in both formal

and informal sectors in Ghana. The provision of credit has increasingly been regarded

as an important tool for raising the incomes, mainly by mobilizing resources to more

productive uses. A credit facility is said to be performing if payment of both principal

and interest are up to date in accordance with agreed repayment terms. The non-

performing loans (NPL) represent credits which the banks perceive as possible loss of

funds due to loan defaults. They are further classified into substandard, doubtful or

lost. (Kolapo et al 2012).

According to Arti et al (2013), there are four basic types of credit. These are service

credit used to pay for utilities such as telephone, gas, electricity, and water. Borrowers

are required to make initial deposit before the service is rendered and penalties are

imposed when payment delays. The second type is cash loans that enable prospective

borrowers borrow small or large amounts on short and long term basis. Loans can be

secured or unsecured; Installment credit that allows borrowers to take goods such as

cars, appliances, and furniture home and make payment later. Credit cards are issued

by individual retail stores, banks, or businesses. The use of credit card can be the

analogous of an interest-free loan that borrowers pay for after the use of it usually at

14
the end of the month. But Rosy K., distinguished between two main types of credit

products as follows: Funded Credit Facilities which refers to credit services where

transfer of money is involved. Some examples are overdraft, cash credit, term loans

(long term finance) and bill discounting. The second type is non- funded credit

facilities in which funds are transferred only when a specific unforeseen event

happens. Two main examples are Letters of credit and Bank Guarantee. Chandni D.

listed the following types of loans and advances that a typical co-operative bank

provides: Personal Loan, Gold Loan, Rent Securitization Loan, Mortgage Loan,

Housing Loan, Education Loan, Vehicle Loan, Project Loan and Loan against Bonds.

A total of 2,518 loan applications requesting for various amounts totaling

GH¢7,008,404.14 were received by Saint Peter‟s Cooperative Credit Union

(SPeCCU) in the 2014 financial year. This is captured in the table below (SPeCCU,

2014 annual report).

Table 2.0: Loan Disbursement by type and amount.

Type of Loan Number of Amount approved and paid

Applications (GH¢)
Normal Loans (Personal, 2,368 201,064.14
Business and Provident)
Vehicle Loan 21 313,036.00
Daily Deposit Loan(Susu 100 161,000.00
loan)
Staff Loan 14 207,062.14
Funeral Loan 15 57,100.00
Total 2,518 7,008,404.14
Source: SPeCCU 2014 annual report.

15
The report showed the amount of the various loans that were repaid by borrowers.

This is depicted in the table 2 below.

Table 2.1 Loan repayment by type and amount.

Type of Loan Amount repaid (GH¢)

Normal Loans 4,642,949.50

Vehicle Loan 70,176.20

Daily Deposit Loan(Susu loan) 74,809.81

Staff Loan 12,797.00

Funeral Loan 39342.00

Total 4,840,074.50

Source: SPeCCU 2014 annual report.

2.8 UNDERSTANDING CREDIT RISK- CREDIT RISK DEFINED

The Global Association of Risk Professionals (GARP) considers credit risk as the

probable loss that emanates from borrowers inability to fulfill credit terms as

contained in the agreed terms in the contract. An example is when a homeowner stops

paying for mortgages. Credit risk is generally known as default risk. Activities that

lead to credit risk include bankruptcy, inability to settle outstanding debts, loan

restructuring, loan moratorium, accelerated loan payments. For banks, credit risk

typically resides in the assets in its banking book (loans and bonds held to maturity).

The Basel Committee for Banking Supervision (BCBS) also defined credit risk as the

possibility that a bank borrower or counterparty will fail to meet its obligations in

accordance with agreed term.

Nawaz et al (2012) on the other hand, defined credit risk as the existing and potential

risk to income or assets emanating from a borrower‟s inability to fulfill the provisions

16
of credit arrangements with the financial institution. According to them, credit risk is

associated with agreements in which success is a function of counterparties‟, issuers‟

or borrowers‟ behavior. Heffernan (1996) equally saw credit risk as the risk that an

asset or a credit is rendered difficult to recover as in total non-payment, or the risk of

postponement in the repaying the principal and interest.

Credit risk, or the risk that money owed is not repaid, has been prevalent in banking

history. It is the principal and perhaps the most important risk type that has been

present in finance, commerce and trade transactions from ancient cultures till today.

Numerous small and large failures, combined with the corresponding economic and

social impact, further accelerated the importance of credit risk management

throughout history. Credit risk is by far the most significant risk faced by banks and

the success of their business depends on accurate measurement and efficient

management of this risk to a greater extent than any other risk (Gieseche, 2004).

Increases in credit risk will raise the marginal cost of debt and equity, which in turn

increases the cost of funds for the bank (BCBS).

Ken B. and Peter M. (2012) affirm that credit risk is regarded as the possibility that

counterparty will dishonor his /her promises according to the tenets of the contract.

According to them credit risk may also be called default risk, performance risk or

counterparty risk. All these are basically referring to the similar idea: the effects of

credit on an organization‟s business. Credit risk may be considered as an information

asymmetry issue. The lender does not know much about the borrower and his

intentions to repay the loan or not. They identify three characteristics that define

credit risk. These are: The exposure (to a party that may possibly default or suffer an

adverse change in its ability to perform), the likelihood that this party will default (or

the default probability) on its obligations and the recovery rate (that is, how much can

17
be retrieved if a default takes place). It must be noted that if the first two elements,

are high, the experience will be high and that if the amount that can be retrieved is

high, the risk will below. Officially, credit risk is expressed as: Credit risk = Exposure

*Probability of default *(1 – Recovery rate).

2.9 CREDIT RISK MANAGEMENT

Credit risk management is a management tool that helps to minimize the rate of credit

risk .However, the goal of credit risk management is to maximize a bank‟s risk-

adjusted rate of return by maintaining credit risk exposure within acceptable

parameters (Casu et al, pg. 282). Banks need to manage the credit risk inherent in the

entire portfolio as well as the risk in individual credits and transactions. Furthermore,

credit risk management is responsible for the establishment of credit policies and

procedures in financial institutions. Credit policies and procedures, credit analysis and

credit review help to prevent poor lending decisions and protect company investments

(Franklin J. 2012).

Internationally, bad debts and NPLs are the most noticeable cause of credit risk

among financial institutions; however, other sources of credit risk exist throughout the

activities of a bank as mentioned earlier. It is also accountable for the implementing

decisions that reduce the lending experience of a business entity and carries out a

number of duties with the aim of dropping the risk related to an organization‟s

financial assets. Ken B. and Peter M. on the other hand recognize credit risk

management as the process of controlling the potential consequences of credit risk.

The process follows a standard risk management framework, namely: identification,

evaluation and management. That is, the cause of the risk has to be identified, the

extent of the risk has to be evaluated and decisions made as to how this risk is to be

18
managed. Managing default risk is a decision making activity. The appraisal process

deals with the determination of the reward of risk taking against the likely loss. Credit

risk management comes to maximize a bank‟s risk adjusted rate of return by

maintaining credit risk exposure within acceptable limit in order to provide a

framework for understanding the impact of credit risk management on banks‟

profitability. Kimeu argued that the credit risk management function in banks needs to

be a robust process that enables the banks to proactively manage the loan portfolios to

minimize the losses and earn an acceptable level of return to its shareholders. The

excessively high level of non-performing loans in the banks can be attributed to poor

corporate governance practices, lax credit administration processes and the absence or

non- adherence to credit risk management practices. The importance of credit risk

management is recognized by banks for it can establish the standards of process,

segregation of duties and responsibilities. Credit risk management practices is an

subject of concern to financial institutions today and there is the necessity to develop

improved processes and systems to deliver better visibility into future performance.

