Osei-Nyarko George

CREDIT APPRAISAL PROCESS AND REPAYMENT OF LOAN AT GN BANK.
A CASE STUDY OF UPPER AND LOWER DENKYIRA.
by
OSEI – NYARKO GEORGE
(PG.9615713)
A Thesis submitted to the School of Business, Kwame Nkrumah University of Science and
Technology in partial fulfillment of the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION
JULY, 2015
DECLARATION
I hereby declare that this submission is my own work towards the Masters of Business
Administration and that, to the best to 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.
………………… ……………………. …………………
Osei – Nyarko George Signature Date
(PG.9615713)
Certified by:
………………….. …………………….. ………………..
Dr. K. O. Appiah Signature Date
Certified by:
Dr. K. O. Appiah …………………….. ………………..
Head Of Department Signature Date
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ABSTRACT
This study examines the credit appraisal process and repayment of Bank loans at GN Bank.
Specifically the study investigates the appropriateness of the credit appraisal process of GN
Bank, the relationship between loan officers and customers and the effect of loan officer –
customer relationship on the credit appraisal process. The study also identifies strategies to help
improve the credit appraisal process of the Bank. A face-to-face household-level survey of 142
respondents is conducted in Upper and Lower Denkyira East Municipal, Ghana in 2015 with a
structured questionnaire. The subjects for the study are formal and informal sector workers.
On the appropriateness of the credit appraisal process, the factors are loan processing time,
nature of collateral, loan diversion, credit scoring and evaluation, loan amount disbursement,
loan repayment and loan default. The study also finds out the loans department offers excellent
reception to all customers irrespective of the loans officer’s relationship with the customer. Loan
officers provide assistance to most customers in completing the loan form and also advise them
on how to invest the loan amount in the intended business or project. The relationship between
loan officers and customers has almost no effect on loan repayment. Majority of customers who
defaults loan repayment has no relationship with loan officers. Also, there should be a thorough
screening of the borrowers before loans are disbursed. Further, there should be supervisory visits
by credit officers after loans have been disbursed to ensure proper use of the borrowed funds
thereby enhancing the chances for higher profitability of enterprises and loan repayment. Also,
loan repayment period should be set in accordance with the financial viability of the project, loan
size and market situation.
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DEDICATION
This work is dedicated to my daughter, Nana Adwoa Osei-Nyarko and my wife Ophelia Animah
Konadu for their co-operation and good relationship during the period I pursued the course.
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ACKNOWLEDGEMENTS
I am very thankful to the almighty God whose inspiring words gave me the needed motivation
for this work and the entire course.
My heartfelt appreciation also goes to my supervisor Dr. K.O. Appiah, Accounting Department,
Kwame Nkrumah University of Science and Technology (KNUST).
His guidance and passion for me to accomplish this task has made this work a reality. May God
richly bless him.
My special appreciation goes to staff of GN Bank, Dunkwa On Offin and Twifo Praso.
Special thanks go to my respondents who took time of their busy schedules to attend to me
during the administering of the questionnaire.
Finally, l wish to extend my sincerest gratitude to Mum and Dad, who edged me on when l was
down spirited in the process. God bless you.
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TABLE OF CONTENTS
DECLARATION ........................................................................................................................ i
ABSTRACT .............................................................................................................................. ii
DEDICATION ........................................................................................................................... ii
ACKNOWLEDGEMENTS....................................................................................................... iv
TABLE OF CONTENTS ............................................................................................................ i
LIST OF TABLES .................................................................................................................. viii
CHAPTER ONE .........................................................................................................................1
INTRODUCTION ......................................................................................................................1
1.1 Background to the Study....................................................................................................4
1.2 Statement of the Problem…………………………………………………………………...4
1.3 Objectives of the Study......................................................................................................5
1.4 Research Questions ...........................................................................................................5
1.5 Significance of the Study ...................................................................................................6
1.6 Organization of the Study ..................................................................................................6
CHAPTER TWO ........................................................................................................................7
LITERATURE REVIEW ............................................................................................................7
2.0 Introduction .......................................................................................................................7
2.1 Lending .............................................................................................................................7
2.2 Credit Assessment .............................................................................................................9
2.2.1 Credit Appraisal .............................................................................................................9
2.2.2 Credit Documentation ................................................................................................... 10
2.2.2.1 Collateral ................................................................................................................... 11
2.2.2.2 Interest Rate............................................................................................................... 11
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2.2.2.3 Size of Loan .............................................................................................................. 12
2.2.2.4 Purpose of Loan ......................................................................................................... 12
2.2.2.5 Loan Period ............................................................................................................... 13
2.3 Credit Risk ...................................................................................................................... 13
2.4 Cost of Borrowing ........................................................................................................... 15
2.5 Borrower Creditworthiness .............................................................................................. 17
2.6 Disbursement .................................................................................................................. 21
2.7 Repayment of Loans ........................................................................................................ 21
2.8 Monitoring of Loans ........................................................................................................ 23
2.9 Causes of Poor Loan Assessment and Recovery .............................................................. 23
CHAPTER THREE................................................................................................................... 25
RESEARCH METHODOLOGY............................................................................................... 25
3.1. Introduction .................................................................................................................... 25
3.2 Population and Sampling Techniques .............................................................................. 25
3.3 Data Collection Procedure .............................................................................................. 25
3.4 Research Instruments ....................................................................................................... 26
3.5 Research Design .............................................................................................................. 26
3.6 Data Analysis .................................................................................................................. 26
3.7 History of GN Bank ………………………………………………………………………27
CHAPTER FOUR ..................................................................................................................... 32
ANALYSIS AND DISCUSSION OF RESULTS ...................................................................... 32
4.0 Introduction ..................................................................................................................... 32
4.1 Socio-economic Statistics ................................................................................................ 32
4.2 Appropriateness of Credit Appraisal Process ................................................................... 34
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4.3 The Relstionship between Loan Officers and customers .................................................. 39
4.4 The Effectof Loan Officer’s relationship with customer’s on Loan Repayment ................ 43
4.5 Strategies to improve the credit appraisal system of GN Bank ......... Error! Bookmark not
defined.45
4.6 Chapter Summary ............................................................................................................ 46
CHAPTER FIVE ...................................................................................................................... 47
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS ......................... 47
5.0 Introduction ..................................................................................................................... 47
5.1 Summary of Findings ...................................................................................................... 47
5.2 Conclusion ...................................................................................................................... 49
5.3 Recommendation ............................................................................................................. 50
REFERENCES ......................................................................................................................... 52
APPENDIX .............................................................................................................................. 56
Survey Questionnaire on Credit appraisal process of and loan repayment of GN Bank .............. 56
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LIST OF TABLES
Table 4.1: Socio-economic Statistic………………………………………………………….....33

