THE CAUSES AND EFFECTS OF LOAN DEFAULT ON THE PROFITABILITY OF RURAL BANKS: A CASE STUDY OF AMENFIMAN RURAL BANK

Abstract

This research was embarked upon to identify the causes and effects of loan defaults on the profitability of rural banks (a case study of Amenfiman Rural Bank). Specifically, the study sought to analyze the factors accounting for loan default in the rural banking industry, to determine ways of reducing loan defaults in financial institutions and to examine the effect of bad loans on the lending potential and profitability of rural banks. Questionnaires were administered to the employees of Amenfiman Rural Bank. Thirty (30) respondents were sampled out for the study. A combination of convenience sampling and the judgment sampling was used for the study. Findings from the research revealed that bad loans have been identified as one of the major factors affecting the profitability and survival of rural and community banks in Ghana. Most rural banks are unable to remain competitive in the turbulent financial sector/industry due to high default rate. Based on findings of this study, it is concluded that bad loans have a major negative effect on banks’ profitability, lending potential and financial performance. The study recommended that, management should organize regular training programmes for credit staff in areas like credit management, risk management and financial analysis. This would sharpen the knowledge and skills of credit officers so as to improve on the quality of credit appraisal, prevent delayed loan approvals, enable credit officers appreciate the need to comply with credit policy and further enhance monitoring of credit.