According to Saunders and Allen (2002), good selection strategy for credit risk

monitoring is adopted by the credit unions implies good pricing of the products in line

with the estimated risk which greatly affect their profitability. Mwirigi (2006) on the

other hand stated that loan portfolio management and operational efficiency

management are the most important to consider in credit risk management as they are

the most important in improving performance.

Credit risk management is a structured approach to managing uncertainties through

risk assessment, developing strategies to manage it and mitigation of risk using

managerial resources. The strategies include transferring to another party, avoiding

the risk, reducing the negative effects of the risk and accepting some or all of the

19
consequences of a particular risk (Gakure et al, 2012). Lending has been and is still

the mainstay of financial institutions and this is more to emerging economies of

developing countries where capital markets are not well developed. It has been found

that in order to minimize loan losses thus credit risk, it is essential for financial

institutions to have effective credit risk management systems in place.

2.10 CREDIT APPRAISAL METHODS

This section discusses the main methods for evaluating credit risk. Assessing credit

risk is a difficult multi-dimensional challenge and a number of diverse methods have

been proposed. Thus, credit appraisal involves a variety of techniques that can be

applied individually but are usually used simultaneously as part of the appraisal

procedure. These approaches may be classified as qualitative or quantitative.

Irrespective of the technique employed, the aim is to appreciate the behavior and

forecast probability of borrowers who may default. Ascertaining or estimating which

borrower may not fulfill contractual obligation is the art and skill required in credit

risk management. According to Ken B. and Peter M. three different approaches can

be identified-judgmental techniques, deterministic or relationship techniques that rely

on previous understanding of the risks or statistical techniques that can be fixed or

dynamic. The application of these methods helps to classify credit quality and predict

likely default. Two basic methods exist for analyzing credit quality: traditional

quantitative- qualitative credit analysis and decision models based on deterministic or

statistical processes. In credit risk management, the analyst would want to verify the

borrower‟s creditworthiness. This is a borrower‟s capacity and desire to fulfill his

contract terms with the party providing the facility. To ascertain the credit behavior of

the counterparty, credit analysts normally use a blend of financial or accounting

information as well as non-financial indicators and a variety of techniques. We can

20
differentiate between a number of techniques and their fundamental methods

summarized in table below.

Table 2.2: Different approaches to the credit evaluation process.

APPROACH METHODOLOGY
Judgmental Applies the assessor‟s experience and
understanding of the case to the decision
to extend or refuse credit.
Expert Systems(eg lending committee) Uses a panel approach to judge the case or
formalizes judgmental decisions via
lending systems and procedures.
Analytic Models Uses a set of analytic methods, usually on
quantitative data to derive a decision.
Statistical Models (eg credit scoring) Uses statistical inferences to derive
appropriate relationships for decision
making.
Behavioural Models Observes behavior over time to derive
appropriate relationships for reaching a
decision.
Market Models Relies on the informational content of
financial market prices as indicators of
financial solvency.

Source: Ken B. and Peter M. (2012).

2.11 CREDIT RISK MANAGEMENT PROCESS

Credit risk identification: Credit risk Identification is very significant for effective

risk management. For credit co-operative banks to manage credit risks facing them

effectively, there is the need to identify these credit risks. The first step in credit risk

identification is the implementation of the credit risk management function to

21
establish crucial observation areas inside and outside the corporation (Christen and

Pearce 2005). The use of credit policies to establish the framework for lending reflects

an institution‟s credit culture and ethical standards. To be effective, policies must be

communicated in a timely manner, be implemented through all levels of the

organization by appropriate procedures and revised periodically in light of changing

circumstances.

Credit risk mitigation: Tools used to control credit risk include the use of covenants,

the use of adequate collateral and the use of personal guarantors, use of savings

/deposit accounts and also insurance against default. Peer or group lending as

commonly known, mitigates credit risk by evading the risk of lending without

collateral, over a large number of borrowers within the group acts as insurance cover

for the institution. Those members of the group who have not received the loans

become agents of the bank in debt collection so that they can have access to their

loans also. The work of the Credit Officers is transferred to the group which has to do

overtime here, because they have interest. Group Savings may act as guarantee

instead of formal collateral. Credit risk analysis: The lending decision is based on

an evaluation of the firm‟s financial position and its future prospects, in a process

known as credit risk analysis. It consists of estimating the probability that a borrower

fails to return its credit in accordance with the terms agreed (probability of default)

and the expected loss that the bank would incur in case of default (loss given default).

The process involves the estimation of the firm‟s future cash flow and of the value of

the assets that can be provided as collateral security for the credit in the event of

default (Guimon). Risk analysis involves the application of the traditional 5Cs of

good credit which constitute the key risk factors in credit union credit risk

assessment.

22
Character is the maturity, honesty, trustworthiness, integrity, discipline, reliability

and dependability of a customer. Character is no doubt the most important quality of a

client. A person of good character will pay his debts whether it is secured or not. Such

a person will disclose all the facts of his deal because his intentions are to seek

guidance and help from the organization. When in problems such borrowers will

adhere to the credit managers‟ request for alternative arrangements to pay his debt

instead of hiding from the bank.

Secondly, Capacity refers to a client‟s ability to service his debts fully. Even if he has

good intentions but has no funds he will not be able to keep his loan repayment up to

date. Capacity also refers to a client‟s record of performance. A client who has

borrowed money from various institutions and paid regularly over long periods can be

described as having experience of borrowing and paying. Thirdly, they may require

collateral to secure the loan. This is the pledge given to secure the loan in terms of

assets e.g. land, motor vehicles e.t.c.

Fourthly, Condition refers to the general economic environment or special conditions

applying to the borrower of credit. Is the commercial, socio-economic, technological

and political environment conducive? Lastly, Common Sense this is the natural

ability to make good judgments and behave in a practical and sensible way. It refers to

being prudent and reasonable in analyzing, presenting, using and interpreting financial

data and other related business information. Additionally, common sense is the

reasonableness of the financial information provided to support the case for financing

a project as an indication of the ability of the project to pay itself. While each of the

above factors is important on their own right, they however should not be considered

in isolation. While adverse record on each one is enough to reject an application, good

23
reports on all aspects improve the probabilities of success. Therefore these elements

can be used individually or in combination, depending on the level of quality of credit

appraisal required and the amount of credit involved. The credit scoring rule is meant

to help financial institutions to thoroughly evaluate and assess the credit worthiness of

existing and potential customers before granting them new credit and hence exposure

of banks and the avoidance of non-performing loans. The credit scoring rule covers

the entire area of credit risk and hence its application in credit risk appraisal will

ensure that banks and financial institutions protect their assets against loss (Abedi

2000).

On the other hand Kurt Kelly identified the 5C'S of Bad Credit which constitute the

red flag areas for credit unions credit risk assessment processes. These are:

Complacency - refers to the tendency to assume that because things were

good in the past, they will be good in the future. Common examples of this

are-an over-reliance on guarantors or past loan repayment success or just

because things have always worked out in the past.

Carelessness - this involves poor loan underwriting, typically evidenced by

inadequate loan documentation, a lack of current financial information or

pertinent information on the member's file.

Communication - arises when the Credit Union's credit policy and objectives

are not clearly understood. The Board, through the manager, must effectively

communicate and enforce loan policy and the manager/loan officers should

make management aware of specific problems with existing loans, as soon as

24
 they appear.

Contingencies - this refers to the tendency to play down or ignore

circumstances in which a loan may default. The focus is on trying to justify

the loan rather than identifying the downside risk.

Competition - Giving the loan because the member, if refused, will only go

elsewhere i.e. a moneylender. This is not prudent lending practice.