Table 4.2: Response on customers who have taken loans more than once…………………..…34
Table 4.3: Response on the nature of collateral provided……………………………………...35
Table 4.4: Response on whether Loan was diverted……………………………………….......35
Table 4.5: Credit Scoring and Evaluation……………………………………………………....36
Table 4.6: Loan amount disbursement……………………………………………………….…37
Table 4.7: Response on how regular customers repay loans…………………………………...37
Table 4.8: Loan Processing Time……………………………………………………………….38
Table 4.9: The causes of Loan Default………………………………………………………….38
Table 4.10: The reception offered to customers at the Loans Department……………………....39
Table 4.11: Response on whether Loans Department Staff are approachable and cooperative…40
Table 4.12: Response on whether Loan officers provide special assistance to friends and family
members to ensure they secure the loan…………………………………………………………40
Table 4.13: Response on customer’s relationship with Loan Officers………………………...41
Table 4.14: Response on whether customers were granted their loans because of their
relationship with Loan Officers………………………………………………………………….41
Table 4.15: Response on whether Loan Officers provided any assistance to customers…….…42
Table 4.16: Response on whether customers were granted the loans as a result of the Loan
Officers assistance……………………………………………………………………………….42
Table 4.17: Loan Officers approve all loans applied for by their friends and/or family
members………………………………………………………………………………………….43
Table 4.18: Friends and family members of loan officers mostly default loan repayment….......43
Table 4.19: Loan repayment by customers who have relationship with loan officer…………....44
Table 4.20: Loan officers do not take legal action against friends and/or family members who
default payment………………………………………………………………………………….44
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Banks and other financial institutions are faced with several risks. The most common and
serious among them is credit risk, which is simply the possibility that borrowers will
default repayment of credit facilities they obtain from a bank or any financial institution.
Proper assessment of the borrower evaluates the financial conditions and ability of the
borrower to service the facility within the stipulated period. Lending is a core function of
any banking institution and hence banks should not deter from giving out credit due to
the risk associated with it.
Llewellyn 1992, states that, it is evident that, in many countries, banking is the process of
significant structural change and a limited secular decline. The enormous increase in the
number of banks and other micro finance institutions have principally contributed to a
rise in lending to borrowers. The recent economic situation in Ghana poses a big threat
for lenders to forecast borrowers‟ performance to recessionary conditions.
Lewis, (1992) [21] states that loan assessment procedures such as credit scoring which is
used to appraise whether customers should or should not be granted credit, loan screening
aids such as advances in data technology, changes in regulatory environment, the firm‟s
future profitability, the amount of the owners‟ equity in the business to preserve but have
often not been fully revealing and are imperfectly correlated across banks.
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When assessing creditworthiness of persons applying for loans, banks often refer to their
previous situations with similar borrowers in similar markets. This means that, when a
bank enters into a new market, it finds it difficult to assess the creditworthiness of
persons applying for loans since there are no previous instances in this new market to
compare with.
Assessing the creditworthiness of a borrower by a lender before granting the credit is
termed credit appraisal. The process includes the collection of related information of
customers and projects or business to undertake, assessing the risk involved before
providing any loans. The process also assesses the technical, economic and financial
feasibility of the anticipated project. It considers the borrower‟s character, collateral
capability and capacity. Credit appraisal considers the applicant‟s income, his
dependents, expenditure, repayment capacity, employment history, number of years of
work and other factors affecting the credit rating of a borrower. The appraisal process
also verifies the collateral security accessible for recovery of the credit facility in the
event of default. Credit appraisal therefore ascertains the risk coupled with lending
activities in financial institutions.
Accessing a credit facility from a bank or other financial institutions is not easy. The
borrower applying for the credit goes through a number of tests. Banks pursue an
extensive process of credit assessment before approving any credit facility. They examine
the loan application from diverse angles. The principal objective of credit appraisal is to
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ensure that the credit is granted to the right hands and the capital and interest income of
the bank is comparatively safe.
Lending activities in banks are guided by credit policies which are usually strategies and
measures that are taken to guarantee smooth lending activities and loan repayment. If
credit facilities are not assessed properly, there is the likelihood that borrowers will
default loan repayment (Feder and Just, 1980).
The major operations of banking institutions are savings mobilization and lending.
According to Odongo 2004, margins, interest, fees and commissions on loans are the
major source of revenue of banks.
In as much as banks want to increase lending activities and generate more revenue
through interest, banks have to recover the principal loan amount granted to the borrower
to ensure safety of depositor‟s fund to prevent capital erosion. For this reason banks have
to adequately assess credit to minimize credit default rate.
Banks which are not able to recover the loans they grant to clients are left with small
capital. They are forced to cut down the staff strength and other operations which reduce
the profit of the bank and eventually wind up.
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Loan default is a key aspect of the financial activities of any bank; it creates a certain cost
for the institution. Most banks have folded up due to their inability to retrieve loans
granted to their clients (Annual Report, Association of Rural Banks, 1992).
1.2 Statement of the Problem
According to Ssewagudde (2000), selecting applicants who have a high probability of
loan repayment and rejecting those who have a high probability of default defines the
financial viability of any financial institution.
Banks basically make money by lending money at rates higher than the cost of the money
lent. Lending activities are guided by credit policies and procedures which ensure prudent
lending operations. Credit appraisal involves gathering adequate information about a
client before granting a credit facility. Credit appraisal primarily ensures that the loans
are granted to the right hands and the capital and interest income of the bank is relatively
secured.
However, banks have unfavourable environment and capacity to gather the necessary
information required before granting loans to clients. There is always unequal access to
information between lenders and borrowers, that is, information asymmetry. Information
asymmetry leads to adverse selection in the loan granting process.
Inadequate and inaccurate loan appraisal results in granting credit facilities to people who
are not creditworthy. This subsequently leads to loan defaulting which is one of the major
challenges of banks. The funds lent to clients do not belong to the banks and therefore
must be repaid to be returned to depositors in future. For a loan to be classified as good, it
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should be able to satisfy the banks quest for maximizing returns and also have a low
default risk. This is achieved when Banks properly assess clients and acquire enough
information before lending. The relationship between the loan officer and client should
not influence the loan granting process. Most customers who are in good relationship
with loan officers tend to default loan repayment expecting loan officer to pay for them
because of their good relationship. Banks therefore need to strengthen their credit risk
assessment mechanism and appraisal process for qualitative growth in credit and also to
mitigate risk effectively. It is in light of this that the research seeks to find out how GN
Bank assesses persons applying for credit facilities.
1.3 Objectives of the Study
i. To investigate the appropriateness of credit appraisal process of GN Bank.
ii. To investigate the relationship between loan officers and persons applying for loans.
iii. To investigate the effect of loan officers‟ relationship with customers on credit
appraisal process and loan repayment.
iv. To design strategies on how credit appraisal and repayment of loans in GN Bank can
be improved.
1.4 Research Questions
i. What were the procedures used by GN Bank in credit appraisal?
ii. What is the relationship between loan officers and persons applying for loans?
iii. What is the effect of the loan officers‟ relationship with customers on loan
repayment?
iv. What strategies can help improve the credit appraisal system of GN Bank?
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1.5 Significance of the study
This study will be an important step in policy formulations to aid in tackling the
challenges in assessing the creditworthiness of persons applying for loans. Moreover, this
research would also aid as a guide for policy makers and other cooperate institutions to
know the effect of loan officer – client relationship on loan repayment. The study would
again add to the body of knowledge and literature for other researchers to possibly build
upon. With the aforementioned issues therefore, this study was not only relevant but also
necessary. The study will again provide an empirical data for policy makers of banking
institutions to assist them in formulating appropriate policy environment for their
operations. The study will finally provide recommendations on how to assess and recover
loans granted to the customers of the bank.
1.6 Organization of the Study
This project is structured into five chapters. Chapter one contains the background of the
study, the objectives, the research questions and the relevance of the study. Chapter two
provides an extensive literature review on credit assessment. The chapter three describes
in detailed the study area, population and sampling techniques, data collection procedure,
research instrument and data analysis. Chapter four provides descriptive analysis from the
survey data and also discusses other findings. Chapter five provides a summary of the
research findings, conclusion, some policy recommendations and suggestion for future
research.
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CHAPTER TWO
LITERATURE REWIEW
Studies conducted on various banking institutions worldwide validate the difficulty of credit
assessment en route for determining the creditworthiness of a borrower.
The literature review examines the basic elements of credit appraisal in respect of: lending, credit
appraisal, cost of borrowing, borrower credit worthiness, collateral, repayment of loans,
monitoring, causes of poor loan assessment and regulation and supervision. The identified
parameters constitute the basis for effective credit appraisal practice and underlining theoretical
frameworks propounded by various authorities are detailed below:
2.1 LENDING
Lending is an important activity in the operations of banks and is identified as one of the pillars
of the financial intermediation. It provides banks with a lot of income and at the same time
highly risky.
McNaughton (1992) highlighted that, risk taking is part of banking activities and the success of
banks depends on how reasonably they control and manage this risk within their financial
reserves and credit competence. McNaughton further explained that Banks must re-structure
their administrative tendencies to become responsible to the financial needs of the economy in
order to survive the various lending risks and become successful. Loan applicants get frustrated
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by these bureaucratic tendencies and are unable to secure credit facilities at the right time, which
may hinder the success of projects leading to the high rate of loan default.
In the field of credit delivery, Rouse (1989) explained that lenders does not give the monies they
lent away but they „lends‟ them. The assessment of the borrower by the lender is for him to look
into the future and ask, will the borrower repay the loan by the agreed date? There is the
likelihood that customers will not be able to repay the loans they take, so the lender needs to
demonstrate good skill and judgment in assessing the borrower, Rouse (1989). The success of
banks (in the view of this researcher), centers on the banks‟ ability to identify the financial
services of the public, produce those services and sell them at a competitive price.
Lending involves imagination and creativity it is therefore perceived as an art, Rouse (1989).The
guidelines to be followed are prescribed by credit management and their religious adherence is
also crucial for good credit management practices. The correctness of the officer‟s judgement
depends on his skills, knowledge and foresight. Knowledge and skills in financial analysis, the
performance of the sector receiving credit, macroeconomic conditions, the psychology in
determining the perceived and indirect motive of the borrower and the anticipated impact of the
credit on the performance of the lending institution. The situation makes lending activity very
involving since a loan default causes detrimental financial losses and threatens the collapse of the
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financial institution in question. In this respect, officers devoid of all egoistic sentiments and
with the right qualification and skill are needed to take charge of the lending activities.
The bank, the depositor, the borrower and the government are four parties identified to have
interest in bank lending activities, Olashore (1988). In as much as the depositor demands the
highest interest on his deposit, the borrower look for the least interest rate on the amount
borrowed. The bank on the other hand wants the highest spread between deposit and borrowing
rates of interest whilst the government‟s attention is on the responsiveness of lending to the
needs of all the sectors of the economy. The interest of the lending bank supersedes that of the
other parties involved.
2.2 CREDIT APPRAISAL/ LOAN ASSESSMENT
The first stage in the loan granting process is the credit assessment. The stage at which the
necessary documentations are presented to the bank by the loan applicant in order to obtain a
credit facility is credit assessment, Nsereko (1995).
2.2.1 Credit Appraisal
The 'heart' of a high quality portfolio is credit appraisal, Anjichi (1994). It involves determining
the loan applicant‟s creditworthiness and reducing the default between the lenders as principals
and the borrowers as agents through the process of gathering, processing and analyzing of
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quality information about the borrower. The credit assessment process is usually guided by the
Banks credit policy, procedures and directives. Character, Capacity, Capital, Collateral and
Conditions are the various principles of lending which banks base their credit appraisal (Matovu
and Okumu, 1996). The principles are designed to ensure that actions that will facilitate
repayment and reduce default rate are taken by lending institutions. Financial institutions take
measures like requesting for collateral, shorter loan repayment period, high interest rates and
other form of payment when the information gathered signals the possibility of the borrower to
default payment (Stiglitz and Karla, 1990). The performances of financial institutions are highly
affected when they do not adequately appraise loans.
Edminster (1980) observed that the abandonment of the credit appraisal process often resulted
into several banks using credit card to process and therefore addressed the importance of credit
analysis. The length of time taken to process loan applications, credit experience, proportion of
collateral security to the loan approved and the purpose of the loan are the variables identified by
Hunte (1996). It was concluded that informed credit decisions made by loan officers are affected
by the long waiting time which reflects a shortage of credible credit information. This
subsequently results in greater risk, more intense credit rationing and low repayment rates.
Loan experience shows the ability to manage the business loans portfolio better hence good
quality borrowers for the business, Hunte (1996). A loan applicant with little loan experience is
considered to have less ability to manage a business loan and therefore is not creditworthy
(Devaney, 1984;Robinson, 1962; Hunte, 1996). This means that new loan applicants are
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considered to bear high risk since the loan officer has no previous records of loan repayment
from them.
2.2.2 Credit Documentation
The credit assessment process covers the credit documentation and disbursement process. The
Process ensures that collateral securities and formal documentation is completed before the credit
facility is disbursed. It further ensures that all the documentation is within the credit polity of the
institution. McNaughton et al, 1996, noted that documentation process should take into accounts
the maintenance of updated credit files. He further stated that, lending institutions should impose
relevant fees, update records and notification of credit reviews and renewal dates.
Loan documentation process involves reviewing the documents submitted by the borrower,
checking the collateral security provided and a making a legal draft. It clearly outlines the
necessary security and covenant before the credit facility is approved and disbursed. The legal
aspect of the documentation process provides financial institutions the grounds to take legall
action against borrowers in the event of default (Day et al, 1996).
Credit documentations clearly states the credit terms attached to the loan after the borrower's
loan application has been favorably appraised. These includes:
2.2.2.1 Collateral
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In lending agreements, collateral refers to a borrower's pledge of specific property to a lender, to secure
repayment of a loan. The request for collateral by most Banks before approving a credit facility
to customers is to reduce the risk associated with the facility. Lending institutions always ensure
that the amount granted is a percentage of the value of the collateral provided by the borrower to
ensure that the loan is paid back in return for the collateral. The use of groups as collateral is now
being practiced by some banks (Yunus, 1996). The group becomes the collateral for the facility
and in the event of default by one member, the other group members pay for that member. Group
lending encourages other group members to monitor the progress of payment of other members
leading to improved loan repayment. However, Antonio (2000) argues that most group members
are dissatisfied when they are made to service the loan of a member who defaults payment.
2.2.2.2 Interest Rate
An interest rate is the rate at which interest is paid by borrowers for the use of money that they
borrow from the lending institution.
Rose (1998) defined interest rate as the price of the loanable funds. Interest rates can be looked at
from two perspectives, that of the borrower and the lender. Martin (1998) stated that to the
borrower, interest rate is the costs of borrowing money expressed as a percentage of the amount
borrowed. The borrower assesses the returns of the proposed project and considers the interest
rate of the credit facility before deciding to take the facility. Lenders on the other hand consider
costs such as production cost, the inflation rate, personnel, administrative costs, provision for
loan loss and capital growth before determining the interest to be charged on a particular facility
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at a particular time (Kasibante, 2001). Financial institutions should charge rates that can cover
costs and make a contribution for the institution.
2.2.2.3 Size of Loan
Loan size refers to the amount of money disbursed to the borrower. The loan amount can be
small, medium or big. Banks prefer bigger loans to smaller ones because the transaction costs of
bigger loans are lower than small and medium loans but have higher returns. Efficient loan size
should fit the capability of the borrower to repay and stimulate enterprise performance. Poor loan
sizing is illustrated by extensive credit rationing, which issues too little credit to too many
borrowers Pische (1991). However, Chirwa (1997), points to the fact that borrowers are tempted
to divert portions of loans when the amount is relatively large for the project. He explained that
most of such loans are diverted for non-business purposes, hence the default.
2.2.2.4 Purpose of Loan
Banks are more particular about the reason for which a borrower sought for credit due to the high
risk associated with lending. Vittas and Chao (1996) identified that in many countries, Banks
prefer to finance low-risk activities, such as self-liquidating, short-term working capital and trade
finance. Most banks are generally reluctant to lend to finance projects that are perceived to have
high risk and long payback period. Small firms or new businesses that lack adequate collateral
also find it difficult to access credit facilities in most banks even though such firms may be more
innovative and promising than others.
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2.2.2.5 Loan Period
The World Bank (1996) reported that Banks have little capacity and interest to provide long-term
capital. This is partly due to the high composition of short term liabilities in their portfolio and
also their concern for risks associated with lending activities. Banks in Uganda are therefore
unwilling, for reasons of caution as well as profit to lend for periods longer than twelve months
and because of stringent provisions of the Financial Institutions Statute, 2004.
2.3 CREDIT RISK
The granting of credit facilities is subject to the risk of default by the borrower when repayment
is due. The primary danger in loan granting is the possibility of default by the borrower.
According to Williams and Heins (1985), risk identification refers to the process by which a
business systematically and continuously identifies property, liability, and personnel exposures
as soon as or before they come out. According to them the first step in business risk
management is to identify the various types of potential loses confronting the borrower, and
secondly, to measure these potential losses in relation to issues such as their likelihood of
occurrence and their probable severity. This gives rise to the need to assess the inborn risk of a
credit facility, the existing operational management to mitigating the risk and determining the
actual risk. The assessment gives a fair idea of the intended quality of the credit facility.
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Rouse (1989) stressed on the primary danger of loan granting stating that a lender „lends‟ money
and does not give it away and there will always be some risk that the borrower will default
repayment. The bank therefore need to critically assess any credit request with reasonable
assurance that repayment would not be a problem.
The role of supervisors
On supervisory role, the Basel Committee (2000) suggested that supervisors
should require that banks have an effective system in place to identify, measure,
monitor and control credit risk as part of an overall approach to risk management.
The Basel Committee (2000) further advised supervisors to conduct independent evaluation of
the strategies, policies, procedures and practices of the Banks related to the granting of the
credit and the ongoing management of the portfolio.
Additionally, supervisors should consider setting prudential limits to curb bank
exposures to single borrowers or groups of connected counter-parties.
The issues raised in the Basel Committee Publications No. 54 (2000) are very
relevant credit risk management information. The Board of Directors should endorse and
occasionally review credit risk strategy whilst senior management should ensure it
is effectively implemented.
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A sound credit management process provides the basis for assessing the credit
worthiness of customers and creates a procedure to be followed through. This reduces moral
hazard in the granting process and ensures that credit facilities are used for intended purpose.
This also unveils any bottlenecks, which may arise for appropriate course of action to be
enforced. This mitigates the risk of the credit facility not achieving the intended purpose and
generating sufficient cash flows to service the facility as well as liquidate the principal amount.
Credit facilities meant for projects with high-risk profile should be given close and continuous
monitoring to ensure being managed efficiently.
The Bank of Ghana has set limits for Rural Banks beyond which credit facilities should be
submitted for ratification before disbursements are made.
The researcher considers the Basel Committee‟s report very relevant to the management of
credit risk.
2.4 COST OF BORROWING (INTEREST RATE)
Stiglitz (1987) is of the view that higher interest rates should be imposed on credit facilities when
it is identified that the probability of default higher. As a result businesses with high risk of
success attract higher interest rates. However, the higher interest rates attached to proposed
risky businesses rather tends to increase the risk of default. This is because the higher interest
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rated will add up to the cost of production of the business which may eventually affect the
patronage of the products concerned, hence loan default.
Kumar, (2004) [18] shared the same view with Stiglitz, according to him, the high interest rates
charged by most banks on credit facilities is a major contributing factor of loan default. Kumar
argued that even if loans are adequately assessed, other factors such as high interest rates may
cause borrowers to default payment.
The level of inflation in an economy is a determining factor of interest rate since a higher
regime bears direct relationship on interest rates. Cox (1988), buttressed this assertion when
he explained that, demand and supply for funds in an economy influences the interest rate
charged on credit facilities. Other factors noted were risk premium, the loan amount and
inflationary factors.
In 1990 before the liberalisation of the economy, interest rates of various banks were regulated
by the Bank of Ghana. During the period of pre-liberalisation, the Bank of Ghana was the
institution that fixed interest rates for the other banks to comply with. However, this system was
abolished and banks were to determine the interest rates on their own according to the market
forces and the economic conditions. The interest rate set by the Bank of Ghana becomes the
benchmark. When Bank of Ghana revises interest rates downwards it takes time for banks to
appropriately adjust to such revision.
The overwhelming competition in prices (interest rates)among banks and with imperfect
knowledge of borrowers‟ ability to repay their debts has accelerated poor loan assessments to
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potential borrowers, Bofondi and Gobbi, (2003) [7]. Considering Ghana‟s banking sector, most
banks charge high interest rate due to the perceived risk associated with lending.
2.5 BORROWER CREDITWORTHINESS
The creditworthiness assessment of borrowers involves the gathering, processing and analysing
of information on the loan applicant. The most reliable way gathering information is by way of
credit references and credit rating. Ghana is yet to have credit rating agencies, which will provide
opinion on the credit standing of individuals and businesses in the system. The existence of such
an agency would improve and speed up the credit decision process of banks.
According to Mensah, (1999) the success or failure of financial institutions are strongly
influenced by how it manages its credit. Mensah, (1999) further outlined the following as the key
elements to effective credit management:
i. A well-developed credit policies and procedures
ii. Strong portfolio management
iii. Effective credit controls
iv. A well trained staff
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Loan officers should have adequate knowledge about the borrowers‟ business. In determining
the credit worthiness of the borrower, loan officers need to conduct a proper credit analysis
before approving loans for projects.
Credit risk evaluation involves a careful analysis of information regarding the borrower to
determine the possibility of loan repayment (Vigano, 1993). The probability that a borrower
will service his loan regularly depends on his operating environment and personal attitude
towards loan repayment. The bank‟s success depends on its ability to evaluate these two
factors through the information available to the bank.
Rose (1999), stated that the question that must be dealt with before any other is whether or not
the customer has the ability and capability to service the loan, that is, pay out the credit when
due, with a comfortable margin for error.
Character, capacity, cash, collateral, conditions and control are factors to be considered to
safeguard the assessment of pre-lending.
Rouse (1989) on the other hand referred to mnemonics used as common checklist to review and
assess loan application as:
CCCPPARTS (Character, Capital, Capability, Purpose, Person, Amount, Repayment,
Terms and Security);
PARSER (Person, Amount, Repayment, Security, Expediency, Remuneration);
CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment, Insurance/Security).

