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1 Chi, Marcus (2007) Credit Risk Management in Banks of a Developing Economy: The Case of Cameroon. [Dissertation (University of Nottingham only)] (Unpublished) Access from the University of Nottingham repository: Copyright and reuse: The Nottingham eprints service makes this work by students of the University of Nottingham available to university members under the following conditions. This article is made available under the University of Nottingham End User licence and may be reused according to the conditions of the licence. For more details see: For more information, please contact eprints@nottingham.ac.uk

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27 2$ + $ ' ) *, "' 2 " $ # ' >)C &&? B D >,? ' BB> B? '! B >+ C&&?,C B F ' ' ' Establishing an appropriate credit risk environment Operating under a sound credit granting process Maintaining an appropriate credit administration, measurement and monitoring process Ensuring adequate controls over credit risk Emphasising the importance of supervision BC ' DB D ' B B'B,' BC C >BC%$$"?/ Marcus Achu Junior Chi Page 26 of 109

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32 B' >4C&&&?CB D 'B >G ( C&&;?BD 'B > C&&=? BB!! 'C '! '!! 'L D ' D B D ' D B 0,0$ A@ BC D ' D 5 BD ' DB!! D >1 G5C%$$$? DB B!!!!! B C 'C ' B C '! B B '>G( C&&;?B D '!!!! B '((! B A Marcus Achu Junior Chi Page 31 of 109

33 $ ' ) * 2 2,. ", " 0 - D ' C!! '' D '! Character Capacity Capital Conditions 0,0$0$ A + D ' ''! B B B ' K'! > B '? > B K?! ' D B K B! ' Of what reputation is the applicant/borrower? How consistent/regular is the cash flow of the borrower? What about employment and Job Security? What other engagements is the borrower currently having? Etc. How much wealth does the borrower have? Collateral Is the request backed up by adequate collateral security? How liquid is this collateral? What about economic, financial and market conditions? Marcus Achu Junior Chi Page 32 of 109

34 $ 2' A +? # Marcus Achu Junior Chi Page 33 of 109, "+ "? "0 * " + * " Screening Isolate bad credit files from good ones so that loans are profitable Collect reliable information, e.g. salary, bank accounts, outstanding loans, etc. Use personal judgement, e.g. talking to references supplied, etc. Evaluate likely future success of the business, e.g. future plans, purpose of the loan, industry analysis, visit to company, etc. Assess the value of collateral

35 ? #, ", ; ", * " " 0 " A B ".!C!!D ' C B 'D ' D B B! Monitoring and Use of Restrictive Covenants Write restrictive covenants in loan contracts. Note that this is to minimize the effect of moral hazard Follow up regularly to see if borrowers are complying with restrictive covenants Enforce restrictive covenants if borrowers are not complying. Build a long-term sustainable customer relationship 0,0 ' B B!> C%$$=LBC%$$"L C%$$$LGC&&? Marcus Achu Junior Chi Page 34 of 109

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45 '! BB ' 0/ +# / ' B 0 C ' BD! >1C&&;? 'B B ' ' C D >C%$$=L G2C%$$=L8 C%$$=L# C&&LG5 C&&6? ( )BC.C-C:CB >?' ' B! >!C &&=? '! # /C(C2KCK>3C%$$? ( ) >%$$;? B ' ' >B? %7 $ 'B 'B!A 2)3 % Weak Judiciary Bank Runs Fraud 1 Lending to SOEs Connected Lending Political Interference Frequency (in 29 cases) Deficient Bank Management Poor Supervision/Regulation Marcus Achu Junior Chi Page 44 of 109

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59 '0)0)0 494: (( (! '%7&B B!H '! '%C6&&> C '?'7& 5 +C C 0 C C - ) (( %$";! O' (/ B ( B C! C (( DB! B (/&&6((! OB 0 K B (B' '# C (( ' B '! 8! C!! '0* B B! D B ' D ';! B Marcus Achu Junior Chi Page 58 of 109

60 #,414 4 BH4 -( (( 0( (( 14 B0 >0?! ;&N B0! 0 '=&N # 0!! 0 77N B! '$&N ;''B -(C((C0( (( C -(C (( 0( 0 >0?! 0 ;&NC=&N 77N ', >B?C 6&N -(C&N((67N0(! 2,1+ =?I 80% 70% 60% 50% 40% 30% Loans to SMEs Others 20% 10% 0% UBC CBC EBC ' ' -(C (( 0( B B 0 ' A Marcus Achu Junior Chi Page 59 of 109

