Effect of the Use of Credit Referencing Bureaux on Loan Quality of Selected Banks in Ghana

Abstract

The study makes use of the Ghanaian banking industry's implementation of Credit Referencing Bureaus (CRBs) in 2010 as a natural experiment to assess the effect of CRBs on impairment loans (loan quality) and write-off loans by using a dataset from some selected banks in Ghana. The specific objectives were to investigate how the use of the CRB affects the quality of loans in Ghana‘s banking sector. The target population was 15 banks from 2012 to 2019. The Fixed Random and Effect Estimation was used in the study to determine whether CRBs adversely correlated with impairment and write-off loans in Ghana. The results suggest that banks that employ CRB services in their operations, particularly on loans administration can reduce their impairment loans and minimize information asymmetry, which improves banks‘ ability to forecast borrowers' behavior and put pressure on borrowers to make loans payments in order to avoid future loans denials by banks. The study also discovered that key predictors of loans quality are banks‘ capital, size, liquidity, profit before tax, Gross Domestic Product (GDP) growth rate, and inflation rate. The study recommends that banks in Ghana should frequently use CRB services and products since doing so will improve their loans quality and lower their exposure to impairment and write-off loans. Again, to strengthen the operations of both banks and CRBs, it is recommended that the data source for CRBs be expanded with an increased publicity regarding CRBs existence in Ghana. Even though CRBs have a significant effect on impairment and write- off loans, they only cover about 10% of Ghana‘s adult population. Therefore, expanding data sources for CRBs can enhance the accuracy, consistency, and reliability of client evaluations, improving loan quality and reducing impairments and write-offs.