THE EFFECT OF CREDIT REFERENCE BUREAU ON CREDIT MANAGEMENT IN MICROFINANCE INSTITUTIONS IN GHANA

RISK

Introduction Background of Study Microfinance encompasses the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients (Otero, 1999). It includes loans, savings, insurance, transfer services and other financial products and services. Their financial intermediation is supposed to help the poor uild up assets and manage their highly irregular cash flows (!ollins, et al. "##9). $hile profita ility has increased the outreach of microfinance in %hana, it has gradually een discriminating and reorienting towards wealthier clients (&a ie, et al. "##9). Two fundamental re'uirements for the profita ility of microfinance institutions (M(Is) are e)cellent loan portfolio 'uality and high efficiency of lending operations. *ortfolio 'uality is mainly created and safeguarded y the credit worthiness of the prospective orrower which is mainly determined and managed y the credit reference ureau) or agencies (+oltmann "##1). , !redit -eference ,gency or !redit .ureau (!redit -eporting ,gency in the /0,) is an organi1ation that collects and collates personal financial data on individuals, from financial institutions with which they have a relationship with. The data is aggregated and the resulting information (in the form of credit reports) is made availa le on re'uest to contri uting companies for the purposes of credit assessment and rating ($i2ipedia, "#11). 0tandard and *oor3s (04*), one of the world3s leading credit rating agencies, defines credit rating as 5a

current opinion of the creditworthiness of an o ligor with respect to a specific financial o ligation. The opinion evaluates the o ligor3s capacity and willingness to meet its financial commitments5 In other words credit report is an accumulation of information a out how you pay your ills and repays loans, how much credit you have availa le, what your monthly de ts are, and other types of information that can help a potential lender decide whether you are a good credit ris2 or a ad credit ris2 (O ringer, "##6). The report itself does not say whether you are a good or ad credit ris27 it provides lenders with the data, which allows them to ta2e the decision themselves. &enders ma2e their decisions ased on their ris28reward trade8off. +aving all the needed information helps the lenders ensure that they are ma2ing the right decision with regards to the assessment of the orrower3s creditworthiness. .asically, the credit report would reflect the reputation collateral of that customer in some sense (Miller, "##9). The logic underlying the e)istence of credit reference ureaus (+enceforth, !-.s) is to solve the pro lem of the informative asymmetry etween lenders and orrowers regarding the creditworthiness of the latter. Issuers with lower credit ratings pay higher interest rates em odying larger ris2 premiums than higher rated issuers (Millon and Tha2or, 19:6). ,gain, recent research ased on information from several countries across the glo e

(0ingapore, Ira', !hina, -omania, ;ietnam, !am odia, .ra1il, +ong <ong etc.) show that the e)istence of credit registries is associated with increased lending volume, growth of consumer lending, improved access to financing and a more sta le financial sector (&arrain et al., 199=7 -eisen and Malt1an, 199=).

ro!"#$ Stat#$#nt

The issuance of credit reference ureau licences y the .an2 of %hana to >?0 ?ata %hana and ?un and .radstreet %hana has heightened general interest in the credit rating industry in the country. Many have egun as2ing who the industry@s firms are7 what they do7 how they do it7 and what the conse'uences of their actions would have on the players and consumers within the microfinance industry in %hana. ,lready a lot of 'uestions are eing as2ed a out how credit ris2 is managed y Microfinance companies. +owever, the intriguing 'uestion on the minds of many financial industry players is whether or not the !-.s would have any effect on lending decisions in the Microfinance industry in %hana. Aven though many conducted researches outside the Burisdiction of ,frica suggest that the e)istence of credit reference ureau (!-.) leads to a igger credit mar2et, lower default rates which leads to lower interest rates, improved profita ility and increased competitiveness within the industry, not a single empirical study has systematically e)amined the effect of !redit -eference .ureaus on microfinance industry in %hana. This research wor2 will therefore attempt to fill this noticea le 2nowledge gap in literature.