61 ? 0 '"&N ( B B B >0. + C&&7?? 0''B B B ' D >C &&=? 0( C '';&& 0B B N>0(+ C &&7?? 0 ' *' C B!!B ' >0C&&7? '? 0! ' 'B '' >C &&? '? /! 0(! ' B! 0'! D! >KC&&7? - -(C((0(C(( B / B ; '/ ( '$&N ('BC > 0? 'B >%&N? '! Marcus Achu Junior Chi Page 60 of 109

62 2"4C % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SCBC Loans to Multinational Companies 'B!((F / C (( >B B 'B >0 C&&6? Others? (! 'B >C&&? '0, 4 (! B ( / B 5 F ' B B B! L! C ' 'BC C!B>!?! >? B ' B C!!! B!! ''B BB ( B!BB (! Marcus Achu Junior Chi Page 61 of 109

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69 2/A%&+ Defining the Research Question Creating an Interview Guide Recruiting Participants Carrying out the interview. : * "0 2 " )0)0$0$ A D ' '! D > F B >(! G (!C %$$"?/ C D! '!!B )0)0$0 %&> D ' '! '!>'C&&6?*' O '! %;! D C ' '!! DB!! %; O '! '!! B!!! C ' C!O!B B ' ' - D! C! D C '!! D +' B! ' BC@C ' D! ' Marcus Achu Junior Chi Page 68 of 109

70 , B '!!B ' '!>? / C '!! C C B!! +27 0I" )0)0$0' + 3' '! >( G BC &&6?/ C '! ' %! B '' 'C( B C B''/ C! B '! ' %&&N F ' '! +2J )0)0$0) %& D ' '!B '! >G8! C%$"? '! B! C '!! ' '+2 F " Marcus Achu Junior Chi Page 69 of 109

71 /! ' C! B / C! ' C! '! 'B '!BB! '. B D ' '! ' '!!!B B ' ' '>(GBC&&6? )0)0$0* %& D ' '! A BB! D >3 G C &&? ' '@ ' >3!BC &&&? / C B ' '!C!!! D B '! >' B '!?! B!'B! ' B! B ' '!! ' B )0)0$0, 1 %& ' C D ' '! B DB A Marcus Achu Junior Chi Page 70 of 109

72 / '! B >+G+C&&6?A' B! ' 0 B! '' ' /! 'B B '! ' E F B! ' /@ C '! '! '!! '!! B I! ' *' ' B BC!! / C '!'! '!F E F ' K - " )0* 4 ( B B L>?B! >?B! DB Marcus Achu Junior Chi Page 71 of 109

73 > '?C Marcus Achu Junior Chi Page 72 of 109

74 ( )#!* Marcus Achu Junior Chi Page 73 of 109

75 *0$ +& ( B ( '!B B ' /! BBB ' BB(,9 B B '!!! ' D B B D B L? 5( +? < 'D( + C? < 'D( + 0 B! B!! B B. DB' D ' *0 % + #4 BK B '! B Marcus Achu Junior Chi Page 74 of 109

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77 #" % = 4 # $?,5B'!( + B9? B / B9?.!( D B B K (?(/ 9 K?0 ( 9 K K?(#'9 K K K K '?' 9 B B '??B ' 9 B B K K?3'B ' 9 K K K K?5/ + + B 9 B B B K '?- D9 B B B '?B ' 9 K K K K '?! 9 K K K C ) ( 9 B B B B?( '! 9 B B K K? B B B K K 9 * 4?0 'B BCC 9 B B K K?/ 0' CC 9 B B B B?3' # H@ 9 B B B B,D 2 "+ * : " Marcus Achu Junior Chi Page 76 of 109

78 #/% + #4 BANKS Rate of Implementation of Credit risk Management Principles UBC 42% CBC 42% EBC 74% SCBC 79%,! 6 : F78 G% %" F! '9%+CA DF8 1 6! D!8 ". 7 " 2. + #4 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 UBC CBC ECOBANK STANDARD CHARTERED, 1% '9%+CA 648 " C B! ' Marcus Achu Junior Chi Page 77 of 109

79 *0 0$ % +$ D ' ' L i) >,? ' B B '! B B >)C&&?L ii) '>'? B B>BC%$$"?L iii).! ' D > C %$$$? ' C, B B '! B ' C B DB ' B B!'! B! ' D 'B!B! ' D B / C!B B ' '! B B ' B O >0 C&&6? C' B! ' D B Marcus Achu Junior Chi Page 78 of 109