Credit risk monitoring and control: Monitoring is the last step in the credit risk

management process. Effective risk management requires reporting and reviewing the

structure to ensure that risks are effectively identified, assessed and appropriate

controls and responses are in place. After the loan is approved, the loan should be

continuously watched over. These include keeping track of borrowers‟ compliance

with credit terms, identifying early signs of irregularity, conducting periodic valuation

of collateral and monitoring timely repayments. Commercial banks need to regularly

monitor the status of borrowers and re-evaluate individual credits and commitments,

and their ratings. Reliance on unreviewed credits can lead to a serious undetected

deterioration of the credit portfolio. Accordingly, the credit risk management program

of each institution must include procedures governing the regular formal review

where applicable. Because of their frequent contact with borrowers, Credit officers

are in a position to detect changes in a borrower‟s operations or financial condition.

This permits these officers to identify potential problems before they may be

discovered by independent credit reviewers. Accordingly, credit review systems must

ensure that a credit officer is monitoring credit quality where applicable. The

objective of effective credit review systems include: ensuring that the institution is

aware of borrowers current financial condition; ensuring that collateral security is

25
adequate and enforceable relative to borrowers‟ current circumstances; ensuring that

credits are in compliance with their covenants and margins; providing early

identification and classification of potential problem credits; and providing current

information regarding the quality of the loan portfolio.

2.12 CREDIT APPRAISAL PROCESS

Akila and Padmavathy 2014, see credit appraisal as the process of ascertaining the

risks related to the lending of loans to clients. This activity is normally performed by

banking entities concerned with provision of credit resources to clients. It is therefore

essential to assess the trustworthiness of customers so as to alleviate the credit risk.

Appropriate assessment of clients is carried out to enable the institution determine the

financial situation as well as the capability of the borrowers to settle loan obligations.

Although credit facilities are provided against collateral security, financial institutions

are generally concerned with the repayment of the principal and the interest accrued

instead of default that may warrant seizure of collateral.

Credit appraisal involves a comprehensive activity that begins with potential

borrowers making official application culminating in loan extension and monitoring

with the aim of making sure that the quality of credit provision and its attendant

default risks are maintained ( Akila and Padmavathy, 2014).

But, Rosky K. 2012 defined loan assessment as the procedure through which credit

providers ascertain the credibility of loan seekers. This activity usually deals with the

assessment of borrowers‟ repayment and savings history as well as determining the

quality and sustenance of their incomes.

And according to Kelly K, credit appraisal in the context of credit union operations,

refers to a method of ascertaining and evaluating a borrower‟s credit worthiness,

26
capacity and willingness to pay back principal plus interest loaned. Credit assessment

involves member default risk analysis and aims at keeping loan delinquencies to a

minimum acceptable level. The appraisal activity is the most significant function that

the credit committee or loan officer can accomplish to reduce credit risk. Ability to

repay a loan simply refers to a member having the financial resources to make

scheduled loan repayments over a period of time. Determination of ability to pay is

the function of a member's income and financial obligations. This is generally

calculated as the ratio of a member's monthly payment obligations to the member's

gross income. Characteristically, a higher ratio corresponds to a lower ability of a

borrower to repay a loan. It is vitally important that income/expenditure is evidenced

i.e. bank statement, credit card statement mortgage statement, wage slips, credit

checks etc. Without formal information sources, verification of other income and

obligations should be done using interviewing and observation. This should be

documented. Most credit unions perform comprehensive credit assessment of their

members without formal credit scoring systems. The trade-off is time and cost. Credit

assessment is necessarily labor intensive but if it is not done properly, default risk will

increase. If loan defaults become weighty - prepare for the regulator to load up the

rubber bullets.

Chandni D. states that credit appraisal deals with the process by which a lender

appraises the technical feasibility, economic viability and bankability including

creditworthiness of a prospective borrower. The process of lending in co-operative

banks begins with membership. Thus, the borrowers must be members (shareholders)

of the banks. Chandni D. subsequently outlined the credit appraisal process of co-

operative banks as follows: Receipt of application from applicant, Receipt of

documents (Balance sheet, Know Your Customer(KYC) papers, Different

27
government registration numbers and Properties documents), Pre-sanction visit by

bank officers, Check for defaulters list, willful defaulters list, other data, caution list,

etc, Title clearance reports of the properties to be obtained from empanelled

advocates, Valuation reports of the properties to be obtained from empanelled

valuer/engineers, Preparation of financial data, Proposal preparation ,Assessment of

proposal , Sanction/approval of proposal by appropriate sanctioning authority,

Documentations, agreements, mortgages, Disbursement of loan, Post sanction

activities such as receiving stock statements, review of accounts, renew of accounts,

etc (On regular basis).

2.13 EMPIRICAL REVIEW

This section presents the empirical research and highlights the most relevant findings

in the field of credit appraisal system among co-operative credit banks. An attempt is

made to find out the relative impact of the level of loan default on the performance of

co-operative credit banks.

Jyoti G. and Suman J. (2012) did a descriptive study of the co-operative banks in

India with particular emphasis on their credit creation activities so as to ascertain

types of loans preferred by different sets of customers. They used questionnaire and

interview. Results from the study indicated that greater part (32% as per the study) of

the respondents favored housing loan. This was followed by personal loan (30% of

respondents), educational loan (16%), consumer loan (12%), vehicle loan (6%) and

other loans (4%). The study also indicated that majority (64% as per the study) of the

customers like to take facilities with longer duration of 3 years and above. It also

established that the processing of these facilities followed very simple procedure.

28
Akila and Padmavathy studied the credit assessment processes and the approval of

loans to Micro, Small and Medium Enterprises (MSME) in India using correlation

and regression analysis with the objective of understanding the credit appraisal

procedure used by the bank to grant loans to MSME and to explore the causes of loan

default by MSME and suggest measures to reduce non-performing assets (NPA). The

result revealed 44.14% of credit granted the Micro enterprises resulted in Non-

Performing Assets (NPA). And another 59.62% of credit granted the Small

enterprises became Non-Performing Assets (NPA). It can be inferred that the

percentage increase in NPA may be an indication of declining financial success of the

bank. The correlation and regression results showed insignificant positive association

between non-performing asset and credit granted by the bank, implying that as the

non-performing asset rises, credit granted reduces. As non-performing assets (NPA) is

high due to defaults the net profit (NP) is low.

Omara M. (2007) conducted empirical research on the loan appraisal systems and

settlement of such facilities in Barclays Bank Uganda Ltd. Among other things, the

research was intended to reveal the level of loan default on the efficiency of the bank.

The findings clearly showed a high default rate constituting 50 % of the annual credit

granted that was delinquent. Analysis of Loan Performance confirmed a miserable

trend in the performance of advances. Scientific outcome of the study indicated

general poor performance of loans disbursed by Barclays bank. Over fifty percent

(52%) of the respondents were not settling their credit facilities regularly, another%

settle their loans promptly but with difficulty. Over 16% classified out rightly as bad

and doubtful debts.

Agu and Okoli (2013) examined credit management and bad debt in Nigeria

commercial banks and its implication for development. Analysis of Variance

29
(ANOVA) and autoregressive model were applied. It was meant to investigate the

causes of bad and doubtful debts in Nigeria Commercial Banks and also to examine

the effects of bad and doubtful debts in banks profitability, investors, the public and

the economy. The survey confirmed the increasing existence in the amount of bad and

doubtful debts in Nigeria Commercial Banks. The effects of these bad debts as

revealed by the survey were that bad debts destroy loan which are banks earning

assets. They are the source of earning as well as the essential determinants of the

liquidity and ultimate solvency of the bank. It is these earnings that translate into cash,

which of course is the life and blood of any business. Eating them up therefore,

amounts to slamming death certificates on banks. Again, due to the fact that the

higher the bad debts written off from the profit of the bank, the lower the net profit

and, therefore, the amount available for distribution as dividends to shareholders and,

in fact, the amount ploughed back into the business to enhance its future revenue

earning capacity.

