Effectiveness of credit risk management practices of Ghanaian commercial banks in agricultural finance.

Abstract

Lending to the agricultural sector by commercial banks in Ghana is characterised by high credit risk even though empirical evidence suggests that commercial banks can minimize this exposure by using appropriate practices to mitigate against adverse effects. This implies that the credit risk management practices adopted by Ghanaian commercial banks may be inadequate and ineffective due to credit risk identification challenges or problems in implementing credit risk management policies. The study investigated the methods adopted by commercial banks to identify credit risk, the effectiveness of the implementation of credit risk management policies, and the strategies used by Ghanaian commercial banks to mitigate credit risk in agricultural finance. The mixed methods approach, involving the use of quamtitative method using survey questionnaire and qualitative method through interviews and policy documents, was adopted. Data were analysed using Principal Components Analysis (PCA), ANOVA and MANOVA, documents, and thematic analysis. Findings indicated that some of the methods used by commercial banks to identify credit risk in agricultural finance do not meet commercial banks’ credit risk management needs. Also, some other methods that proved effective in minimising credit risk were not frequently used by commercial banks. Also, most Ghanaian commercial banks lacked technical units and technical employees with agricultural training backgrounds to manage the credit related to agricultural finance. Further, agricultural activities lacked insurance schemes to protect against credit risk. The ANOVA and MANOVA tests showed significant differences in credit risk management practices among Ghanaian commercial banks. The study recommeneded the need for a robust credit risk management strategies to mitigate credit risk in agricultural finance. The agricultural sector should be supported with refined policy and implementation documents informed by the reality of borrowers’ inability to honour loan contracts. The findings point to the needs to increase credit guarantee schemes and create incentive-based risk-sharing systems for small and medium agriculture enterprises; and establish more robust credit referencing bureau institutions to reduce credit risk.