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81 !! K ' 0(,.) 0C (!! *0 0' +' 5 C > C%$$"?!A 'B ' '! 3!'C ' 'B > ' B? ' / ' B B D BC 'L -(C (( 0(,.), C B ( BB *0 0) % +) 56D D ' B '! 'B B >)C&&L C%$$$L( C%$$"? Marcus Achu Junior Chi Page 80 of 109

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84 Banks Rate of Employment of Techniques 1 UBC 67% 2 CBC 67% 3 EBC 67% 4 SCBC 100%,! "" 1 * * * * G% % '9%+CA 7 J LD8 1J 448 ". J ", 2" 100% 90% 80% 70% UBC 60% CBC 50% ECOBANK 40% Standard Chartered 30% 20% 10% 0% 1. J2 * "0 1 %" *'!'C B!! D Marcus Achu Junior Chi Page 83 of 109

85 *0'0$ D 'B C! L? >''?C? >'' ''? 0 B!A *0'0$0$ 4! *'! B ' ' ' B C ' '' >( C&&;L &&=? ' C '!C B '!D B!C D C CC / ' C B '!'! DB / C BF ' B DB '!!B!! >G3!C&&7? Marcus Achu Junior Chi Page 84 of 109

86 . ' 0C B 0!B B BC 0 '!B BC C B! ' ' /@ C 'O > B&&;?*' 0 B BC '' 0! >BC &&;?3!'C B 0C BB C DB / C B '! / C B B' C '!BC KC BC' ' ' ' >?! >?/! B 0 DB ' ' D %%! B '' B Marcus Achu Junior Chi Page 85 of 109

87 2$$4+ #4 4. G% % '9%+CA 1 % " UBC CBC ECOBANK Standard Chartered *0'0$0 Collection of reliable information - E.g. Salaries, bank accounts, insurance, etc for personal loans - Income statements, assets and liabilities and an evaluation of future business prospects, for business loans - Use of personal judgements in the case of personal loans - Carrying out due diligence in the case of business loans - Assessing the value of collaterals $' '' B /((C-(0(,.)C + +' B B!!BB! B B DB!!. + '! B' / ( C ( ( >((?! B '! B! BFB Marcus Achu Junior Chi Page 86 of 109

88 B! %! B B A 2$ + #4. 7 " UBC CBC ECOBANK Standard Chartered *0'0 A@ Writing provisions (restrictive covenants) in loan contracts that restrict borrowers from engaging in risky activities after loan is granted - Use of Account Relationship Managers to monitor activities of borrowers once a loan is granted in the case of UBC, CBC and ECOBANK - Credit Control Department has responsibility of monitoring once the loan is granted in the case of Standard Chartered Bank $ BC B ( ( B B BD ' D! ( B D 'D ' *' >? >? B DB C!! ' Marcus Achu Junior Chi Page 87 of 109

89 *0) % (1+ 4! ' B!! C B D 'D ' D M ' ' #$$ % (1+ % (?!!": UBC 42% 67% Greater than 20% CBC 42% 67% Greater than 20% EBC 74% 67% Less than 20% SCBC 79% 100% Less than 15 %, * < " I < " C!! D@ '!B DDB ( (! D! ' ' '! D Marcus Achu Junior Chi Page 88 of 109

90 8 C / B *0* %1 + B B 0! F C B B C B C D /!!B 'B(,( K (,(D /! C! BB BC!! B B! D B (,( C ' B B>?!! ' 'B >? *0, 4 ( 7 BK ( (!L >? 5( +! %$B C>? D '! B C >? D '! D B B!! Marcus Achu Junior Chi Page 89 of 109

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97 >?D D! >D B?,0* 2 /B BC BC B!! D B!! B + B ' B ' BC ' '! >?C B B C! BB' ' BC B ' B ' D B *' B ' ' D ' C!! Marcus Achu Junior Chi Page 96 of 109