According to a study by Nawaz et al, which sought to assess the effects of credit risk

on the financial performance of Nigerian banking system and determine the

association between the non-performing assets and banks financial success and

appraise the impact of credit and advances on banks. The correlation result indicated

inverse link between credit risk factors and profitability. Results of the regression

model of the study revealed inverse relationship between the proportions of non-

performing credits to loans and advances. Conclusions from the work indicate

considerable association linking bank performance (in terms of profitability) and

credit risk management (in terms of loan performance). Loans and advances and

nonperforming loans were considered key determinants of bank asset quality. This

research examined the effects of credit risk on the financial success of Nigerian banks.

30
As already stated, results of this study showed negative association between banks

profitability and the levels of loans and advances as well as non-performing loans and

deposits that expose them to immense risk of illiquidity and financial distress.

A comparative empirical examination by Agyarko A. (2012) on the impact of credit

unions on member businesses in the Techiman Municipality of Ghana assessed the

difficulties credit union members and clients of traditional banks encounter in

applying for loans. The researcher employed one-on-one interviews and administered

closed- ended and open- ended questionnaires as design for the study along with

accidental sampling method. Notable among the findings for the study includes delays

in granting loans to clients, rigid collateral guarantee requirements, high interest rate

on credit facilities and its hidden charges by traditional banks”.

31
 CHAPTER THREE

METHODOLOGY AND ORGANIZATIONAL PROFILE

3.0 INTRODUCTION

According to Yin, “research method defines what the activity of research is, how to

measure progress, and what constitutes success”. This chapter is designated to the

methodology and justification of each selected method to be used in the study by the

researcher to collect and analyze data on credit appraisal systems of cooperative credit

banks. It also takes into account the research design, sampling techniques, sample size

and all data collection instruments, empirical procedures adopted for the study as well

as some ethical considerations in relation to the study.

3.1 RESEARCH DESIGN

Research design is said to be the structure of the research, that is, it is the “adhesive”

that holds all elements of the project. Again, under the design the study describes the

qualitative research procedure involved in this study. Some of the Qualitative analyses

that were adopted for the work were summary statistics for the variables used in the

estimation and also through the use of bar chart and pie-chart.

3.2 DATA COLLECTION INSTRUMENTS

The data collection instrument used was the survey method with specifically designed

questionnaires. In general, surveys are methods of data collection in which

information is gathered through questioning. Face to face interview and questionnaire

administration in collecting the data.

32
3.2.1 Questionnaire

A questionnaire is a research instrument consisting of a series of questions and other

prompts for the purpose of gathering information from respondents, (Mellenbergh,

G.J).The questionnaires designed for this study basically contained closed-ended and

open-ended questions with options for responses provided for the respondents to

choose from. The open - ended questionnaire were aimed at ensuring that adequate

data was gathered to enable the study carry out detailed assessments of the issues

identified by respondents. Questions were carefully designed to throw up the issues

that could support the research problem. Questionnaires were designed and

administered to the selected cooperative credit bank to collect data on the topic.

3.2.2 Interviews

An interview is a conversation between two or more people where questions are asked

by the interviewer to elicit facts or statements from the interviewee. Interviews are a

standard part of qualitative research. The type of interview conducted for the study

was a face-to-face interview, which was one-on-one. This technique was useful as it

helped in gathering data that could not be obtained via the administering of

questionnaires. In addition, the research work explored a number of relevant

secondary data available in the industry. The study accessed the credit policy

documents of the credit union as well as annual financial reports for a reasonable

number of years.

3.3 POPULATION OF THE STUDY

Population is the overall sum of cases from which a sample is chosen. (Saunders et al,

2007). The population of this study comprised all members of SPeCCU who have

33
taken credit facility before. The total number of these members is 2,518 out of which

the sample was drawn.

3.4 SAMPLE SIZE AND SAMPLING TECHNIQUE

Sampling is simply the process of selecting a number of units from a population for a

study in such a way that the units represent the larger group (population) from which

they are selected. Realizing that collecting data from all cooperative credit banks in

the country would not be successful, the researcher affirms that sampling was

essential. Thus, the study was restricted to St Peter‟s Cooperative Credit Union

branches in Ashanti region, which was taken as the case study institution. In all, one

hundred and fifty-six (156) respondents were selected as the sample size consisting of

one hundred and fifty (150) members who were selected using accidental sampling

technique from the three branches and four credit staff and two loans committee

members using purposive sampling technique.

Accidental technique was to enable the researcher use her judgment to select cases,

which best answer the research question(s) and meet the objectives of the study.

According to Saunders et al, besides the above advantages, this technique is useful for

small samples and cases that are particularly informative.

3.5 DATA ANALYSIS

Other statistical analysis of the data such as frequency, percentages, graphs and tables

were used in interpreting results for this report from the data gathered.

In relation to the use of primary data for estimation, SPSS version 16.0 was used for

the descriptive estimations. The process of lending in co-operative banks begins with

membership. Thus, the borrowers must be members (shareholders) of the banks.

34
Chandni D. subsequently outlined the credit appraisal process of co-operative banks

as used in the empirical estimation in the study.

3.6 PROFILE OF SAINT PETER’S CO-OPERATIVE CREDIT UNION

(SPeCCU).

Saint Peter‟s Co-operative Credit Union (SPeCCU) is a community based credit union

established in 1969, affiliated to the Ghana Co-operative Credit Union Association

(CUA) in 1992 and registered in 1998. As at the end of the 2013/ 2014 financial year,

the total membership stood at 12,613 and total assets value of GHC10, 089,771.94.

Capital was also GHC1, 775,872.25, made up of GHC745, 513.54 members‟ shares

and GHC1, 030,358.71 reserves (SPeCCU annual report). SPeCCU is a financial co-

operative with a strong social enterprise culture. Its aim is to help its members

improve their living standards by developing solid entrepreneurial skills. By

supporting micro and small scale enterprises with good financial products, SPeCCU

helps build wealth.

3.6.1 Mission and Core Values of SPeCCU.

SPeCCU is committed to building an organization that is focused on its members,

staff and community. “Our mission is to provide the best financial solutions to

members at competitive rates and ultimately raise their standard of living and their

families thereby contributing to the improvement of the community in which they

live”. The core values of the union are: Serving and growing our members, delivering

to our shareholders, being proactive, working in teams guarding against arrogance,

respecting each other and upholding the highest level of integrity.

SPeCCU has a team of competent personnel with creative business knowledge,

experience and skills to manage the funds of the union efficiently. The management

35
structure of this co-operative society is as follows: Board of Directors (BoD),

Management and Staff, Loans Committee, Supervisory Committee, and Education

Committee. The Head Office of SPeCCU is located at Bompata, Kumasi opposite

Rent Control Board. It has two main branches at Suame and Tafo Nhyiaso. It provides

a wide range of financial services.

3.6.2 Products and Services of SPeCCU

Typically, Credit Unions offer variety of facilities which include savings and current

accounts, youth and member savings, various forms of credit, insurance, money

transfer services, investments and other financial services. In particular, Saint Peter‟s

Co-operative Credit Union (SPeCCU) has two major products-savings and loans and

a number of financial services. Savings include member savings (which accounts for

70% of total assets), special savings, youth savings, group savings, Susu savings,

bobrapa (metal box) savings, and member business account and member current

account. Loan portfolio consists of loan- within- savings (members borrow up to 75%

of their savings deposit and repay over one year), loan-above-savings ( members

take double or triple of their savings as loan and pay within 24 months ).Others

include smart loans, member business loans, overdraft facilities, educational/ school

fees loans, funeral and vehicle loans. Some of the services rendered by SPeCCU

include Bill Payments, Money Transfers and Call Credit Top-Ups and Credit

Insurance Services. It also undertakes different types of investment activities that

yield good returns to members.

