FOREWORD
Globalization, to be effective, requires the actual involvement
of all countries of the world.
Unfortunately, the level of development of Africa is
questionable about its contribution to the success of globalization. Many
projects are initiated by international organizations to help the continent to
be competitive and play a significant role in the world economy.
The MBA in Banking and Finance is part of those projects, which
aim is to reduce the gap between developed and emerging countries.
The MBA in Banking and Finance is a post-graduate
bilingual program in banking and finance. It was established in
collaboration with the BCEAO, the BEAC, the Bank of France,
the French Development Agency, the European Union, the World
Bank, the French Ministry
of Foreign Affairs and the African Capacity Building
Foundation.
Africa like the rest of the world needs to be competitive and
must comply with international standards. Banking and Finance are areas where
techniques and methods grow at a very high speed. It was then important to
provide to Africans high skills in bank and risk management, value creation,
corporate finance, financial markets techniques and others.
Since financial markets and techniques are not yet well
developed in the continent, the most important risk banks are exposed to is
credit risk, that is the default of a borrower to meet his obligations. This
risk is worsen by the growing number of banks and the competition deriving
from, the need for financing to develop the countries, the
ineffectiveness of banking supervision among others.
For these reasons, we worked on the topic: «Problem
Loans Management Practices: Ecobank
Ghana Limited as a case study».
Essential data to engage the research were collected during our
three-month internship period
at the Bank. This work is part of the requirements for the Award
of the MBA in Banking and
Finance.
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MBA in Banking and Finance
EXECUTIVE SUMMARY
This study aimed to improve problem loans management practices at
Ecobank Ghana Limited
in order to reduce loan losses.
The reasons that justify the choice of this topic were as
follows:
- Most of world financial crises were due to large
amount of doubtful loans in banks'
portfolio especially in Japan and China among others.
- West Africa is exposed to the problem because of the
growing number of financial institutions (banks, stock exchanges,
microfinance institutions);
- The problem is not new for Ghana (crisis of 1970s) and its
current non-performing loans ratio is higher than 15%.
To achieve these objectives, the following issues were dealt
with:
1. Gathering of information about the guidelines of some
financial institutions (IMF, World Bank, BCEAO, and of Ghana) and setting
up of standards to provide the bank with maximum protection against
problem loans and better dealing with the issue.
2. Assessment of the credit risk management processes of the
Bank through a scanning of
the general credit policy and procedure manual and interviews
with the portfolio manager.
3. Sampling of some problem loans files, comparison between the
actual practices and our standards and interpretations of similarities and
dissimilarities.
The outcome of the study according to the points listed above
was:
1. Despite the lack of universally adopted common principles
the financial institutions have globally almost the same classification and
provisioning systems in dealing with problem loans management. They recommend a
four-tier classification as per the level of risk and,
to each class a provision is required.
However, the literature review showed that an effective
problem loans management demanded a sound credit risk management before,
during and after the loan was granted.
2. The Ecobank credit risk management assessment showed the
following steps:
- through a market analysis and targeting, the Bank
identified profitable and safe industries,
- a periodical follow up of the borrowers to have a dynamic
vision of the risk linked to them,
- a classification and provisioning of problem loans.
1 MBA in Banking and Finance
3. The comparison between our standards and the
Bank's actual classification system and remedial strategies showed that
ours were more severe than the Bank's one. The reasons were that:
- Due to historical client relationship the Bank tends to
be less severe with clients becoming bad.
- Asymmetric information between the Bank and us also justifies
different views in the assessment of the bad client situation.
Nevertheless, in order to improve the Bank's problem loans
management practices, namely incentives system, collateral risk, industry
risks, ownership of borrowing companies among
others.
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