Abstract
Credit Unions play a pivotal role in the Microfinance Industry in Ghana. They are not only deeply rooted in financial intermediation but also provide favorable terms and conditions in financial products and services to their members compared to banks and other financial institutions. The sustainability of Credit Unions has been threatened by the incidence of loan defaults or non-performing loans. The diagnostics of the causes of loan defaults in Credit Unions become paramount toward sound credit risk management practices. The study relied on primary data. Purposive sampling technique was applied to select 244 Credit Union members. Questionnaires were used for data collection and logistic regression model was adopted. The study utilized Statistical Product and Service Solution (SPSS v. 20) and Stata (v.14) as statistical tools for data analysis. The results reveal that education, loan diversion, monitoring, marital status and income are significant factors that influence loan default. Thus, credit education should be intensified and that effective loan monitoring should be vigorously pursued. Additionally, loan appraisal systems should be robust with the application and development of credit scoring systems that will factor in key variables of loan default.
Highlights
The results reveal that education, loan diversion, monitoring, marital status and income are significant factors that influence loan default
Large transactions cost incurred by borrowers when applying for loan, monopoly power on credit markets often exercised by informal lenders, and interest rate ceiling usually imposed by the government come to the fore in accounting for the causes of loan defaults [3]
The study concludes that the significant factors which drive loan defaults are marital status, education, monthly income, diversion of funds and monitoring
Summary
The repayment of loans granted by some Credit Unions becomes delinquent and results in bad debts which impact adversely on their overall financial performance. Loan delinquencies or defaults are constant source of misery for Credit Unions due to their adverse effects on operations in terms of profitability, liquidity, lending capacity, debt-servicing capacity as well as the ability to raise extra capital. Ahmed [1] noted major factors affecting loan defaults as diversion of funds on the part of the borrowers, improper appraisal by credit officers, willful negligence and lack of willingness to repay loan. Large transactions cost incurred by borrowers when applying for loan, monopoly power on credit markets often exercised by informal lenders, and interest rate ceiling usually imposed by the government come to the fore in accounting for the causes of loan defaults [3]
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