3.7 BACKGROUND OF THE STUDY AREA

The Kumasi metropolis is situated in the transitional forest zone and is about 270km

north of Accra which is the capital of Ghana. It is found amid longitude 1.30o – 1.35o

36
and between latitude 6.35o – 6.40o, an elevation which ranges between 250 – 300

metres above sea level with an area of about 254 square kilometers. Its central

location makes it attractive for many people to migrate to. The metropolis shares

boundaries with Atwima District to the west, Ejisu-Juaben Municipal to the east,

Kwabre East District to the north and the south with Bosomtwe. Its green

environment has accorded it the accolade of being the “Garden City of West Africa”

(Ministry of Local Government and Rural Development and Maks Publications &

Media Services). Beginning with the groups Krobo, Bompata and Adum, the region

has developed with a common center to encompass an area of about ten (10)

kilometers in radius. The direction of growth started along the arterial roads due to

the accessibility they offered resulting in a radial pattern of development. Kumasi

covers around 90 conurbations, most were absorbed into it as an outcome of the

physical development due to growth. Figures from the year 2000 Population Census

kept the population at 1,170,270. It was projected to be about 1,610,867 in 2006 and

1,889,934 by 2009 (Ministry of Local Government and Rural Development and Maks

Publications & Media Services).The Metropolis has a lot of financial and nonfinancial

institution; making it one of the highest commercial cities in Ghana. There are also

many schools and other industries. It is very heterogeneous in the sense that it has

people with almost all the features of the people in the other regions of Ghana living

in it. Also the area is endowed with a lot resort or hotel facilities such as Golden

Tulip, Miklin Hotel etc. as well as the Kwame Nkrumah University of Science and

Technology (KNUST) sports center which are all opened to the general public.

37
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 INTRODUCTION

This chapter basically involves the results and discussions of data gathered from the

respondents sampled for the study. In all, 150 samples were used for this descriptive

analysis. For orderly presentation of the data analyses and in line with the objectives

of the study, the chapter begins with the demographic characteristics of respondents

followed by the analysis of the type of loans, loan procedures analysis and the

challenges borrowers face in accessing credit facilities from the institution

4.1 DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS

From the table 4.0 below, it could be observed that majority of the respondents were

aged between 31 to 40 years, with frequency of 55 out of 150 respondents, this group

constitutes a significant component of senior staff with rich experience in SPeCCU

financial operations. This category constituted 36.7 percent of the total respondents of

150. Following this was the category of 18 to 30 years, another senior staff category

with 28 percent of total respondents. 41 to 50 years category was next with 13.3

percent. 51 to 60 years followed with 12 percent of the total respondents, while more

than 60 years constituted 10 percent with 15 frequencies out of the total respondents

of 150 sampled.

The statistics below is an indication that the information gathered was from mature

and more experienced members of the financial intermediary who are very

knowledgeable in the credit activities of Saint Peters Co-operative Credit Union.

38
With respect to the level of education of respondents, it came up that most of the

respondents had secondary level qualification. This category constituted 36 percent of

the total respondents of 150, with frequency of 54. This was followed by the category

with basic education with 27.3 percent and a frequency of 41 while tertiary education

category followed with 26.7percent. 10 percent of the respondents had no formal

education. The study was also interested in respondent‟s status with SPeCCU, since

this information will help to ascertain the credibility of the information gathered, as to

whether information gathered is from the needed source for the study. Here, Members

topped the chart with 72 percent and frequency of 108 out of the 150 respondents, this

category constitute the core borrowers of the union. The staff member‟s category who

are mostly responsible for selling the loan products to members had 21.3 percent with

frequency of 32 from the sample of 150 while the management category constituted

6.7 percent with a frequency of 10. This is the group officially charged with loan

appraisal procedures in the institution.

The years of experience that respondents have had with SPeCCU was another

indicator of concern for this study. Experienced workers and members may have rich

information on the organization and can help do a more credible assessment on the

credit appraisal system of SPeCCU. Here, majority of the sampled respondents were

long serving members of the intermediary. Example, it came up that 5 to 7 years‟

experience topped the chart with 35.3 percent with frequency of 53 out of the 150

sampled. This was followed by 2 to 4 years with 33 percent; the category with the

least percentage was more than 10 years. The demographics helped to ascertain the

source, nature and characteristics of respondents and credibility of information

gathered for the study of the credit appraisal system and how this influence its

appropriateness. Establishing the fact that the information gathered was from

39
members (borrowers) and the experienced management members and staff of the

union, the study can comfortably proceed from here with further discussion of the

result.

Table 4.0 Demographic characteristics of respondents

VARIABLES FREQUENCY PERCENTAGE

AGE
18-30 years 42 28.0
31-40 years 55 36.7
41-50 years 20 13.3
51-60 years 18 12.0
More than 60 years 15 10.0

LEVEL OF EDUCATION
None 15 10.0
Basic 41 27.3
Secondary 54 36.0
Tertiary 40 26.7
STATUS IN SPeCCU
Management 10 6.7
Staff 32 21.3
Member 108 72.0

YEARS OF EXPERIENCE
1year or Less 23 15.3
2 – 4 years 33 22.0
5 – 7 years 53 35.3
8 – 10 years 20 13.3
More Than 10 years 21 14.0

SOURCE: Researcher‟s Survey Data (2015)

4.2 ANALYSIS OF TYPE OF LOANS ACCESSED BY MEMBERS OF SAINT

PETER’s COOPERATIVE CREDIT UNION (SPeCCU).

In this section, the researcher investigated whether or not members of this credit union

had taken loans since they joined the cooperative before analyzing the type of loans

they normally access. This investigation was relevant as it formed the basis of the

whole empirical assessment of the credit appraisal system of SPeCCU. The figure 4.0

40
below illustrates responses on the question of whether respondents had accessed a

loan facility from SPeCCU or not. Here, it came up that 88.67 percent of the

population sampled responded in the positive that they had accessed a loan facility

from the financial intermediary while 11.33 percent answered in the negative. Since

greater number of respondents had loan processing and accessibility experience from

the institution, it makes it credible to continue to explore this subject from the point of

view of members, staff and management, given their experience on credit matters

from the institution.

FIGURE 4.0 Accessing loan facilities at Saint Peter’s Co-operative Credit Union

SOURCE: Researcher‟s Survey Data (2015)

Figure 4.1 below, illustrates responses on loan facilities mostly accessed by members

of SPeCCU. Here, it could be observed that normal loan (Provident, Agricultural and

Business) topped the chart with 40.67 percent. This could be as a result of the fact

that the provident component of the normal loans consist of loans for school fees,

wedding, rent and medical bills. The business loan component of the normal loan is

also for business capital for unregistered businesses, liquidity support and special

41
women loan(Women In Development-WID).Base on these, it can be expected that

majority of members may access the normal loans far more than the other types. Since

these loans are meant for meeting basic life expenses, it is not out of place to top the

list. The interest paid on WID loans is relatively low and the processing of school fees

loan is also less cumbersome compared to the other forms. This may be an incentive

to members to patronize these products.

Next to this was SPeCCU Member Business Loan with 22 percent and 18.67 percent

for SPeCCU Salary Loan. Auto Loan, Funeral Loan and Others such as Susu loan,

staff loan etc followed with 10 percent, 4.67 percent and 4 percent respectively. The

lower percentages recorded for these categories could be as a result of high interest

and administrative charges, the nature of collateral and cumbersome procedures

involved, making these facilities unattractive to members. For instance, it came up

during the interview that members (borrowers) for auto loan are required to deposit 10

percent of the cost of the car. This may be one of the reasons why it recorded low

patronage as indicated by the chart.

