EVALUATION OF CREDIT MANAGEMENT AND ITS EFFECT ON PERFORMANCE OF RURAL BANKS IN GHANA (A CASE STUDY OF ADANSI RURAL BANK LTD, FOMENA-ASHANTI)

ABSTRACT

The study sought to analyze the effect of credit management on financial performance of Adansi Rural Bank Ltd, Fomena, Ashanti. A descriptive research design was used for the study. Qualitative data was gathered in order to establish the relationship between credit risk and performance of Adansi Rural Bank Ltd, Fomena, Ashanti. The study collected data from Adansi Rural Bank Ltd staff from the period 2012 to 2016. The target population was the bank financial bankers, branch bankers and credit/loan officers in Fomena, Ashanti. The study was based mainly on both primary and secondary data which was collected from questionnaires sent to the bank managers and from the annual reports of bank and it was presented using tables and charts. The study findings concluded that the credit risk had an inverse effect on performance in Adansi Rural Bank Ltd, Fomena, Ashanti. It was recommended that rural banks should put consideration on non-performing loans which increases credit risks thus decreasing the bank's performance, they should have effective techniques of measuring and mitigating credit risk such as the use of ratios like non-performing loans ratios, liquidity and operational cost efficiency ratios, they should have effective and efficient strategies to manage credit risks which might increase the performance in rural banks.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Rural and community banks occupy a distinctive and important position within Ghana's financial system, extending credit and banking services to rural populations and small businesses that would otherwise have limited access to formal financial institutions. Because credit granting constitutes one of the primary income-generating activities of these banks, the effectiveness with which credit risk is identified, assessed, and managed has a direct bearing on their financial performance, survival, and continued ability to serve their rural client base.

Nigerian and Ghanaian research on this relationship, spanning more than a decade, offers a broadly consistent, if occasionally nuanced, picture. Foundational research examining credit risk management and profitability among rural banks in the Brong Ahafo Region of Ghana, using panel data from ten rural banks over a five-year period, found a significant positive relationship between non-performing loans and rural bank profitability, an initially counterintuitive finding the researchers interpreted as evidence that, despite higher loan losses, banks were shifting the cost of default onto other borrowers through higher interest margins, ultimately concluding that rural banks in the region lacked sound and effective credit risk management practices (Afriyie & Akotey, 2013). More recent research examining a wider sample of Ghana's rural and community banks over the 2014 to 2018 period found a clearer and more direct negative relationship between credit risk indicators and financial performance, documenting a steady increase in non-performing loans over the study period and concluding that rural and community banks' financial performance was being measurably compromised by rising credit risk, with the recommendation that management work more closely with credit reference bureaus to improve borrower screening (Dunyoh, Ankamah, & Kosipa, 2022).

Most directly relevant to the present study, research examining the credit risk management practices of Adansi Rural Bank Limited specifically, the same institution examined in this study, found that the bank had implemented a comparatively rigorous credit risk management policy, incorporating loan appraisal procedures, the use of collateral, and verification of borrowers' credit history, and further found that rural banks implementing such rigorous credit risk management policies faced fewer challenges in managing credit risk compared to banks with poorly implemented policies (Ayertey Odonkor, 2018). This institution-specific evidence, describing Adansi Rural Bank's credit risk management practices as relatively rigorous, provides an important point of comparison for the present study's own examination of the effect of these practices on the bank's actual financial performance over a defined period. Taken together, this literature confirms that credit risk management is consistently linked to rural bank financial performance in Ghana, though the direction and strength of this relationship, and the adequacy of individual banks' credit risk practices, continue to vary across institutions and study periods, providing the empirical foundation for the present study's evaluation of credit management and its effect on the performance of Adansi Rural Bank Ltd specifically over the 2012 to 2016 period.