R#%#arc& 'u#%tion% Avolving from the pro lem statement discussed a ove, the study aims at providing answers to the following 'uestionsC 1. $hat are the types of regulatory oversight to which !-.s are su Bected toD +ow effective is this oversightD ". ?o Microfinance !ompanies access !-.s for information of their prospective orrowersD ,nd are the lending decisions of the companies influenced information providedD y !-.s

9. ?o the 'uality of the information disclosed sufficient for ma2ing lending decisionsD

y !-. to Microfinance companies

E. +ow do the !-.s protect against the misuse and unauthori1ed disclosure of non8 pu lic information. 6. ?o !-.s play any role on consumer3s accessi ility of credit in the microfinance industriesD

R#%#arc& O!(#cti)#% The study has a general o Bective of esta lishing how the credit reference ureau will affect the microfinance industry in %hana. 0pecifically, the study has the following o BectivesC 1. To determine the types of regulatory oversight to which !-.s are su Bect, the effectiveness of this oversight and the types of 'ualifications regulators re'uire of !-.s. ". To determine whether the microfinance companies do access !-.s for information of the prospective orrowers and whether their lending decisions are influenced y !-.s information. 9. To find out whether the 'uality of the information disclosed y !-. to Microfinance companies is sufficient for ma2ing lending. E. To find out how !-.s protect against the misuse and unauthori1ed disclosure of non8 pu lic information. 6. To determine the effect of !-.s on consumer3s accessi ility of credit from the microfinance companies.

*u%tification of t&# r#%#arc& !ertainly, microfinance is not a new concept in %hana. It has always een common practice for people to save andFor ta2e small loans from individuals and groups within the conte)t of self8help in order to engage in small retail usinesses or farming ventures. Over the years, the microfinance sector has thrived and evolved into its current state than2s to various financial sector policies and programmes such as the provision of su sidi1ed credits, esta lishment of rural and community an2s (-!.s), the li erali1ation of the financial sector and the road types of

promulgation of *G?! &aw 9": of 1991. !urrently, there are three

microfinance institutions operating in %hana. These includeC (ormal suppliers of microfinance (i.e. rural and community an2s, savings and loans companies, commercial an2s), 0emi8formal suppliers of microfinance (i.e. credit unions, financial nongovernmental organi1ations ((G%Os), and cooperatives7 Informal suppliers of microfinance (e.g. susu collectors and clu s, rotating and accumulating savings and credit associations -O0!,s and ,0!,s, traders, moneylenders and other individuals).

!onsidering that, the current level of interest rates is a com ination of costs (information search costs), ris2 premium7 most of it on reali1ed goes to profits. +igh interest rates increase the level of default ris2s. $ith good credit trac2 records through !-.s, the ris2 premiums and search costs imposed on customers will ideally shrin2. In this regard, !-.s is e)pected to instill good credit ehaviour that will attract competitive pricing of credit facilities.

!redit y the an2ing sector in %hana has to a large e)tent een underwritten y physical collateral such as land and uildings and costs of evaluating that collateral H with

inappropriate definition of property rights. .orrowers without access to such collateral have een constrained from accessing credit and are therefore limited to these Microfinance institutions which y their definition are a le to lend small amount of money at a time.

This thesis will e attempting to fill the 2nowledge vacuum regarding the effect of !-.s on micro financing in %hana. It will concentrates on the credit ris2 assessment and the decisions Microfinance !ompanies as well as how the !-.s impact on their lending decisions.

+it#ratur# r#)i#, T&# %tructur# and -#rfor$anc# of t&# financia" %#ctor in G&ana The finance services industry encompasses a road range of organi1ations that deal with the management of money. In %hana, the financial services industry is categori1ed into three main sectors (%I*!, "##9)C I .an2ing and (inance (including Gon8.an2 (inancial 0ervices and (ore) .ureau) I Insurance and I (inancial mar2etFcapital mar2ets The operating institutions include oth foreign and local maBor an2s, -ural and !ommunity .an2s (-!.s), 0avings and &oans !ompanies (0&!s) and other finance and leasing companies. Through the implementation of the (inancial 0ector 0trategic *lan ((IG00*) the %overnment of %hana intends to promote the evolution of a financial sector which is appropriate for the needs of a country moving towards middle income status. The vision is

one of a financial sector which is responsive to the needs of the "1st century, particularly given the prospect of greater international and regional competition and opportunity for %hanaian financial mar2et participants (%I*!, "##9). K#y -"ay#r% <ey players in the industry include an2s and supporting institutions. The operating

institutions include oth foreign and local maBor an2s, -ural and !ommunity .an2s (-!.s), 0avings and &oans !ompanies (0&!s) and other finance and leasing companies. The num er of institutions e)isting in the various categories at the end of ,pril "##: was as follows (%I*!, "##9)C Organi.ation .an2s -ural and !ommunity .an2s Gon8.an2 (inancial Institutions (ore) .ureau) Insurance !ompanies -e8insurance !ompanies Insurance .ro2ers %0A &isted !ompanies %0A &icensed 0toc2 ro2ers Bank% Nu$!#r ": 1"9 EE "=9 1= " 96 96 1J