42
FIGURE 4.1 Loan facilities accessed by members at Saint Peter’s Co-operative

Credit Union.

SOURCE: Researcher‟s Survey Data (2015)

4.3 ANALYSIS OF LOAN ACCESSIBILITY PROCEDURES OF SPeCCU

This section of the analysis is devoted to ascertaining whether loan policies and

procedures of SPeCCU follow acceptable best practices. It takes a look at the various

processes and procedures through which loan appraisal goes from the beginning to the

last stage where the loan is finally granted.

Formal application for loans: The figure 4.2 below illustrates responses on the

question of whether borrowers formally apply for loans. Here, respondents strongly

agreed that they put in a formal application before credit facilities are granted. The

43
majority of respondents agreed with 77.34 percent, this was made up of 40.67 and

36.67 percent strongly agree and agree respectively. However, 15.34 percent

disagreed, this was made up of 6.67 and 8.68 disagree and strongly disagree

respectively. Meanwhile, 7.33 percent were not able to take any concrete stance on

the subject under discussion, may be due to insufficient information on the matter.

From the above, it can be inferred that formal application for loans has helped to

improve the credit appraisal system at Saint Peter‟s Co-operative Credit Union as it

legitimizes the application process and also help to screen and select less risky

applicants and also ensures that beneficiaries are held accountable in case of default

FIGURE 4.2 Formal applications for loans

SOURCE: Researcher‟s Survey Data (2015)

44
Signing of Guarantors Form before loan is granted: The figure 4.3 below shows

the responses on the argument “whether the signing of guarantors form before loan

facility is approved improves the credit appraisal system in SPeCCU” or otherwise.

From the figure below, it could be observed that majority of respondents provide

guarantors when accessing loan facilities. From the figure below, 79.33 percent

provide guarantors, this was made up of 44 percent strongly agree and 35.33 percent

agree. On the contrary, 4 and 3 percent disagreed and strongly disagreed respectively,

arguing that merely signing on as a guarantor to a contract does not necessarily ensure

contract credibility, as guarantors could at times be as risky as the applicants since

appraisal officers may not have full information about loan guarantors. Meanwhile,

8.67 percent were indifferent with the statement under discussion. This may be due to

the fact that these people have access loans of GHC10, 000.00 and above, which do

not require guarantors but collateral as confirmed by some respondents during the

interview.

Figure 4.3 The guarantors form singing and the credit appraisal system at SPeCCU

SOURCE: Researcher‟s Survey Data (2015)

45
The pre-sanction visits by credit officers and the credit appraisal system at

SPeCCU: Figure 4.4 below illustrates respondent‟s agreement or disagreement with

the statement of whether they had experienced pre-sanction visits by the credit

officers. From the figure below, 76.66 percent of the respondents agreed whereas

12.67 percent of the sampled respondents disagreed. Again, 10.67 percent could not

take any concrete stance on the matter. Here, it could be observed that majority of

respondents agreed with this arguing that this visits helps to do a thorough assessment

of the applicant and evaluate risk level or ability to pay back facility with current

interest and nature of business involved. Again, it may serve as a check on the

borrower since they know that when they default, they can be located all things being

equal

Figure 4.4 The pre-sanction visit by credit officers and the credit appraisal system
at SPeCCU

SOURCE: Researcher‟s Survey Data (2015).

The clearance reports of properties and the credit appraisal system at saint peter’s
co-operative credit union: The figure 4.5 shows responses on the argument of
whether clearance reports on properties improves the credit appraisal system or
otherwise. Here, it was revealed that majority of respondents (80.63%) agreed to this.

46
This was made up of 27.33 and 53.33 percent strongly agree and agree respectively.
However, 7.33 percent disagreed and strongly disagreed while 4.67 percent were not
able to take a stance on the matter. Since majority of respondents have had the
experience of providing the clearance report of their properties as part of requirement
for accessing loan facility from SPeCCU, it can be inferred that this procedure may
have positive impact on the credit appraisal system.
Figure 4.5 The clearance reports of properties and the credit appraisal system at

saint peter’s co-operative credit union

SOURCE: Researcher‟s Survey Data (2015)

Valuation reports of properties and the credit appraisal system: The valuation report

of properties was another variable of interest in this study. The figure 4.6 below

illustrates respondents view on this reports and how it affects the credit appraisal

system. Here, it could be observed that majority of the sampled respondents

(82.67%)agreed with this assertion. This was made up of 40 percent strongly agree

and 42.67% agree of the sampled responses. Once again, it may be argue that since

majority of respondents had uncounted this activity of the appraisal system, it can be

47
concluded that this report helps to ensure the total credibility of the processes

involved in the contract. However, 8.67 percent did not agree to this assertion. While

8.67 remain neutral with the argument under consideration which may be that they

might not have access a loan above GHC 10,000.00 as confirmed by some

respondents during the interview.

Figure 4.6 Valuation reports of properties and the credit appraisal system

SOURCE: Researcher‟s Survey Data (2015)

Documentations and submission of collateral: Another major variable of interest in

this study was the issue of collateral and the appraisal system in place at SPeCCU.

The figure 4.7 below represents respondents view on the argument of whether the

documentations and submission of collateral really has improved the credit appraisal

system or otherwise. It came up that majority of the respondents, agreed with this

assertion, stating, among other things, that the formal documentation and the issue of

48
collateral and personal guarantors still remain the major determinant of applicant‟s

ability to pay back facilities with interest, and so ignoring these when doing credit

appraisal can spell a grave disaster for any financial intermediary, irrespective of

management competences and capital outlay of business. Here, it was revealed that

79.3 percent agreed, this was made up of 28 and 51.33 strongly agree and agree

respectively. Nonetheless, 13.33 percent disagreed, with the argument. This may be

due to respondents who might not have accessed a facility that require provision of

collateral. Another reason that may account for disagreement may come from

respondents who need such facilities but do not have the collateral to secure the loan.

The rest of the respondents(7.33%) remained neutral to the statement under

consideration arguing that the immergence of granting loans without collateral or

guarantors particularly with salaried workers and the Ghana Inter-payment and

Settlement System makes the issue of guarantors and collateral irrelevant in modern

financial intermediation,

FIGURE 4.7 Documentations and submission of collateral for loans

SOURCE: Researcher‟s Survey Data (2015).

49
Approval of loan by loans committee: The figure 4.8 below illustrates responses on

the question of whether loans were approved by the loans committee. Here, it came up

that 80 percent of the respondents responded in the positive that the application of

loans is always sanctioned by the committee. While 20 percent answered in the

negative which may be because they are not first time borrowers or loans such as

school fees and funeral sometimes do not require approval from the loans committee

as explained by credit officers during the interview.

FIGURE 4.8 Approval of loans by loans committee

Approval of loan by loans committee

80
60
40

80%
20
0

20%
SOURCE: Researcher‟s Survey Data (2015)

50
Post-sanction activities and the credit appraisal system: The figure 4.9 below

illustrates the respondents view on the argument that post-sanction activities improve

the credit appraisal system. From the diagram below, it could be observed that

majority of respondents agreed with the assertion that post-sanction activities improve

credit appraisal, arguing that it reminds beneficiaries of their contract terms and keep

them on their toes to work harder to improve their individual credit ratings with the

loan granting institution and equally helps to build a good rapport between

officials(management and staff) and members who may need additional technical

advice after facility has been secured. Here, 82.67 agreed with the statement.

Notwithstanding this fine argument, 8 percent disagreed with this, though they were

in the minority, while about 9 percent could not take any stance on the matter.