1.2 Statement of the Problem

While existing Ghanaian research consistently links credit risk to rural bank financial performance, the specific direction and severity of this relationship has varied across studies, from an inverse relationship attributed to weak credit risk management practices in some regions (Afriyie & Akotey, 2013) to a more direct negative relationship documented in more recent, broader sector data (Dunyoh, Ankamah, & Kosipa, 2022). Institution-specific research on Adansi Rural Bank Limited itself has previously examined the bank's credit risk management practices and policies in isolation, describing them as comparatively rigorous (Ayertey Odonkor, 2018), but without directly evaluating how these practices actually translated into measurable financial performance outcomes over a defined multi-year period. This leaves an important gap: does Adansi Rural Bank Ltd's documented credit risk management approach actually correspond to strong financial performance, or does the bank, like others in the sector, continue to experience an inverse relationship between credit risk and performance despite its stated policies. It is this gap that the present study seeks to address.

1.3 Specific Objectives

The following strategically designed objectives guided the study:

i. To find out the effectiveness of bank bankers in managing and identifying credit risk. ii. To establish whether the strategies of managing credit risk have an effect on the financial performance. iii. To analyse how the management challenges of credit management affect the financial performance. iv. To find out the perception of bank bankers towards controlling and managing credit risk.

1.4 Research Questions

1. How effective are bank bankers in managing and identifying credit risk at Adansi Rural Bank Ltd?
2. Do the strategies used to manage credit risk have an effect on the financial performance of Adansi Rural Bank Ltd?
3. How do the management challenges of credit management affect the financial performance of Adansi Rural Bank Ltd?
4. What is the perception of bank bankers towards controlling and managing credit risk at Adansi Rural Bank Ltd?

1.5 Research Hypotheses

Ho1: Credit risk management strategies have no significant effect on the financial performance of Adansi Rural Bank Ltd.

Ho2: There is no significant relationship between non-performing loans and the financial performance of Adansi Rural Bank Ltd.

1.6 Significance of the Study

This study will benefit the management of Adansi Rural Bank Ltd by providing evidence-based insight into the effect of its credit management practices on financial performance. It will benefit the Association of Rural Banks and the Bank of Ghana, by contributing institution-level evidence to inform broader regulatory oversight of rural bank credit risk. It will benefit branch managers and credit officers, by clarifying the practical link between credit risk management strategies and performance outcomes. Finally, the study will serve as a reference for future researchers examining credit management and rural bank performance in Ghana.

1.7 Scope of the Study

This study is limited to evaluating credit management and its effect on the financial performance of Adansi Rural Bank Ltd, Fomena, Ashanti, based on data covering the period from 2012 to 2016.

1.8 Limitations of the Study

The study's findings are based on a single rural bank and therefore may not be fully representative of rural banks across Ghana. The reliance on staff-administered questionnaires and annual reports limited the study to information available through these specific sources. Time and resource constraints also limited the scope of data collection achievable within the study period.

1.9 Definition of Terms

Credit Management: The process by which a financial institution assesses, monitors, and controls the risk associated with extending credit to borrowers.

Credit Risk: The risk that a borrower will fail to meet their obligations in accordance with agreed loan terms.

Non-Performing Loans: Loans on which the borrower has failed to make scheduled payments for a specified period, typically 90 days or more.

Financial Performance: The measure of how well a financial institution utilizes its assets to generate revenue, commonly assessed through indicators such as Return on Assets (ROA) and Return on Equity (ROE).

Rural Bank: A community-based financial institution licensed to provide banking services primarily to rural populations and small businesses.

REFERENCES

Afriyie, H. O., & Akotey, J. O. (2013). Credit risk management and profitability of rural banks in the Brong Ahafo region of Ghana. European Journal of Business and Management, 5(24), 24–34.

Ayertey Odonkor, A. (2018). An assessment of credit risk management practices of Adansi Rural Bank Limited. International Journal of Economics and Finance, 10(11), 110.

Dunyoh, M., Ankamah, E. T., & Kosipa, S. J. K. (2022). The impact of credit risk on financial performance: Evidence from rural and community banks in Ghana. Hybrid Journal of Business and Finance, 3(1).