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DETERMINANTS OF BUSINESS LOAN DEFAULT IN GHANA
Authors: Akwaa-Sekyi, Ellis Kofi; Bosompra, Portia
Number of views: 345
The initiation, funding, servicing and monitoring of loans by financial intermediaries
has been done without regard to some critical factors which could have averted the likelihood
of default. The study aimed at measuring the extent that owner-specific, borrower-specific, loan
and lender-specific characteristics could determine the probability of loan default. The study
used logistic regression for 224 business customers of a bank in Ghana from its nation-wide
branches. The study found that owner’s extra income (ownership characteristics), multiple
borrowing, diversion of loan purpose (borrower characteristics), loan price, loan purpose, loan
age, repayment plan (loan characteristics) and underfunding (lender characteristics)
significantly determined the probability of business loan default. The overall model predicted up
to 78.5% of variations in the likelihood of default. The hierarchy of strong determinants given
by their odd ratios were loan purpose (47.9 times), underfunding (19.2 times), diversion of loan
purpose (11.7 times) multiple borrowing (9.4 times) and owner’s extra income (8.2 times). The
study can conclude that financial intermediaries should be wary of the credit granting process
taking cognisance of ownership, borrower, loan and lender characteristics especially the
significant predictors. Combining quantitative and qualitative variables as determinants of
default could be considered in future