Figure 4.9 Post-sanction activities and the credit appraisal system at saint peter’s

co-operative credit union

SOURCE: Researcher‟s Survey Data (2015)

51
4.4 ANALYSIS OF SOME CHALLENGES RELATED TO ACCESSING LOAN

FACILITIES AT SAINT PETER’S CO-OPERATIVE CREDIT UNION

And equally important variable of interest for the study was some major challenges

faced in an attempt to access a loan facility from SPeCCU. From the study conducted,

it was revealed that the main challenges facing the system was High Administrative

Charges on loan contracted by members, categorized into the 10 percent that is kept

in business loan account and the curent interest rate, both with 51.33 and 24 percent

respectively. Demand for collateral on facilites of 10,000 cedis and above and

valuation reports and clearance reports were also cited as additional cost for members

in an attempt to contract loan facility from SPeCCU. Bureaucratic tendencies,

unecessary delays in loan payments and Long Probation period for beneficiaries

constituted 11.33 percent, 6.67 percent and 3.33 percent respectively. Other issues

cited as challenges included non availabitly of overdraft for members and the hectic

time with loan committee before final approval of loans made, this constituted 3.3

percent of the total responses gathered for the study.

52
 FIGURE 4.10 Challenges related to accessing loan facility at saint peter’s co-

operative credit union

Challenges encountered When Accessing Loan facility at SPeCCU

SOURCE: Researcher‟s Survey Data (2015)

4.5 CHALLENGES FACED BY CREDIT OFFICERS IN APPRAISAL OF

LOANS

This section present the analysis of the challenges that co-operative credit banks

encounter in credit appraisal processes. Some of the challenges faced in appraising

loans from the interview of the credit officers are:

Determining members’ revenue, expenses and profit – according to the officers,

some members are not able to come out with figures on sales and cost of sales and so

it become difficult to get accurate information to determine whether the project is

viable or otherwise.
53
Diversion of funds is another challenge cited by the officers. Some members do not

use the loan for the purpose stated on the loan application form but since the objective

of the appraisal is to ensure the loan do not go bad, it is over looked when detected

during post sanction stage especially when such members are not defaulting in the

repayment arrangement. This behavior of borrowers amounts to the problem of moral

hazard in the financial intermediation process.

Inappropriate bookkeeping is also a challenge in the appraisal process according to

the officers. It came out from the interview of the officers that some members do not

keep proper books so when the financial aspect of the appraisal process is solely

dependent on what is in their books, it will not present a true picture because many a

times, these figures are massaged to impress the officers.

Provision of wrong personal information by members (borrowers) – Some

members intentionally provide wrong addresses especially house numbers on their

application forms which is identified only when the officer visit their premises,

workplace or residence.

The loans committee also noticed that some members (borrowers) apply for the loan

because they are members and qualify for a facility and not because they need it. Such

members will state or give a good reason for the loan on the application form but

when probed further during the face to face interview, it turns out otherwise.

54
 CHAPTER FIVE

SUMMARY OF FINDINGS AND POLICY RECOMMENDATIONS

5.0 INTRODUCTION

This chapter recaps the results of the study and expound deductions that have

stemmed from the descriptive analysis of the data. Commendations and policy

repercussions resulting from the study and proposals for additional research on the

subject investigated.

5.1 SUMMARY OF FINDINGS

The demographic statistics from the study revealed that about 36.7% of the

respondents aged 31 to 40 years. Again, majority of the respondents were mostly

members (borrowers) with 72% and secondary level education with 36 % while

35.30% had 5 - 7 years of relationship/ experience with SPeCCU. 88.67% agreed of

having accessed a loan facility from SPeCCU and the loan facility mostly accessed

was the normal loan (provident, agricultural loan and business loan) with 40.67%,

followed by business loan with 22%, while salary loan had 18%.

Formalizing the loan contract processes and guarantor system were major

determinants of ensuring the integrity of the credit appraisal system at SPeCCU.

77.34% and 79.33% agreed to these respectively. Pre-sanction visits to applicant‟s

facilities, the clearance and valuation reports systems also came up credible and

reliable criteria for the smooth implementation of the appraisal system. Here, 76.77%,

80.63% and 82.67% agreed to these respectively.

The demand for collateral, approval of loan by loans committee and post-sanction

activities of loan officers also came up as major factors influencing the credit

55
appraisal system at SPeCCU. Here, 79.3%, 85.22% and 82.67% agreed to these

respectively.

High administrative charges, higher interest on loans, bureaucratic tendencies and

delays in loan processing procedures etc were identified as some of the major

challenges facing members in credit accessibility. This was made up of 51.33%, 24%,

11.33% and 6.67% respectively.

5.2 CONCLUSION

The study set out to measure the credit appraisal system of co-operative credit banks

with a case study of Saint Peter‟s Co-operative Credit Union, Kumasi. The study can

conclude that, the loan policies and procedures of SPeCCU follow acceptable best

practices in granting credit facilities for members by formalizing the loan application

procedure for applicants, the demand for collateral and valid documents from

applicants, meeting the loan committee members one-on-one, signing the guarantor

forms and both pre-sanction and post-sanction activities of loan officers, as well as

clearance and valuation reports have a positive influence on the credit appraisal

system of co-operative credit banks in Ghana, given the outcome of the study on

SPeCCU. Also high administrative charges, higher interest on loans, bureaucratic

tendencies and delays in loan processing activities etc were identified as some of the

major challenges facing members in accessing credit facilities from SPeCCU.

5.3 POLICY RECOMMENDATION

The study recommends that mechanisms such as competitive interest rate, low

administrative charges, flexible terms of loan repayment, less cumbersome

application procedures among others must be put in place to make credit facilities

such as business loans, salary loans, funeral and auto loans more attractive to

56
members, just like the normal loans, these facilities have the potential to increase

volumes of transactions and profit levels of the financial institution and improve the

general financial position of Co-operative banks in Ghana.

The study was interested in finding out whether SPeCCU credit creation activities

follow the best practices of financial intermediation. It came up that standard practices

(formalizing the loan application procedure for applicants, the demand for collateral

and valid documents from applicants, meeting the loan committee members one-on-

one, signing the guarantor forms and both pre-sanction and post-sanction activities of

loan officers etc) are observed at SPeCCU, and these have had positive influence on

the credit appraisal system of the institution. The study therefore recommends that

sustainable efforts must be put in place to avoid relaxation of these all-important

components of the appraisal system to ensure the integrity and credibility of the

Union.

The pre and post-sanction activities of loan officers were another significant

component of the appraisal processes at SPeCCU according to the study. It is

therefore recommended that measures such as keeping a solid data base of all

applicants including phone numbers and residential and business addresses of

applicants, financial literacy program for applicant, offering technical advice on

investment opportunities, regular review of accounts and regular organization of

social programs for members, will engender a great sense of belongingness and

improve the corporate image of the Union. These equally have the potential to

increase the membership of the union and its fortunes.

57
5.4 SUGGESTION FOR FURTHER RESEARCH

The study suggests that further survey should be conducted into the effect of credit

appraisal systems of co-operative credit banks using regression analysis, this will help

to explore the correlation and the statistical properties of variables in future.

58
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 APPENDICES

APPENDIX I

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF ART AND SOCIAL SCIENCE
SCHOOL OF BUSINESS ADMINISTRATION
(DEPARTMENT OF ACCOUNTING AND FINANCE)
QUESTIONAIRE

ASSESSING THE CREDIT APPRAISAL SYSTEM OF CO-OPERATIVE

CREDIT BANKS IN GHANA- A CASE STUDY OF SAINT PETER’S CO-
OPERATIVE CREDIT UNION LIMITED, KUMASI.

This research is being conducted in partial fulfillment of the requirements for the
award of Master in Business Administration degree (KNUST School of Business).
All information received would be used only for academic purposes and treated with
strict confidentiality. Please tick in the box  where appropriate .You
may also be required to complete the open ended questions in the spaces provided.
Thank you.

