Determinants of Loan Default Rates in Project Financing in Banks in Ghana from the Perceptive of Credit Experts Using Econometric Model Selection in the Financial Sector

Abstract

This study identifies the determinants of loan default for project financing in Development Banks in Ghana from the credit experts  perspective. In order to fulfill the stated objectives an explanatory research design with quantitative data approach was used. The  collected data was taken from experienced credit officials in banks directly involved in project financing from beginning to end. In order  to obtain more insight, the open and close ended questions were used. The variables used in the study are policy induced attributes,  source of equity contribution, credit evaluation criteria of banks during project appraisal and specific commodity nature attributes were  assessed. In the study, probit regression model was used to identify variables which determine project loan default rates in banks. Based  on the responds collected from 122 purposively selected senior employees of banks in Ghana, and run by the probit regression and  correlation analysis, I assessed the relationship between loan default rates, independent and aggregate variables. The study established  that policy induced attributes and credit evaluation criteria during project appraisal stages have significant impact on loan default rates in  project financing which is consistent with the Researcher’s expectation. Whilst source of equity contribution and specific commodity  natures attributes is found to have no significant contribution to loan default rates. The findings further reveals that credit evaluation  criteria such as banks’ credit project appraisal and evaluation parameters do not impact significantly to successful project realization. The research data do not reflect realistic facts, project appraisal of financial projections are exaggerated and unrealistic, and finally there is no  prudent lending practice in banks, were statically significant determinant of loan default rates of banks financed projects. Thus, banks  policy to reduce the rate of non-performing loans percentage to single digit of less than 5% is highly unachievable. Banks should  critically appraise feasibility of projects before financing and also strong follow-up is required after financing, credit evaluation criteria  unit of the bank (i.e. research directorate of the bank) is better outsourced to project experts and detail parameters genuinely set by  independent professional researchers.