19
The variation in the mnemonics identified by Rose relates to the basic principle of assessing the
potential of having loans repaid by borrowers.
Dunkman (1996) identified the following as reasons for security: safeguarding against
some doubts about borrowers‟ repayment ability, basis for increasing amount of loans
over and above existing facilities, and as a last resort to recover loan in the face of default by
borrower.
Agyeman (1987) argued that, irrespective of the importance attached to the request of collateral
security during the appraisal process, its requirement by banks must be done cautiously else it
would be capable of being counter productive.
Stiglitz (1996) supported Agyeman‟s (1987) contribution adding that, the request for security
collateral has the unintended tendency for causing property owners to have advantage over
customers who are not able to provide collateral security during the appraisal process.
The researcher believes that if security becomes the leading factor in credit appraisal, profitable
projects, may be denied credit due to the borrower‟s inability to provide collateral security.
Banks are usually faced with the problem of taking legal action against loan defaulters to
take possession of assets pledged as collateral.
Akakpo (1994) stated that during the loan appraisal process, the request for security should be
the last consideration. Credit should not be granted just because the borrower provided security.
He argued that security should only provide cushion should the borrower default repayment.
20
Rouse (1989) however, argued that loan approval and disbursement should not be made until the
borrower meets all the necessary security requirements. Rouse stressed on the fact that the
provision of security should be paramount to taking a decision as to approve a loan or deny it.
Delays during the credit granting process invariably affects the success of the customer‟s project,
the researcher is of the view that, the strictness in demanding total secured collateral before
disbursement of credit facilities needs to be relaxed.
2.6 DISBURSEMENT
Loans are disbursed when all requirements relating to the loan are met. During disbursement,
Banks ensure that proper documentation and the security requirements are met before funds are
disbursed. According to Msi, (1994) and Nsereko, (1995), failure to put in place proper
disbursement controls will lead to the abuse of the credit process. Proper documentation controls
of loans will ensure that the right amount is paid to the borrower and this will in the long-run
decrease the bad debt amount in the books of the bank resulting from loan default.
2.7 LOAN REPAYMENT
After the credit assessment and disbursement is done, the credit customer is expected to repay
the installment as per agreed schedule. Banks have various repayment mechanisms. Customers
can repay loans weekly, bi-weekly or monthly depending on the credit policy of the bank
21
(Odongo, 2004). In order to ensure good repayment, Banks have to ensure proper monitoring of
clients and follow up actions.
Loan repayment performance is affected by a number of socio-economic and institutional
factors. Some factors positively affect loan repayment while other negatively affect loan
repayment.
Retta (2000), (cited in Abafita, 2003) revealed that factors such as the frequency at which a
customer takes loan, loan officer‟s supervision, suitability of loan repayment period and other
income sources of the borrower are found to encourage repayment hence reduce the probability
of loan default. According to Retta (2000), educational level is negatively related to loan
repayment.
2.8 MONITORING OF LOANS
Monitoring in the loan granting process is a significant function which ensures that the loan
amount is invested in the project for which it was applied for. Huppi and Feder (1990) revealed
that an effective monitoring process enable banks to quickly identify possible dangers (like loan
diversion) and leads to higher loan recovery. The monitoring teams also remind borrowers of
their obligation to service loans and interest to banks.
Most banks embark on monitoring when there are signs of default. Such practice fails because
the facility might have already gone bad.
The researcher is of the view that, monitoring of loans should commence immediately when the
amount is disbursed. The monitoring team should monitor the progress of the borrower‟s project;
22
identify shortcomings and advice the borrower through field visits and discussions. The
monitoring team must ensure that the borrower makes prompt repayment from the proceeds of
the project and render advice on further expansion of business.
2.9 CAUSES OF POOR LOAN ASSESSMENT AND RECOVERY
Hahn, (1992)[15] noted that, low-income consumers are perceive to be high-risk borrowers
because it is assume their income is inadequate and that makes it difficult for them to regularly
service loans. He further added that this is compounded by the higher interest rates charged to
credit available to low-income earners because of the higher risk of default associated with such
group of people. However, he failed to give explanation to the relationship that exist between
poor loan assessment and low-income earners.
Hannig and Mugwanya, (2000) [14] shared the same view with Hahn. They also found out that
low income borrowers are in poor position to provide collateral and therefore micro finance
institutions sometimes deny them access to subsequent loans. However they also failed to
explain how to determine the credit worthiness of a borrower.
Alter, (1980) [2] stated that, financial institutions have inadequate credit policies to determine
the credit worthiness of prospective borrowers. According to Alter, (1980) banks have failed in
determining the credit worthiness of borrowers because officers fail to comply with lending
23
policies. Low staff morale and bank officers‟ exposure to fraud also affect loan officers‟ decision
in determining the credit worthiness of borrowers.
Burki and Perry (1998) [10] are of the same view like Alter and they revealed that fraudulent
practices during the appraisal process leads to off-balance sheet operations. These fraudulent
practices happen when officers‟ realize that their loan assessment system is weak and hence have
nothing to fear.
Joseph et al., (2002) [17] supports the idea of Alter and adds that, there is the likelihood that
loan officers might compromise with borrowers during the assessment process and as a result
some of the compromised customers may fail to repay the loan.
The researcher shares the same view with Joseph et al. (2002) because experience shows that
many customers who are in good relationship with loan officers tend to default loan repayment
expecting the loan officer to pay on their behalf because of their relationship. This has led to an
increase in default rate and also loss of job on the part of the loan offices.
24
CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Introduction
The chapter describes the methodology employed by the researcher in the conduct of the study.
This section covers the population and sampling techniques employed for the study, data
collection procedure, research instrument, research design and method of data analysis.
3.2 Population and Sampling Techniques
Using a random sampling method, a purposive sample of 152 respondents were taken from the
total population of 250 respondents from Upper and Lower Denkyira. They were 10 Staff and
142 customers of GN Bank. The staffs sampled were those at the Credit Department, Operations
Department, Customer Advisers and the Manager. On the other hand, the customers were those
who have taken a loan facility from the Bank.
3.3 Data Collection Procedure
Both quantitative and qualitative data will be used. First, qualitative information provide an in-
depth understanding of the activities of credit unions and to inform the quantitative analysis. The
data collection procedure involves visiting the sampled respondents in their stores or shops as
well as work places of respondents. This is to provide the opportunity to explain questions which
are difficult to answer, to obtain the exact information needed for the study, and also to afford
the interviewer the opportunity to educate the respondents. A structured questionnaire is used to
conduct a face-to-face interview to interview the staff.
25
3.4 Research Instruments
The research instrument for this study is a structured questionnaire. The questionnaire is
designed and base on the strength of the review of the related literature and the research
questions. The questionnaire comprises of four sections; the first section included questions on
respondents‟ socio-economic characteristics such as age, gender, and educational level. The
second section looks at the relationship between loan officers and persons applying for loans.
Also, the third section examines the effect of loan officers – client relationship on loans whereas
the final section identifies how loan officers evaluate the credit worthiness of new loan
applicants.
3.5 Research Design
The study was a study of GN Bank, Dunkwa On offin. A sample survey was carried out to seek
the opinion of different bank officials and customers on implication of credit assessment process
and policies in the bank and how this impacts on the quality of loan portfolios. This research
design helps to gather opinions and other data relating to the occurrence of a phenomenon within
a relatively large population. By this method, the researcher collects and analyzes view points
from customers of the Bank and staff at the credit department. The data collection which
involved the collection of both primary and secondary data using questionnaire was undertaken.
3.6 Data Analysis
The quantitative and qualitative methods are employed in the data analysis. For the quantitative
aspect, Statistical Package for the Social Scientist (SPSS version 20) is used. Correlation and
factor analysis is used to identify the major factors used as a means of screening and to evaluate
whether these factors are the loan repayment determinants as well. Frequency distributions,
26
percentages, mean and descriptive analyses are also used to assess the qualitative data and the
results were presented in tables.
3.7 History of GN Bank
GN Bank is a wholly-owned Ghanaian financial institution licensed by the Bank of Ghana in
2006 to operate as a savings and loans company with a simple goal of making it “the people’s
bank”. The Company was founded in May 1997 with its first branch opened on May 30th, 2006
at North Ridge in Accra. It attained a universal bank status on June 3 rd, 2014. GN Bank is
committed to helping develop the Ghanaian entrepreneurial sector whiles contributing
substantially to the Ghanaian financial sector. The company aims and strives also to support
Ghanaians in making financial decisions for their personal sustenance.
Within a period of Seven years, the institution has made banking easy and convenient for the
people of Ghana by taking it to their doorsteps. The institution already has over 60 branches
across the nation and staff strength of 1173, making available to the ordinary person; students,
workers, farmers, traders, professionals and small to medium scale entrepreneurs our attractive
products and excellent banking services. GN Bank is the only Financial Institution which is
represented in all the 10 regions and also represented in the 3 Northern Regions of the country.
We call it „The People‟s Bank‟ and that is exactly what it is.
Our Mission
To be the National Bank for the ordinary person providing close to client banking service
throughout Ghana and be known for excellent customer service while creating wealth for its
stakeholders.
27
Our Vision
To be a truly National Bank for the Ordinary person namely; Farmers, Professionals, Students,
Workers, and Small and Medium Scale Entrepreneurs in Ghana.
Our Goal
To become the People‟s Bank.
Our Core Values
 We approach every aspect of our work with the highest standards of integrity.
 We value our customers.
 We approach our work as a professional team.
 We treat each other as we wish to be treated by others.
 Loyalty and absolute honesty.
Our Branch Network
GN Bank currently has over 103 branches in Ghana.
Products and Services
 Sika Plus Domestic Money Transfer
Internal money transfer within all our Branches Nationwide, competitive pricing,
immediate delivery and quick cash transfer.
 POS, ATM and SMS Services.
28
 International Money Transfer – Western Union, Vigo, MMall RIA, MoneyGram
Fast and reliable global money transfer. GN Bank places emphasis on security, accuracy
and compliance. It can be accessed in all our Branches nationwide.
 Susu Savings
Susu savings operates on a passbook scheme with small daily savings designed to assist
micro/small entrepreneurs in the formal sector to expand business. Contributors deposit
funds on a regular basis either daily or weekly. Contributors to the scheme may, after two
months of savings qualify to access microfinance loans up to Ghc5000.00 for first time
borrowers and up to Ghc6000.00 for repeat borrowers.
 Savings Deposit Account
An account in which a customer deposits money for any non-immediate use. No initial
amount is required to open account. Withdrawals can be made once every 7 days only
and interest is paid quarterly.
 Current Account
An account that can be owned by an individual or corporate entity. No initial amount
required to open an account. It is a cheque book account with minimal cost of transaction
(COT) charges. Withdrawals could be made as many times as possible. Overdrawn limits
can be arranged on this account. Standing orders could also be established using this
account.
 Fixed Deposit Account
Deposits to this account attract high rates of interest. Customers are required to deposit
funds for 3, 6, 9 or 12 months period. The typical interest rate is at least 1% higher than
commercial banks.
29
 Wo Daakye Account
An account in which daily deposits are made. It is also known as the daily microfinance
savings scheme. Deposits are mobilized and collected by the Bank‟s Field Cashiers on a
daily basis with a minimum savings of 50 Pesewas. A minimum contribution period of
six months needs to be established before any withdrawal can be made. Any amount
saved for 6 months attracts competitive interest.
 Small Medium Enterprise (SME) Loan
SME loans are loans to individuals and small companies for any declared legal purposes.
The product is offered to existing and non- GN Bank customers who have been in
business for at least 1 year. Non – GN Bank customers are required to open accounts for
repayment. The SME term loans are equal installment amortizing loans with tenors
between 1 to 2 years. The minimum amount will be Ghc10, 000.00.
 Microfinance Group Loan
A savings and lending scheme that can be accessed by a group. It is also referred to as the
band group savings and loans programme. The group consists of between 5-10 members.
Individual members of the group make daily savings into a savings account up to eight
weeks to qualify for a facility.
 Microfinance Susu Loan
Customers make deposits for a minimum of two months. Build a guarantee fund of 20%
of amount being borrowed. Security required for a Susu loan is a personal guarantor and
a guarantee fund which would be created from the applicants susu account. Repayment of
loans is made through a flexible package covering between six to twelve months.
30
Repayments are mobilized/collected by the Bank‟s Field Cashiers on a daily basis. Loan
amounts are between Ghc400.00 – Ghc9000.00
 Payroll Based Loan
PBL are facilities granted to salaried staff of recognized institutions. Employers must
guarantee to deduct repayment at source. Applicants must be a current account holder at
any of our branches with their monthly salaries channeled through GN Bank. Applicant
qualifies after three months of operating a current account.
 Farmer Based Loans
Farmer based loans are facilities granted to farmer based groups to support purchase of
inputs. The Bank participates in MiDA programmes to administer funds made available
to support farmers.
 Diaspora Service
The GN Diaspora Account allows Ghanaians abroad to open a cedi account with GN
Bank. Each Diaspora Account Holder (DAH) gets a unique password. A Diaspora
Account telephone number and email address is available for DAHs to use in making
inquiries and executing banking transactions. Diaspora Accounts can be used to make
payments for school fees, utility payments, regular remittance payments to relatives,
housing construction payments, make investments on Ghana Stock Exchange and with
approved mutual funds and unit trusts, etc.
31
CHAPTER FOUR
ANALYSIS AND DISCUSSION OF RESULTS
4.0 Introduction
This chapter presents the results and discusses the finding of the study. The areas covered under
this chapter include socio-economic statistics, appropriateness of credit appraisal process of GN
Bank, investigate the relationship between loan officers and persons applying for loans, effect of
loan officers – client relationship on loan repayment and how to assess the creditworthiness of
new clients.
4.1 Socio-economic Statistics
The socio-economic characteristics of the respondents are shown in Table 4.1. From Table 4.1,
the majority (61.18%) of the respondents are females. More than half of the respondents
(51.32%) were self-employed with 23.03 percent being public/civil servant while 25.65 percent
are in the private sector. Most of the respondents had attained some level of formal education.
15.79percent of the respondents have had no formal education. Some have either completed
primary education (12.50%), or junior high education (21.05%), or senior high education
(14.47%), polytechnic/ diploma / university education (36.18%). The majority (48.03%) of the
respondents are married. 81.58 percent of the respondents are Christians.
32
Table 4.1: Socio-economics statistics of respondents
Variable Frequency Percentage

