Credit risk management in rural banks a case of some selected rural banks institutions within the Ashanti region of Ghana

Abstract

Credit risk has shown to be one of the main forms of risks financial institutions are exposed to due to the very nature of their business operations. The study investigated how rural and community banks managed their credit risk in Ghana. Accordingly, the main objectives of the study were to determine the main sources of credit risks rural and community banks are exposed to in Ghana, to identify the credit risk management practices of rural and community banks in Ghana, to assess the rural and community banks credit risk management policies as against Bank of Ghana credit risk policy and finally to analyze the constraints to managing risks by rural banks. The target population for the study constituted all the rural and community banks in Ghana and specifically the study sample came from rural banks who operated in the Ashanti region; Amensie-West Rural Bank, Atwima Mponua Rural Bank, Sekyere Rural and Atwima Kwanwoma Rural Bank. Since the study was employed cross sectional research design, the study used questionnaires as the data collection instrument. The questionnaire had three parts. The first part of the questionnaires dealt with the demographic characteristics of the study respondents. The second section dealt with the main sources of credit risk that rural banks were exposed to. The third and final section looked at the credit management practices the credit management, credit risk management policy and the constraints to credit risk management. It became evident that the key credit risk sources that most rural were exposed to in their operations were corporate, individual and SMEs commercial loans. Also it was established that most of these banks did not used or have in place independent bodies to review their organization credit decisions and policies. On this score it was recommended that management of these banks should employ the services of external bodies who will have the capacity and competencies to assess their organization’s credit decision and policies to ascertain how robust it is in mitigating their organization operations against potential credit risk sources.