Determinants of Financial Failure in Ghana: Probit Analysis of UniBank Loan Defaults

Determinants of Financial Failure in Ghana: Probit Analysis of UniBank Loan Defaults

Richard Amponsah (UNIBank Ltd., Accra, Ghana) and Gordon Kanyoke (UNIBank Ltd., Accra, Ghana)
Copyright: © 2014 |Pages: 19
DOI: 10.4018/ijrcm.2014010105


Most countries in the world were negatively impacted by the USA financial crisis of 2008. In 2010-2012 people have seen economic failures of Greece and Iceland impact the European Union and other countries. Interestingly, the factors which caused the financial industry failures in these developed nations were not identical; nonetheless, the results were similar: severe economic recession. It is important to better understand the financial predictors and best-practices for developed and emerging nations in other countries, particularly outside USA and the European Union - namely Africa. Businesses in Ghana (and the continent of Africa) make a significant economic contribution to the global Gross Domestic Product (GDP), which is important to study because their financial activities impact many countries, since our global economic systems have become interconnected. This study examined a large bank in Ghana (a country located on the north-west coast of Africa, to empirically identify problems and to propose solutions to improve financial policies associated with Small-to-Medium-Sized-Enterprise (SME) industry - who are the key contributors to national GDP. A statistically significant probit logistic model was developed using a mixed-method approach which also included a qualitative SWOT analysis. The results indicated that the critical socio-economic success factors of financial success versus failure for SME businesses were: age of owners, company size, total income, and quality of hired labour. The secondary factors were institutionally-related: organisational structure, credit policies, inadequate technology platform management, ineffective monitoring of SMEs, and weak economic recovery strategies. Recommendations were made to improve national economic policies for the banking industry in Ghana, based on this model.
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Ghana Banking sector has witnessed a phenomenal growth and restructuring. Ghana’s financial sector according to the Bank of Ghana (BoG), 2011, is well capitalised, very liquid, profitable and recording strong asset growth. Total assets of the banking industry grew by 25.2% to GH¢17.9 billion (US$ 9.0 billion) (33.5 per cent of GDP) at the end of February 2011 on top of the 29.6% growth (31.9 per cent of GDP) achieved during the corresponding period of 2010 (MPC, 2011).

The banking sector has emerged from severe financial and reputational damage resulting from economic recession and government debt in the 1980s and 90s, when Ghanaian banks and other financial institutions stopped lending to the private sector. The banking sector in Ghana has seen major capital injection partly because of the political stability, attainment of micro and macroeconomic stability and the structural policy changes of successive governments in Ghana. The Central bank has promoted the enforcement of statutory requirements, more stringent supervision and increasing capital requirements. The Bank of Ghana has licensed twenty eight (28) banks to operate in the country (BoG, 2011). In addition, the sector also comprises of 44 non-bank financial institutions, including several rural banks established to mobilise rural savings. The ARB Apex Bank is the umbrella bank for the Rural Banks and supervises about 160 rural Banks in Ghana.

The uniBank Ghana is the 18th Bank on the Ghanaian Banking industry. It started operations with one branch and 35 core staff on 31st January, 2001 as a universal, wholly- owned Ghanaian Bank. It has a mission to provide the best value for its customers, create an excellent working environment for employee development and growth, enhance share holder value and be socially responsible to the communities in which it operates. In line with this, the bank core values are; creating a Vibrant, Flexible, Team based and a Caring Bank in serving SMEs which are its core target group.

Within ten years of its existence, the Bank has developed a superior wide range of products and services to satisfy the Ghanaian financial market. Notable among these products is the Bank assurance, Quick deposit services and the most electronic banking products (uniBank Annual reports, 2010).

In addition, uniBank has won twenty (20) awards from Corporate Initiative Ghana (CIG). Recently in 2009, the Bank was adjudged the 37th most prestigious company in the Ghana Club 100, organized by the Ghana Investment Promotion Centre (GIPC).

Despite these achievements of uniBank within the ten years, the Bank like any bank in Ghana still has high default rate which militate against efficient financial intermediary in the country. The determinants of this default rate are yet to be identified for uniBank SMEs. Ten years in the life of an indigenous financial institution calls for a research to assess the determinants of the default rate and the extent to which they affect the smooth running of the institution.

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