Credit Risk and Profitability of Some Selected Credit Unions in Ghana

Abstract

The paper aims to examine the impact of credit risk on the profitability of credit unions in Ghana. The specific objectives are: to examine the methods of measuring credit risk, examine the factors that influence credit standards of credit union, examine the relationship between credit risk and profitability and to assess the credit risk management strategies adopted by credit unions in Ghana. The research design adopted by the study was a descriptive research design. A sample size of 60 out of the population of 400 credit unions in Ghana was used. A self-administered questionnaire was used as the instrument for the collection of data. The study found out that the use of ratio of non-performing loans to total loans, levels of bad debt written-off and increase in provision for loan losses are methods common in measuring credit risks to all credit unions. It was revealed that there is a negative relationship between credit risk and profitability. The findings revealed that cost of risk associated with the loan, business cycle, availability of interim financing mechanism are some of the conditions that influence the credit standards of credit unions in Ghana. The study found that availability of lending policies, different credit terms for different customers and holding guarantors responsible for the loss and taking over collateral are management strategies towards risk management. It is also recommended that credit unions must develop a framework that consistently measures credit risk. Management of credit unions must provide regulations on credit risk, monitoring mechanisms and credit granting processes to loan/credit officers and also government through the Bank of Ghana can develop and enforce some standard credit guidelines that will influence the credit policies of credit unions.