SECTION A: DEMOGRAPHICS

1) Age a) 18- 30 b) 31 - 40 c) 41 -50 d) 51-60 e)

> 60

2) Level of Education a) None b) Basic c) Secondary d)

Tertiary

3) Status in Saint Peter‟s Co-operative Credit Union:

a) Management(Credit Officers, loans committee) b) Staff

c) Member

4) Years of experience in/with Saint Peter‟s Co-operative Credit

Union………………………

64
SECTION B: This section examines the type of loans most preferred by
borrowers/customers of SPeCCU. Please indicate your level of agreement or
disagreement with the following statements by ticking the appropriate box against
each question using YES or NO on the Likert-Scale provided.
5) Have you accessed any loan facility from SPeCCU? YES =1

NO = 0

6) Which of these LOAN FACILITES did you access from Saint Peters Co-operative

Credit Union? Tick as many as applicable.

a) SPeCCU Auto Loans

b) SPeCCU Member Business Loans

c) SPeCCU Salary/ Controller Loans

d) SPeCCU Funeral Loans

e) SPeCCU Susu Loans

f) SPeCCU Normal Loans( Agriculture, Business and

Provident)

g) Staff Loans

h) Others- specify …………………………………

SECTION C: This section examines the clients default rate and to determine
whether loan policies and procedures of SPeCCU follow acceptable best
practices. Please indicate your level of agreement or disagreement with the
following statements by ticking the appropriate box against each question.

65
 ITEMS Strongly Agree Not Disagree Strongly
Agree Sure Disagree

7. Receipt of formal
application for loan
from members of
SPeCCU

8. Signing of guarantors
forms before loan is
granted

9. Pre-sanction visit by
credit officers

10. Title clearance reports

of the properties to be
obtained from
empanelled advocates

11. The Valuation reports

of the properties to be
obtained from
empanelled valuer

12. Documentations and

agreements/Submission
of collateral documents
before loan is granted

13. Post sanction activities

such as repayment
monitoring, reminder
calls, review of
accounts, surprise visit
to borrower etc on
regular basis

66
14) Do you require approval from loans committee when you access a facility from

SPeCCU?

a) Yes b) No

SECTION D: CHALLENGES FACING MEMBERS OF SPeCCU IN

ACCESSING CREDIT.

15) What are some of the challenges you encounter in an attempt to access any of the

loan facilities provided by Saint Peter‟s Co-operative Credit Union?

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

16) Any additional information or comments that you would like to give to help this
study based on the topic.

…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
……………………………………………

THANK YOU.

67
 APPENDIX II

TABLES OF OUTPUT

Age
Valid Cumulative
Frequency Percent Percent Percent
Valid 18 - 30 years 42 28.0 28.0 28.0
31 - 40 years 55 36.7 36.7 64.7
41- 50 years 20 13.3 13.3 78.0
51 - 60 years 18 12.0 12.0 90.0
> 60 years 15 10.0 10.0 100.0
Total 150 100.0 100.0

Level of Education
Valid Cumulative
Frequency Percent Percent Percent
Valid None 5 3.3 3.3 3.3
Basic 28 18.7 18.7 22.0
Secondary 44 29.3 29.3 51.3
Tertiary 73 48.7 48.7 100.0
Total 150 100.0 100.0

68
 Status with Saint Peter's Co-operative Credit Union
Valid Cumulative
Frequency Percent Percent Percent
Valid Managemen
79 52.7 52.7 52.7
t
Staff 16 10.7 10.7 63.3
Member 55 36.7 36.7 100.0
Total 150 100.0 100.0

Years of Experience with Saint Peter's Co-operative Credit Union

Valid Cumulative
Frequency Percent Percent Percent
Valid 1 Year or Less 23 15.3 15.3 15.3
2 - 4 years 33 22.0 22.0 37.3
5 -7 years 53 35.3 35.3 72.7
8 - 10 years 20 13.3 13.3 86.0
More than 10
21 14.0 14.0 100.0
years
Total 150 100.0 100.0

Have You Accessed Any Loan Facility From SPeCCU?

Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 133 88.7 88.7 88.7
No 17 11.3 11.3 100.0
Total 150 100.0 100.0

69
 Loan Facilities Accessed From SPeCCU
Valid Cumulative
Frequency Percent Percent Percent
Valid SPeCCU Auto Loan 15 10.0 10.0 10.0
SPeCCU Member
33 22.0 22.0 32.0
Business Loan
SPeCCU Salary
28 18.7 18.7 50.7
Loan(controller loan)
SPeCCU Funeral Loan 7 4.7 4.7 55.3
SPeCCU Normal Loan 61 40.7 40.7 96.0
Others 6 4.0 4.0 100.0
Total 150 100.0 100.0

Formal Application for Loan Facility in SPeCCU

Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 61 40.7 40.7 40.7
Agree 55 36.7 36.7 77.3
Neutral 11 7.3 7.3 84.7
Disagree 10 6.7 6.7 91.3
Strongly
13 8.7 8.7 100.0
Disagree
Total 150 100.0 100.0

70
Signing of Guarantors Form Before Loan is Granted
Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 66 44.0 44.0 44.0
Agree 53 35.3 35.3 79.3
Neutral 13 8.7 8.7 88.0
Disagree 6 4.0 4.0 92.0
Strongly
12 8.0 8.0 100.0
Disagree
Total 150 100.0 100.0

Pre-sanction Visit By Credit Officers

Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 65 43.3 43.3 43.3
Agree 50 33.3 33.3 76.7
Neutral 16 10.7 10.7 87.3
Disagree 6 4.0 4.0 91.3
Strongly
13 8.7 8.7 100.0
Disagree
Total 150 100.0 100.0

71
Title Clearance Reports of The Properties To Be Obtained From
Empanelled Advocates
Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 41 27.3 27.3 27.3
Agree 80 53.3 53.3 80.7
Neutral 7 4.7 4.7 85.3
Disagree 11 7.3 7.3 92.7
Strongly
11 7.3 7.3 100.0
Disagree
Total 150 100.0 100.0

The Valuation Reports of Properties To Be Obtained From Empanelled

Valuer
Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 60 40.0 40.0 40.0
Agree 64 42.7 42.7 82.7
Neutral 13 8.7 8.7 91.3
Disagree 6 4.0 4.0 95.3
Strongly
7 4.7 4.7 100.0
Disagree
Total 150 100.0 100.0

72
Documentations and Agreements/Submission of Collateral Before Loan
is Granted
Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 42 28.0 28.0 28.0
Agree 77 51.3 51.3 79.3
Neutral 11 7.3 7.3 86.7
Disagree 8 5.3 5.3 92.0
Strongly
12 8.0 8.0 100.0
Disagree
Total 150 100.0 100.0
Approval of Loan by loans Committee
Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 120 80.00 80.00 80.
No 30 20.00 20.00 100.0
Total 150 100.0 100.0

Post-sanction Activities Such As Repayment Monitoring, Reminder

Calls etc on Regular Basis
Valid Cumulative
Frequency Percent Percent Percent
Valid Strongly Agree 58 38.7 38.7 38.7
Agree 66 44.0 44.0 82.7
Neutral 14 9.3 9.3 92.0
Disagree 5 3.3 3.3 95.3
Strongly
7 4.7 4.7 100.0
Disagree
Total 150 100.0 100.0

73
Challenges Encountered When Accessing Loan Facility at SPeCCU
Valid Cumulative
Frequency Percent Percent Percent
Valid High Administrative
77 51.3 51.3 51.3
Charges
Long Probation Period
5 3.3 3.3 54.7
For Members
Unnecessary Delays in
10 6.7 6.7 61.3
Loan Processing
High Interest On
36 24.0 24.0 85.3
Principal
Too Much Bureaucracy 17 11.3 11.3 96.7
Others 5 3.3 3.3 100.0
Total 150 100.0 100.0

74