Gender
Male 59 38.82
Female 93 61.18
Marital status
Single 50 32.89
Married 73 48.03
Separated 18 11.84
Divorced 4 2.63
Widowed 7 4.61
Educational level
No formal education 24 15.79
Primary school 19 12.50
Junior High/Middle School 32 21.05
Senior High/Technical 22 14.47
University/Polytechnic 55 36.18
Employment Category
Public/Civil Servant 35 23.03
Private sector 39 25.65
Self-employment 78 51.32
Unemployed - -
Others - -
Religion
Christianity 124 81.58
Islam 22 14.47
Traditional 6 3.95
Source: Field Survey, 2015
33
4.2 Appropriateness of credit appraisal process
This section presents findings on the first objective. The appropriateness of credit appraisal
process was studied by examining the credit appraisal, collateral, credit scoring, evaluation and
disbursement as discussed below:
Table 4.2 Response on customers who have taken loans more than once.
Response Frequency
Percentage
Once 59 41.55
2 times 46 32.39
3 times 22 15.49
4 times 12 8.45
More than 5 times 3 2.11
Total 142 100
As revealed in Table 4.2, out of the 142 respondents, 59 which constitute 41.55% of the total
customers had taken loans once from the Bank. 46 respondents out of the remaining 88
representing 32.39% had taken credit facility twice from the Bank, 22 representing 15.49% had
taken loans thrice from the Bank, 12 respondents representing 8.45% had taken credit facility
four times from the Bank while 3 customers representing 2.11% had taken credit facility more
than five times.
Collateral
Collateral refers to asset pledge in exchange for the receipt of a loan. Borrowers are required to
pledge existing assets as security for the receipt of the loans. According to Bank executives
interviewed, most of the loans extended to SMEs were primarily secured by two guarantors and
20% of the amount in the customer‟s account as collateral.
34
Table 4.3 Response on the nature of collateral provided
Response Frequency Percentage

