The Impact of Credit Information Sharing on The Loan Portfolio Quality of Savings And Loan Companies in Ghana

ABSTRACT According to the 2018 Banking Sector Report, the financial sector crises were attributed to two main causes which are bad corporate governance practices on the path of the board and senior management persons, and high non-performing loans (NPLs) due to equally high default rate. Despite the reforms by the central bank to sanitise the banking sector, Non-Performing Loans (NPLs) hit a new record as it shot up from GH¢7.1bn as at end of April 2017 to GH¢8.63bn in April 2018. The Credit Reporting System however was established in Ghana to mitigate or minimise the risk of bad loans by dealing with moral hazard and adverse selection through the provision of the credit history on prospective clients of financial institutions. The study therefore seeks to analyse if the credit information or score furnished to the Banks and SDIs by the credit referencing bureaus are having any impact on credit appraisal and delivery, nonperforming loans, hence their loan portfolio quality. The study employed the qualitative research approach in its analyses. Data collection was done using questionnaire and also interviewing key personnel from the S&Ls. A total of 50 questionnaires were issues to staff from the credit and compliance departments. Senior management persons from the credit reference bureaus were interviewed. The research findings showed that credit information sharing often results in a number of benefits in terms of loan portfolio quality. Some of the benefits include ascertaining the borrower’s character: the borrower’s ability to repay, which translates into lower cost of credit; encouraging timely payment; improving access to credit; improving loan appraisal processes; reducing adverse selection and moral hazard; all of which result in an improvement in the loan portfolio quality. The study further suggested that Savings and Loans Companies and the credit reference bureaus have some challenges affecting the quality of data that are submitted. Furthermore, the credit reference bureaus also mentioned that some of the financial institutions are not fully compliant to the Credit Reporting Act, 2007 (Act 726). The study recommend that Bank of Ghana should tighten the supervision, by making sure all companies comply with the Act, 2007 (Act 726). The study also recommends that the regulator engages the various stakeholders i.e. the Bank and Non-Bank Financial Institutions to iron out the various issues to enhance credit reporting.