Factors influencing loan delinquency in Small and Medium Enterprises’ in Ghana Commercial Bank Ltd.
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Date
2011
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Abstract
The study investigated the determinants of loan defaults among SMEs in Abossey-Okai, Accra, using survey method. Structured questionnaires were administered to owners of SMEs in Abossey-Okai who accessed loans from the Ghana commercial bank from December 2005 to September 2009. The research is line with current efforts by bankers, regulators and international lending institutions to unravel the problem of persistent loan default among small business that has led to high non-performing loans in the banking sector. The findings from the study indicated that borrower screening mechanism employed by the GCB was defective and inefficient and credit need assessment conducted by the bank was flawed which increased the risk of default. Moreover, government policy intervention in the credit market tends to distort the efficiency and quality of term lending activities.
Results from the study also depicted that high officer-application ratio tends to reduce efficiency in credit assessment which increases risks of loan default. The findings of the study supported the assertion that SME loan default is the outcome of flawed financial role of banks and flawed public policy regimes.
The study therefore recommends a number of measures to deal with the problem. First, an efficient and transparent borrowers’ screening mechanism should be employed as a proactive measure to deter the entry of less creditworthy borrowers to term loan regimes. Second, loan repayment performance of the old firms should be assessed before loans are sanctioned to new firms. Finally, Loan repayment schedules should be tagged not with the hypothetical but with the real cash flow situations of the firms and be extended more than the present number of loan repayment installment.
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A Thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Commonwealth Executive Masters in Business Administration,