Mortgage 46 32.39
Hypothecation 59 41.55
Personal Guarantee 26 18.31
Guarantor 11 7.75
Total 142 100
Table 4.3 disclosed that 32.39% of loans were secured by mortgages, 41.55% by hypothecation,
18.31% secured by personal guarantee and 7.75% were secured by guarantors. It was discovered
that the bank maintained a safety margin on properties used to secure loans. The Bank lends
between 50 – 60% of the values of the property presented. In respect of landed property, the
bank requires a signed valuation report by a recognized valuer. Customers are required to save
up to 20% of the amount required as collateral and also provide two guarantors. It was found out
that most customers end up securing credit in other financial institutions because they are not
able to meet these conditions.
Table 4.4 Response on whether Loan was diverted

Yes - -
No 136 95.77
No Response 6 4.23
Total 142 100
35
Table 4.4 revealed that 95.77% majority of respondents confirmed that, the loans received were
used for the purpose for which the loan was secured. 4.23% minority of the respondents ailed to
answer as to whether part or the entire loan secured was diverted. It was revealed that majority of
the loans are used for the intended purpose as a result proper of monitoring and follow – up
exercise undertaken by the Bank to monitor customers.
Table 4.5 Response on Credit Scoring and Evaluation

Account Performance 31 21.83
Collateral 55 38.73
Credit Worthiness 41 28.87
Previous relationship with the 15 10.56
Bank
Total 142 100
From Table 4.5 above, 38.73% of respondents agreed that the most important criteria for credit
storing and evaluation were collateral. Creditworthiness of customers was the second most
important criteria for credit scoring with 28.87%. The creditworthiness of a customer was
determined by the ability and willingness of the customer to pay the loan. 21.83% considered
account performance as the important criteria for credit scoring while 10.56% of respondents
agreed that previous relationship with the Bank was the most important criteria for credit scoring
and evaluation.
36
Table 4.6 Response on loan amount disbursement

Approved as requested 75 52.82
Adjusted but adequate 38 26.76
Adjusted not adequate 29 20.42
Total 142 100
Table 4.6 indicates that, more than half (52.82%) of the respondents confirmed that their loans
were approved as requested. On the other hand, 26.76% had their loans adjusted but were still
adequate for the purpose intended for. 20.42% of the respondents had their loans adjusted hence
inadequate for the intended project or purpose. This contributed to loan default among
customers. Majority of customers who defaulted were those who had the loan amount adjusted
and was not adequate. They ended up securing another loan from other financial institutions
making repayment of both facilities difficult.
Table 4.7 Response on how regular customers repay loans

Loan Repayment on Time 98 69.01
Default Repayment 44 30.99
Total 142 100
Table 4.3 shows the responses of respondents on loan repayment. 98 respondents representing
69.01% disclosed that, they service their loans on time while the remaining 44 representing
30.99% accepted that, they default repayment occasionally.
37
Table 4.8 Response on Loan Processing Time

1 -3days - -
4 -5 days 12 8.45
6 -7 days 31 21.83
More than 7 days 99 69.72
Total 142 100
From Table 4.8, it took 69.72% of the respondents more than 7days to access their loans.
Customers expressed their dissatisfaction with the time it takes them access loans from the Bank.
They complained that delays that last for more than 7days sometimes make them take credit
elsewhere. 21.83% of the respondents confirmed that it took them 6 – 7days to access loans from
the Bank while 8.45% responded that it took them 4 – 5days to access their loans.
Table 4.9 Response on the causes of Loan Default

High Interest Rate 4 6.82
Longer Loan Processing 3 4.44
Period
Adjustment of loan amount 15 31.82
Business Failure 22 56.82
Loan Diversion 0 -
Total 44 100
As indicated in Table 4.9, the above factors contribute to the occasional default of loan
repayment by the 48 customers who could not service their loans on time.
38
4 respondents representing 6.82% confirmed that high interest rate contributed to their default.
3 respondents (4.54%) said the loan process takes a longer time which affects the project they
intend to use the facility for therefore the default. 15 (31.82%) expressed the concern that the full
loan amount applied for are not granted, therefore the amount granted are not adequate to the
intended purpose. Most (56.82%) of the respondents attributed their inability to service their
loans regularly to business failure.
4.3 The relationship between loan officers and customers
Table 4.10 Response on the reception offered to customers at the Loans Department.
Excellent 57 40.15
Very Good 29 20.42
Good 41 28.87
Normal 15 10.56
Bad - -
Total 142 100
From Table 4.10, the researcher found out that 40.15% of the respondents were of the view that
the Loans Department offers an excellent reception to its customer. 28.87% of the respondents
classify the reception at the Loans Department as good, 20.42% sees the reception to be very
good while 10.56% perceived the reception at the Loans department to be normal. No customer
described the services provided by the Loans department as bad.
39
Table 4.11 Response on whether Loans Department Staff are approachable and cooperative.
Responses Frequency Percentage

Strongly agree 92 64.79
Agree 43 30.28
Not Sure 7 4.93
Disagree - -
Strongly disagree - -
Total 142 100
As revealed in Table 4.11, majority 64.7% of the customers strongly agreed that the Loans
Department staff were approachable and cooperative. It was found out that Loan Officers treated
all customers equally without any preferential treatment. None of the customers disagreed to the
fact that Loan Officers were approachable and cooperative. Customers were able to open up and
seek clarification before securing loans which was good for the Bank in building and excellent
relationship with customers.
Table 4.12 Response on whether Loan officers provide special assistance to friends and
family members to ensure they secure the loan.
Agree 25 17.60
Not Sure 37 26.06
Disagree 49 34.51
Strongly disagree 29 20.42
Total 142 100
From Table 4.12, minority 1.41% strongly agreed that loan officers provided special treatment to
friends and family members to ensure they secure their loans. 17.60% of the respondents also
40
agreed to this. It was found out that these customers constituted more than half of the customers
who had their loan amounts adjusted and as a result was not adequate.
Table 4.13 Response on customer‟s relationship with Loan Officers

