Effectiveness of Credit Risks Management Policies Used by Ghanaian Commercial Banks in Agricultural Financing

Lending to the agriculture sector by commercial banks in Ghana is characterized by high credit risk. As a result, the book chapter investigates the effectiveness of the implementation of credit risk management policies (CRMPs) used by Ghanaian commercial banks to mitigate credit risk exposure in agriculture financing. A qualitative research approach was used to evaluate the implementation of credit risks management policies by commercial banks in the agricultural sector. First, a document analysis method was used to evaluate printed and electronic policy documents from the Banking Sector Supervision Department of the Central Bank of Ghana (BoG) on key areas involving policies and regulations on credit agreements, credit guarantee, training, and professional competence, reporting, examination, and investigation requirements, knowing your customers, minimum capital requirement, and risk monitoring review requirements. The document analysis was supplemented by semi-structured interviews with ten (10) Credit managers from major Ghanaian commercial banks and nine (9) farmers. Interview results indicate poor bookkeeping, lack of insurance, lack of collateral, poor yield, underdeveloped export market, and failure of an agricultural borrower to register with credit referencing bureaus institutions, among major challenges encountered by commercial banks in agriculture financing. Additionally, we found that most of the Ghanaian commercial banks lack specialized units comprising of technocrats with an agricultural background. Similarly, the review of policy documents indicated that there is no specific or specialized policy on agriculture finance established by the Bank of Ghana for commercial banks. Considering that agriculture plays a significant role in the Ghanaian economy and still needs aggressive funding to develop, a proper credit risk management (CRM) framework needs to be developed.