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99 13G.>%$"7??? 5 3 >%$$=? 1*>. 1 & ' 8 5 0>&&7?$ $(C2 + BT( + ( U&&;G )G3!5*>&&7?, %.( ',2 0 C5 I / >/?T5( + U 1B%$$$ ( '%$$$ (G#!5T + (U%01M$O &&! T + A 8 3 # 9U 7 A&& G8! 5>%$"?& (1 $& 18BG (T/ (U &&7 (*G)AT /'BA# C5B 9U+= % & ' "!!L" ( 1 >%$$"? $", 2 I. 8B ( >&&;?A0 %-5 3/ ( ( G B * >&&6? ' I M 9 $#5 ( T/' ( +A 0 - # U+' &&6 ( G5+T ''( A0' 0 U0.= O1&&7 (G5 3>&&&?+$+8B (B>&&&?$% 0 *!O3 Marcus Achu Junior Chi Page 98 of 109

100 (+>&&?$= (! 1 G(! 18 >%$$"? M 0* $&( +., "5 ( >%$$$? T ( + 0 A B! U!!!" '5>&&?A. $= 0!0 5 1>%$$"?+ $+$9? ' +>&&?$ %+ 8B 5 &&6? 1 ( 0 -)! 5 B(>&&?0 ' 0,@-' B 5 ) G )1 >&&? $( -5 -' B5 8 T + 0*! U 1 ' "J 744 " 0(U#D B ( U% 2 %%C&&7 0 +T+'! (U, 2""C&&6 KK >&&?..0 " 0 50 # >&&&?$0' (T (U% 2%7&C&&= B5T'! ( &&;G 3>&&7? %18B 3!B 8 >&&&? & * $ &(. + C0 3 5 T 8 U, +1"56$O;7C%$$ AII!!! I I I&&;N&N&+ Marcus Achu Junior Chi Page 99 of 109

101 AII!!!I N& AII!!!!I&&=I&;I BOO V AII!!! III%WWW AII!!!O I9R%GR 3G>&&?,M$5 # 5 1 5T/ + BUG 1 5G58T. ( + A 0 BC B, ( B U. 1 $.' %$$$ 1 5 T( + U.1$A1%$$$ 1 T5 #C( / C/ U.12>?C, &&;C;;O"7 1 >&&7?+ 8B ) >&&? $(., 0' #B(>&&?( 1 + % 0 B/ # + >&&?,. & & " / 5 + T( + 5 ( U -&& B0>%$$"?$ (&+ # 55 ( * >&&=?,? 0 M $? 5 1# T8 F 5 ( 9U. $ % " G5 1>&&6?1 & (. 8 5 Marcus Achu Junior Chi Page 100 of 109

102 >&&;?A,'." 0-50 / TB / (A 'CU +* 3C C.. " (A-' B(5C%$$%C;$O%&" >&&&?$%00"+.3AT' '0U+.$ ":7447". BC/ G 8 >&&? I ' & ' 8 5.K 1 T ' 0U 0 I C%$$", ) >%$$$? 0 $ ( + "+, ) >&&? ( $ & " + + +*>&&?$+**!O35 +3G+/>&&6?M0 0 5 G#>&&?$(C+ N $ 0 8B G( >&&;? *!3/ 0 ( >&&7?M$#5 'B >&&6?, 1 5 I $"% 0 *!O3 * >&&7? M $( >%$$$?A$ % 0 + '>&&6?M$5 0.+ C&&7 ) G 2 * >%$$=? % 1 &?+"8 5 K# T (U, &&7 Marcus Achu Junior Chi Page 101 of 109

103 3U / (U1B&&=. T + B ' 0U 7446" G G4*T5 - (A U.1$1&& 2 >&&;? $' &( $ = %"-C,@-' B5 8G T+ U.9-2C && 8*G33>%$$6?C (B5 8 >%$$=?. & ",$.0 "8 5 4+)>&&&?+ 1$ 0 5 Marcus Achu Junior Chi Page 102 of 109

104 Marcus Achu Junior Chi Page 103 of 109

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ource: Caprio & Klingebiel 1996 Marcus Achu Junior Chi Page 104 of 109

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108 %6 8 B! B 9 %7 3!' BB 9 %; B'!9 %= 9. K 9 %" /!! B B B9 Marcus Achu Junior Chi Page 107 of 109

109 ++B%F'#+ %& + %&? 3 ' -(? 3(? ( B? 3, ((? 3( '? ( +? 3( 0(? ( +? ( + B? 3( ((? 3( (? ( + B I - " Marcus Achu Junior Chi Page 108 of 109

110 5)1 + %& + %& %& B M -(?3( '?3( ' %?( + B 7 ((?3, 6 7?3( ' % %?( 0(?3( %7 %?(?( + B ((?3( 7?3( (?( + B 6, ", % 1 %" K - " Marcus Achu Junior Chi Page 109 of 109