Friend 35 24.65
Family Member 2 1.41
School Mate 6 4.22
Neigbour 11 7.75
No relations 88 61.97
Total 142 100
Table 4.13 revealed that 88 respondents (61.97%) had no relationship with loan officers. This
shows that less than half of the respondents had relations with loan officers in one way or the
other. 24.65% of the respondents were friends to loan officers, 7.75% were neigbours to loan
officers while family members of loan officers constituted only 1.41% of the respondents.
Table 4.14 Response on whether customers were granted their loans because of their
relationship with Loan Officers.
Yes - -
No 139 97.89
No Response 3 2.11
Total 142 100
As revealed in Table 4.14, majority (97.89%) disagree with the fact that they were granted their
loans as a result of their relationship with the loan officers. This means that loan officers were no
influenced by their relationship with customers in assessing their credit worthiness.
41
Table 4.15 Loan Officers provided any assistance to customers.
Yes 117 82.39

No 25 17.61
Total 142 100

As shown in table 4.15, most (82.39%) of the respondents agreed to the fact that loan officers
assisted them in their loan processing. The provision of advisory service on how to invest loans
when granted goes a long way to help the Bank in loan recovery. This is so because customers‟
loan repayment ability depends on the survival of their businesses.
Table 4.16 Response on whether customers were granted the loans as a result of the Loan
Officers assistance.
Yes - -
No 133 93.66
No Response 9 6.34
Total 142 100
From Table 4.16, majority (93.66%) of the respondents disagreed that they were granted the
loans as a result of the assistance the loan officers provided them. According to them they
secured the loans because they were credit worthy and met all the requirements of the Bank.
6.34% of the respondents failed to respond to whether they were granted the loan as a result of
the assistance provided by the loan officers.
42
Table 4.17 Loan Officers approve all loans applied for by their friends and/or family members.
Agree 5 3.52
Not Sure 35 24.65
Disagree 48 58.45
Total 142 100
As revealed in Table 4.17, the majority (58.45%) of the respondents disagreed that loan officers
approve all loans applied for by friends and family members. This is reaffirmed by the low
(5.63%) of respondents on the opposing side. Loan officers confirmed that they approve loans
for all customers who are able to meet all the requirements. If a friend or family member is not
able to meet all the loan requirements that person is denied the loan as any other customer.
4.4 The effect of Loan Officer’s relationship with customer’s on credit appraisal
process.
Table 4.18 Friends and family members of loan officers mostly default loan repayment.
Strongly agree - -
Agree 2 1.41
Not Sure 11 7.74
Disagree 35 24.65
Total 142 100
From Table 4.18, the majority (66.20%) of the respondents disagreed that, friends and family
members of Loan Officers mostly default loan repayment. This is reiterated by the low (1.41%)
of respondents on the opposing side.
43
Table 4.19 Loan repayment by customers who have relationship with loan officers.
No Default 46 85.19
Default 8 14.81
Total 54 100
As already indicated in Table 4.7, 44 respondents out of the total of 142 respondents defaulted
loan repayment. From Table 4.19 above, only 8 (18.18%) respondents out of the 44 respondents
who defaulted repayment had relation with the loan officers. This clearly shows that majority of
the respondents who defaulted payment had no relation with the loan officers. Moreover, the 8
respondents attributed their default to business failure and not because of their relationship with
the loan officers.
Table 4.20 Loan officers do not take legal action against friends and/or family members who
default payment.
Agree 21 14.79
Not Sure 32 22.53
Disagree 66 46.48
Total 142 100
Table 4.20 shows that 46.48% of the respondents disagreed that, loan officers do not take legal
action against friends and family members who default payment. Loan officers issue letters of
default to customers who default loan repayment followed by a final demand notice. A legal
action is then taken against the customer if payment is not made. This policy affects all
customers including friends and family members.
44
4.5 Strategies to improve the credit appraisal process
This section presents findings on strategies designed to improve the credit appraisal process and
loan repayment of GN Bank. The borrowers were asked to give their free opinion on analysis of
loan performance, incidental cost of borrowing, interest rate and the loan period.
GN Bank lack credible information on borrowers‟ previous records with other financial
institutions. It relied on the information provided by the customers themselves about their
previous borrowings. Such information are hard to validate because customers in their quest to
secure the loan will not provide all the necessary information. GN Bank should pool together
under the auspices of the Bank of Ghana and establish a credit information bureau to which
reference can be made before any loan disbursement.
Respondents were asked whether incidental costs to borrowing affected the repayment of their
loan facility. Findings showed that costs incurred in securing a loan influenced the attitudes of
borrowers towards repayment. The findings of the study showed that these costs are high and
sometimes discourage the customers from repaying the loan principal and interest. GN Bank
needs to review this arrangement and revise the charges downwards. In addition, subsequent
borrowings and top-up loans by customers which are currently charged full commitment needs to
be revised downwards.
Findings of the study revealed that the credit appraisal process was long and tedious. A loan
process could take up to a week. Most customers were unhappy with the number of days it takes
to secure a loan; hence look for alternative source of credit. GN Bank needs to review its
appraisal process with a view of shortening the loan period.
45
The credit department should be properly resourced to improve the monitoring exercise in order
to reduce loan diversion. Reminders in the form of text messages to customer‟s mobile phone
and reminder letters are encouraged.
Loan repayment period should be set in accordance with the financial viability of the project,
loan size and market situation.
4.6 Chapter Summary
This chapter presents the results and discusses the finding of the study. The socio-economic
statistics of the respondents is provided. The appropriateness of the credit appraisal process
findings are discussed in this chapter. Also, the relationship between loan officers and customers
and the effect of their relationship on loan repayment are discussed. Finally, strategies that will
help improve the credit appraisal system are underlined.
46
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.0 Introduction
This chapter summarizes the entire study; the findings of the study, recommendations by the
researcher, limitations encountered and directions for future research.
5.1 Summary of Findings
This study assesses the credit assessment process and loan repayment of GN Bank. The
appropriateness of the credit appraisal process, the relationship between loan officers and
customers and the effect of their relationship on loan repayment are investigated. Also, the
factors of loan repayment performance of clients are examined. The descriptive findings reveal
that most of the respondents have attained some level of formal education. Majority (48.03%) of
the respondents is married.
With the appropriateness of the credit appraisal process, the results show that, a greater
percentage of the respondents had the loans secured by hypothecation (41.55%). The bank lends
between 50 -60% of the value of property presented as collateral. The findings revealed that
customers who were not able to save up to 20% of the amount required were not granted the full
amount applied for. As a result, 47.18% of the respondents had their loan amount adjusted. The
adjustment of loan amount contributed to 31.25% of respondents who defaulted loan repayment.
With the loan processing time, it took 69.72% of the respondents more than 7days to have their
loans processed and disbursed. Customers expressed their dissatisfaction with the time it takes
47
them access loans from the Bank. They complained that delays that last for more than 7days
sometimes make them resort to credit elsewhere since they might need the money quickly to
transact business.
For the relationship between loan officers and customers, the results reveal that majority
(61.97%) of the respondents had no relationship with loan officers. A greater percentage
(64.39% strongly agree; 30.28% agree) of the respondents give an affirmative response that the
Loans Department is approachable and cooperative. This practice is one of the hallmarks of a
Bank and this helps build a better customer relation for the Bank. Around 54.93 % of the
respondents disagree that loan officers provide special assistance to customers who are their
friends and or family members. This means that the loan officers are not bias. This was strongly
affirmed by a majority (82.39%) who were assisted in one way or the other by loan officers.
Majority (93.66%) or the respondents agree that, they were granted the loan because they met all
the requirements and not because of the assistance provided by loan officers. It was found out
that the assistance provided by loan officers to customers were mostly helping them to complete
the loan forms educating them on injecting the full amount in the intended project.
The findings revealed that the relationship between loan officer‟s and customers had almost no
effect on loan repayment. A greater percentage (66.20% strongly disagree; 24.65% disagree) of
the respondents strongly disagree that friends and family members of loan officers mostly default
loan repayment. The study revealed that, out of the 44 respondents who defaulted loan
repayment, only 8 (representing 18.18%) had a relationship with loan officers. This 18.18%
minority defaulted not because of their relationship with loan officers but due to business failure.
48
The study further revealed that majority (46.48% Disagree; 9.86% Strongly Disagree) of the
respondents disagree that loan officers do not take legal action against friends and or family
members. Loan officers confirmed in the study that, after two demand notice have been served
on a customer who has defaulted loan repayment, a legal action is taken against the customer
whether a friend or a family member.
5.2 Conclusion
Base on the summary of findings, this study concludes that majority (51.32%) of the respondents
are self-employed. The study also concludes that people in the municipal had attained some level
of formal education.
From the findings, females constitute a higher percentage of respondents that could not repay
loan on time. However females who are married and work in the public sector service their loans
regularly. The study further revealed that females constitute over 70% of respondents who are
friends to loan officers. Females who have no formal education and are friend‟s to loan officers
mostly default loan repayment.
With the appropriateness of the credit appraisal process, the study concludes that most customers
are not able to meet the collateral requirements and therefore resort to take credit facility from
rural banks and other credit unions. The findings reveal that most customers do not divert the
loans they secure but rather use the facility for the intended purpose. The study concludes that
customers did not divert loans because of the proper monitoring and follow-up exercise
undertaken by the Bank. The results also reveal that, the adjustment of loan amounts contribute
greatly to loan default. Customers are not able to undertake the intended project when the loan
amount is adjusted. Customers also raised concern about the number of days it takes them to
49
secure an SME loan. It took majority (69.72%) of the respondents more than 7days to secure
loans.
The study also concludes that loan officers have an excellent relationship with all of their
customers. The findings revealed that loan officers treat all customers equally irrespective of
their relationship with some customers (friends and family members). The study further revealed
that the loans department workers are approachable and cooperative providing assistance to all
customers and not only friends and family members. The findings conclude that not all loans
applied for by friends and family members of loan officers are approved. Friends and family
members of loan officers are equally supposed to meet all loan requirements for approval.
The results also conclude that the relationship between loan officers and customers has no effect
on loan repayment. The study accomplishes that some variables are responsible for loan
repayment default, and these variables are loan diversion and adjustment of loan amount. The
findings also concludes that loan defaulters (including friends and family members) are served
first and second demand notice after which legal action is taken against customers who refuse to
make payment.
5.3 Recommendation
Base on the findings of the study mentioned earlier, the following policy recommendations are
made to improve the credit appraisal process of the Bank. Since the study findings concluded
that it took majority of the respondents more than 7days to secure an SME loan, it is therefore
recommended that the Bank review its credit appraisal process to reduce the number of days it
takes to process SME loans. This is because many customers resorted to other financial
institutions that could process their loans for them in less than 7days.
50
From the study, customers complained of high interest rate charged by GN Bank. To improve
this, the study recommends that GN Bank review its interest rate regularly to tally with
prevailing market conditions. Frequent benchmark of interest rate will improve loan
performance.
The study also finds out that, loan officers provide advisory services to customers on how to
invest the full loan amount in the intended project. It is recommended that loan officers intensify
this as well as the follow-up and monitoring exercise they undertake. This is due to fact that the
results show that the advice and follow-up exercise by loan offices reduced loan default of
customers.
The study also revealed that loan officers who have spent more than a year at a particular branch
had more friends applying for loans at those branches. Even though minority of such customers
defaulted, it is recommended that loan officers are transferred frequently to reduce granting loans
to friends and hence loan default.
5.4 Recommendation for Further Studies
The following suggestions are made for further study:
1. Similar study may be conducted in Banks especially Rural Banks.
2. Borrowers‟ characteristics and their capacity for credit management.
3. Causes of loan failures – assess the behavioural and environmental aspects from both the
lenders‟ and borrowers‟ perspective.
51
References:
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Oromia Credit and Savings Share Company (OCSSCO) in Kuyu‟, MSc thesis, Addis
Ababa University, Addis Ababa.
 Abreham, G. (2002). Loan repayment and its determinants in small scale enterprises
financing in Ethiopia: case of private borrowers around Zeway Area. (Unpublished
Master‟s Thesis).
 Agyemang, K. (1987). “Short term Lending Policies”, Journal Of The Ghana institute Of
Bankers, 2(1), 31-33.
 Akakpo, R. (1994). “Benefits of Appropriate Lending Techniques”, The Ghanaian
banker, 2(1), 35 – 36.
 Alec, M.C., and Annan, A. (2004). A report on Credit Valuation Models
http://www.sas.com/industry/banking/scoring/index.html
 Asiedu Mante, E. (2002). “Silver Jubilee Celebration of the Rural Banking in Ghana”,
The Rural Banker, January – June, 2002.
 Assefa, B.A. (2002) „Factors influencing loan repayment of rural women in Eastern
Ethiopia: the case of Dire Dawa Area. A Thesis presented to the school of graduate
studies, Alemaya Univeristy, Ethiopia
 Asymmetric information in securitization: An empirical assessment
http://www.sciencedirect.com/science/article/pii/S0304393214001597
 Banks improve non-performing loans ratio

http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=307649
 Basel Committee on Banking Supervision, Principles for the Management of Credit

Risk”, September 2000.
 Berhanu, A. (2005). „Determinants of formal source of credit loan repayment
performance of smallholder farmers: the case of north western Ethiopia, North Gondar‟,
M.Sc. Thesis, Alemaya Univeristy, Ethiopia
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 Bofondi, M. and Gobbi, G. (2003). Bad loans and entry in local credit markets. Oxford
University Press, New York.
 CAL Bank posts impressive Q3 results
http://www.ghanaweb.com/GhanaHomePage/business/artikel.php?ID=333192
 Credit risk threatens banks
http://www.mubs.ac.ug/docs/masters/mba/OMARA%20MARTIN%20MBA.pdf
 Credit Appraisal & Recovery Techniques

http://www.irm.edu.pk/index.php/programes-and-trainings/social-mobilization-training-
program/credit-appraisal-recovery-techniques-cart/
 Credit Risk Management: How to avoid lending Disaster and maximize earnings.
http://www.amazon.com/Credit-Risk-Management-Disasters-Maximize/dp/0071446605
 Credit Risk management in Financial Institutions: A Case Study of Opportunity
International Savings and Loans Limited.
http://ir.csuc.edu.gh:8080/xmlui/bitstream/handle/123456789/241/CREDIT%20RISK%2
0MANAGEMENT.pdf?sequence=1
 Dena Bank Credit Appraisal

http://www.studymode.com/essays/Dena-Bank-Credit-Appraisal-1018594.html
 Ghana Statistical Service (2013). 2010 Population and Housing Cesus, National
Analytical Report. May, 2013
 Ghatak, M. and Guinnane, T. W. (1999). The Economics of Lending with Joint Liability:
Theory and Practice. Journal of Development Economics. Vol. 60, pp.195-228.
 Ghatak, M., and Guinnane, T.W. (1999). The economics of lending with joint liability:
theory and practice. Journal of Development Economics. 60, 195-228.
 Hanson & Rocha (1986), high interest rates, Spreads and the cost of intermediation,
World Bank, industry and Finance series, Vol. 18
 Harrison, D (1996); Art or Science? The Importance of Understanding Credit Risk, The
Chartered Banker, Vol. 1 No. 1
53
 Kim, D & Santomero, A (1993); Forecasting required loan loss reserves, Journal of
Economics and Business, August 1993, pg. 315 - 329
 Lending decision making in banks: A critical incident study of loan officers
http://www.sciencedirect.com/science/article/pii/S0263237313000418
 Lewis, E . M. 1992. Introduction to credit scoring. Califonia: Fair, Isaac and Co., Inc.
 Literature Review On Loan Recovery Strategies

http://www.ukessays.com/dissertation/literature-review/literature-review-on-loan-
recovery-strategies.php
 Llewellyn, T. David, (1992); “Banking in the 1990‟2: Challenges and responses,” Journal
of International Banking and Finance, November, pp. 528 – 534.
 Loans should be well appraised. Mr Aye kusi. Akyem Bosome Rural Bank holds AGM
http://www.modernghana.com/news/486802/1/akyem-bosome-rural-bank-holds-
agm.html?utm_source=twitterfeed&utm_medium=twitter
 Martin Omara, 2003. Credit assessment process and repayment of Bank loans in Barclays
Bank Uganda Ltd
http://www.mubs.ac.ug/docs/masters/mba/OMARA%20MARTIN%20MBA.pdf
 MCDM approach to evaluating bank loan default models

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 McNaughton, D. (1992), Banking Institutions in Developing markets Vol. 1: Building

Strong Management and Responding to Change, Washington D. C: World Bank.
 Mengistu, B., (1999). Determinants of Industrial Loan Repayment in Ethiopia: The Case
of Manufacturing Firms in Addis Ababa, Proceedings of the Eighth Annual Conference
on the Ethiopian Economy, 1999. pp. 117-132.
 Mensah, C. (199). Bank Credit provision and Performance Measurement: The Experience
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 Mukasa Muyongo A. (1997); Uganda Barclays Bank non-performing loans: The role of
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 Munene, H., Nguta Guyo, Huka, S. (2013) Factors Influencing Loan Repayment Default
in Micro-Finance Institutions: The Experience of Imenti North District, Kenya
International Journal of Applied Science and Technology. Vol. 3 No. 3; March 2013
 Nakamura, A. (2003). A report on bad loans and entry in local credit market. In:
Publication Distribution Banks of Canada. http://ideas.repec.org/p/bdi/wptemi/td-509-
04.html.
 Nsereko, J. (1995); Problems of Non-Performing advances in the Uganda Banker, Vol. 3,
No. 1, pg. 26 - 35
 Njoku J.E. and Odii, M.A.C.A., (1991) Determinants of Loan Repayment Under the
Special Emergency Loan Scheme (SEALS) in Nigeria: A Case Study of Imo State,
African Review of Money, Finance and Banking, No.1, 1991, pp.39-52.
 Odongo, W. (2004), The effects of credit policies on the performance of loans by

Barclays Bank in Uganda.
 Sevume, G. (2004), The effects of credit policies on the performance of loans officers in
Barclays Bank. A case of Centenary Rural Development Bank.
 Ssewagudde, E. (2000), the management of loan portfolio and the performance of

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 Tjiptone, J. and Darmad, A. (2002). Lending still defensive in nature. Proceedings of
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 When does a loan go bad? Feature Article of Fri, 5 Dec 2014
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55
APPENDIX
KWAME NKRUMAH UNIVERSITY
OF SCIENCE AND TECHNOLOGY (KNUST)
Survey Questionnaire on Credit Appraisal Process and Repayment of Bank Loans at GN
Bank. A case study of Upper and Lower Denkyira (STAFF)
Your response to this Questionnaire will serve as a source of information for the thesis purpose.
Any response you provide here is strictly confidential and will be used exclusively for the
research purpose. Your honesty in responding the right answer is vital for the research outcome
to be reliable.
SECTION A: SOCIOECONOMIC CHARACTERISTICS
1. Gender male { } female { }

2. Marital status single{ } married { }separated{ } divorced{ }widowed{ }
3. Indicate the highest educational level attained
a. No formal education { } b. Primary School { }
c. Junior High/Middle School { } d. Senior High/Technical School { }
e. University/Polytechnic/Diploma { }
4. Religion Christianity { } Islam { } Traditional { } Others (specify)………….
SECTION B: To investigate the appropriateness of credit appraisal process of GN Bank.
5. GN Bank has a credit policy for loan applicants. (a) Yes { } (b) No { }
6. How long does it take a customer to secure a loan from GN Bank?

(a) 1 – 3 days { } (b) 3 – 7 days { } (c) 7 – 14 days { } (d) 14 days or more { }
7. The Bank charge a reasonable interest rate on loans in the range of

(a) 10 - 20% { } (b) 21 – 25% { } (c) 26 – 30% { } (d) Above 31% { }
8. The Bank has a proper way of accessing records of all applicants previous borrowings in
other financial institutions. (a) Yes { } (b) No { }
56
9. Loan Officers make follow up to ensure loan facilities are used for the purposes for
which they were granted. (a) Yes { } (b) No { }
SECTION C. To investigate the relationship between loan officers and persons applying
for loans.
10. How many years have you worked as a credit officer at GN Bank?
a. 6 months – 12 months { } b. 13 months – 24 months { }
c. 25 months – 36 months { } d. 36 months and above { }
11. How do you treat your clients during the loan process?
a. Treat them equally { } b. Offer special treatment to family and friends { }
c. other. Specify ……………………………………..
12. Have you ever granted a loan to a friend or family member before?
(a) Yes { } (b) No { }
13. If Yes, how many?
(a) Up to 10 people { } (b) 10 – 20 { } (c) 21 – 30 { }
(d) 31 people and more { }
14. Did you ask of collateral security from the friend or family member?
(a) Yes { } (b) No { }
15. If No, why?
(a) He was a family member { } (c) I knew his house and workplace { }
(b) He had a good loan repayment record with the bank { }
(d) Other. Specify ………………………………………………………………………
16. Did you provide your friend or family member with any special assistance during the
process? (a) Yes { } (b) No { }
17. If Yes, what kind of assistance?
(a) Filled the loan application form for the customer { }
(b) Told him the kind of document he should provide as collateral security { }
(c) Introduced the friend or family member to the Officer in charge { }
(d) Guaranteeing the loan for friends and family { }
(e) Other. Specify …………………………………….……………………………….
18. Did your assistance help him/her to secure the loan?
57
(a) Yes (b) No
SECTION C. To investigate the effect of loan officer’s relationship with customer’s on

credit appraisal process.
19. Did all your friends and family fulfill their part of the loan obligation?
(a) Yes (b) No
20. Did any friend or family member default repayment?
(a) Yes (b) No
21. If Yes, what measures were taken to ensure repayment?
(a) Convinced him to pay { } (c) Asked family members to talk to him/her { }
(b) Took a legal action { } (d) Other. Specify
………………………………………………………………………………………
22. What was the default rate for 2014? ………………………………………..
23. What percentage were your friends and family members?
(a) 1 - 5 % (b) 6 - 10 % (c) 11 – 20% (d) above 21%
24. What do you think should be done to make the loan assessment process more effective.
………………………………………………………………………………………………
……………………………………………………………………………………………
58
KWAME NKRUMAH UNIVERSITY
OF SCIENCE AND TECHNOLOGY (KNUST)
Survey Questionnaire on Credit Appraisal Process and Repayment of Bank Loans at GN

Bank. A case study of Upper and Lower Denkyira (CUSTOMERS)
Your response to this Questionnaire will serve as a source of information for the thesis purpose.
Any response you provide here is strictly confidential and will be used exclusively for the
research purpose. Your honesty in responding the right answer is vital for the research outcome
to be reliable.
SECTION A: SOCIOECONOMIC CHARACTERISTICS
1. Gender male { } female { }

2. Marital status single{ } married { }separated{ } divorced{ }widowed{ }
3. Indicate the highest educational level attained
b. No formal education { } b. Primary School { }
d. Junior High/Middle School { } d. Senior High/Technical School { }
f. University/Polytechnic/Diploma { }
4. Religion Christianity { } Islam { } Traditional { } Others (specify)………….
5. State the category of employment applicable to you
a. Public/Civil Servant { } (c) Private Sector { }
b. Self-Employed { } (d) Unemployed { }
c. Others (Specify) …………………………………..
SECTION B: To investigate the appropriateness of credit appraisal process of GN Bank.
6. Have you taken loan from the Bank before? (a) Yes { } (b) No { }
7. If Yes, was it the first time? (a) Yes { } (b) No { }
8. If No, how many times have you secured a loan from the Bank?
(a) 2 times { } (b) 3 times { } (c) 4 times { } (d) more than 5 times { }
9. The following collaterals are often asked for to secure the loan.
(a) Mortgage { } (c) Hypothecation { }
(b) Personal Guarantee { } (d) Other (Specify) ………………………………
59
10. Please state if the loans requested for are
(a) Approved as requested { } (c) Adjusted but adequate { }
(c) Adjusted and too little { }
11. Do you service your loan regularly? (a) Yes { } (b) No { }
12. If No, what causes you to default repayment of loan?

(a) The interest rate of the Bank is too high. { }
(b) It takes a longer time for the loan to be processed. { }
(c) The loan provided is not adequate for the proposed project. { }
(d) Other. Specify ……………………………………………………………………..
13. How long did it take you to access your loan?

(a) 1- 3 days { } (b) 4 – 5 days { } (c) 6 – 7days { } (d) More than 7days { }
14. Is the borrowed funds injected in the business for which it was borrowed?
(a) Yes { } (b) No { }
15. Do Loan Officers visit regularly to monitor progress of your business?

(a) Yes { } (b) No { }
SECTION C: To investigate the relationship between loan officers and persons applying
for loans.
16. What was the reception by the Loan Officer(s) the first time?
(a) Excellent { } (c) Good { }
(b) Very good { } (d) Normal { }
(a) Very Bad { } (f) Other. Specify……………………….
17. Did you know the loan officer(s) before your encounter at the Bank?
a. Yes { } (b) No { }
18. If Yes, what was the relationship between you and the Loan Office.
a. Friend { } (c) Family member { }
b. School Mate { } (d) Others (specify) ……………………
19. Did you secure the loan because of your relationship with the loan officer?
(a) Yes { } (b) No { }
60
20. Did the Loan Office assist you in any way aside the normal loan process?
a. Yes { } (b) No { }
21. If Yes, what kind of assistance did he/she offer you?
(a) He filled the loan application form for me. { }
(b) He guaranteed the loan for me. { }
(c) He introduced me to the Loan Officer in charge of my loan processing { }
(d) Other. Specify ……………………………………………………………..
22. Did the Loan Officer‟s assistance help you secure the loan?
(a) Yes { } (b) No { }
SECTION D: To investigate the effect of loan officers – customers relationship on
loan repayment.
23. Have you repaid the loan or installments?

a. Yes { } (b) No { }
24. Did you make all the repayment at the right time?
a. Yes { } (b) No { }
25. If No, why did you default the repayment terms?
(a) The Loan Officer was a friend or family member so I could pay at anytime { }
(b) Business activities slowed down { }
(c) I used the part of the loan money for a different purpose { }
(d) Other. Specify …………………………………………………………………
26. Did the Loan Officer play any role in the loan repayment process?
a. Yes { } (b) No { }
27. Please tick (√) appropriate box for each of the following questions
Questions Strongly Agree Not disagree Strongly

agree sure disagree
Loans Department staffs are approachable and
cooperative.
Loan Officers show excellent human relationship
to all clients.
Loan Officers treat friends and family better than
other customers.
Loan Officers approve all loans applied for by
61
friends and family members.
Collateral security is not demanded from friends
and family members applying for loans.
Loan Officers provide special assistance to
friends and family members applying for loans to
ensure they secure the loan.
Friends and family members mostly default loan
repayment.
Friends and family members mostly expect Loan
Officers to repay their loans for them.
Friends and Family members of Loan Officers
service their loans regularly than customers who
do not have any relationship with them.
Loan Officers do not take legal actions against
friends and family members who default
payment.
28. What challenges did you encounter during the loan processing?
………………………………………………………………………………………………
……………………………………………………………………………………………..
29. What do you suggest the loans department do to make the credit assessment process more
effective?
………………………………………………………………………………………………
………………………………………………………………………………………………
62

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CREDIT APPRAISAL PROCESS AND REPAYMENT OF LOAN AT GN BANK.

A CASE STUDY OF UPPER AND LOWER DENKYIRA.

OSEI – NYARKO GEORGE

Technology in partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION

Administration and that, to the best to my knowledge, it contains no material previously

………………… ……………………. …………………

Osei – Nyarko George Signature Date

………………….. …………………….. ………………..

Dr. K. O. Appiah Signature Date

Dr. K. O. Appiah …………………….. ………………..

Head Of Department Signature Date

size and market situation.

for this work and the entire course.

Kwame Nkrumah University of Science and Technology (KNUST).

richly bless him.

during the administering of the questionnaire.

down spirited in the process. God bless you.

TABLE OF CONTENTS ............................................................................................................ i

LIST OF TABLES .................................................................................................................. viii

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

1.1 Background to the Study....................................................................................................4

1.2 Statement of the Problem…………………………………………………………………...4

1.3 Objectives of the Study......................................................................................................5

1.4 Research Questions ...........................................................................................................5

1.5 Significance of the Study ...................................................................................................6

1.6 Organization of the Study ..................................................................................................6

CHAPTER TWO ........................................................................................................................7

LITERATURE REVIEW ............................................................................................................7

2.0 Introduction .......................................................................................................................7

2.1 Lending .............................................................................................................................7

2.2 Credit Assessment .............................................................................................................9

2.2.1 Credit Appraisal .............................................................................................................9

2.2.2 Credit Documentation ................................................................................................... 10

2.2.2.1 Collateral ................................................................................................................... 11

2.2.2.2 Interest Rate............................................................................................................... 11

2.2.2.4 Purpose of Loan ......................................................................................................... 12

2.2.2.5 Loan Period ............................................................................................................... 13

2.3 Credit Risk ...................................................................................................................... 13

2.4 Cost of Borrowing ........................................................................................................... 15

2.5 Borrower Creditworthiness .............................................................................................. 17

2.6 Disbursement .................................................................................................................. 21

2.7 Repayment of Loans ........................................................................................................ 21

2.8 Monitoring of Loans ........................................................................................................ 23

2.9 Causes of Poor Loan Assessment and Recovery .............................................................. 23

3.1. Introduction .................................................................................................................... 25

3.2 Population and Sampling Techniques .............................................................................. 25

3.3 Data Collection Procedure .............................................................................................. 25

3.4 Research Instruments ....................................................................................................... 26

3.5 Research Design .............................................................................................................. 26

3.6 Data Analysis .................................................................................................................. 26

3.7 History of GN Bank ………………………………………………………………………27

CHAPTER FOUR ..................................................................................................................... 32

ANALYSIS AND DISCUSSION OF RESULTS ...................................................................... 32

4.0 Introduction ..................................................................................................................... 32

4.1 Socio-economic Statistics ................................................................................................ 32

4.2 Appropriateness of Credit Appraisal Process ................................................................... 34

4.6 Chapter Summary ............................................................................................................ 46