The an2s currently operating in %hana are7 0tandard !hartered .an2 %hana &imited7 %hana !ommercial .an2 &imited7 0%00. &imited7 The Trust .an2 &imited7 .*I .an2 &imited7 International !ommercial .an2 &imited7 /ni.an2 %hana &td7 Gational Investment .an2 &td7 ,gricultural ?evelopment .an2 &imited7 *rudential .an2 &td7 Merchant .an2 (%hana) &imited7 !,& .an2 &imited7 +(! .an2 &td7 /nited .an2 for ,frica (%hana) &td.7 0tan ic .an2 %hana &td7 .an2 of .aroda (%hana) &imited7 Kenith .an2 (%hana) &imited7 %uaranty Trust .an2 (%hana) &imited7 (idelity .an27 (irst ,tlantic Merchant .an2 &td7 ,malgamated .an2 &td7 Intercontinental .an2 %hana &imited7 .arclays .an2 of %hana &td.7 ,-. ,pe) .an27 !iti an2 G.,. %hana -ep. Office7 %hana International .an2 plc Su--orting In%titution% The following are the supporting institutions7 .an2 of %hana7 0ecurities and A)change !ommission7 ,-. ,pe) -ural .an27 Gational Insurance !ommission7 ,ssociation of -ural .an2s7 %hana !ooperative !redit /nions ,ssociation7 the %hana Microfinance Institutions Getwor2 T&# Mark#t ?evelopments in the an2ing system as of Lanuary "##: show a continuous surge in asset growth resulting mainly from credit e)pansion. .an2s3 deposits and orrowings were used to fund the growth in assets. Total assets of the an2ing industry grew on an annual asis y EJ." per cent to %+M=,:#=.# million as of Lanuary "##:, compared with 9:.1 per cent growth for same period in "##=. ,s of Lanuary "##: net loans and advances had reached %+M9,:J:.= million, recording an annual growth of 69." per cent compared with growth of 9=.J per cent a year earlier. .an2s3 investments reached %+M1,9J9.1 million in Lanuary "##: recording a year8on8year deceleration of #.E per cent compared with 9=.6 per cent in the 1"8month period

to Lanuary "##=. The growth in an2s3 foreign assets pic2ed up in Lanuary "##: reaching 6E.= per cent compared with the "#.= per cent recorded during the same period in "##=. !redit8deposit ratio increased to :1.6 per cent as of Lanuary "##: from =9.E per cent in the same period in "##=.

E)o"ution in G&ana/% Financia" Indu%try %hana3s financial sector has undergone significant changes over the years. In the 19=#s, the .an2 of %hana promoted the esta lishment of rural an2s and the government of %hana also em ar2ed on an e)tensive regulatory reform programme in 19:9 (%oc2el, 1996). The first generations of financial sector reforms were launched under the (inancial 0ector ,dBustment *rogram ((IG0,*) in 19::. The government promulgated the .an2ing ,ct in "##E. 0uch developments have rought a num er of new institutions into the sector. The .an2ing &aw (*G?!& ""6) was revised in 19:9. The innovations in the new law included (.rown ridge and %oc2el 199J)7 i. ii. iii. iv. v. vi. The tightening of ris2 e)posure limits, Asta lishment of tighter capital ade'uacy ratios, 0trengthening of accounting standards and ma2ing them uniform for all an2s, .roadening the scope for audits of the an2s, Imposition of stringent reporting re'uirements, and Improvement of on8site and off8site supervision of an2s y the .an2 of %hana.

, revised .an2 of %hana &aw (*G?!& "91) was also enacted in 199" to give more supervisory powers to the central an2. These two laws together provide the legal and

regulatory framewor2 for the an2ing usiness in %hana. One maBor development was the esta lishment of the +ome (inance !ompany that has rought a out a great change in the loan portfolios of an2s in %hana (.rown ridge and %oc2el 199J). 0ince the introduction of .an2s in %hana, their loan portfolios have consisted of short8term facilities granted to their customers who were mostly international traders. .ut since the mid819:#s, most of the an2s started to e)pand their loan portfolios y granting mortgage facilities to customers. In order to provide secondary mar2ets for the an2s in this direction, the +ome (inance !ompany &td (+(!) was esta lished in 19:= to provide secondary mortgage finance (0M() to the an2s. Thus it can e said that, the 0M( scheme provides the an2s with the opportunity to manage their asset8lia ilities and li'uidity efficiently there y preventing failures in the an2ing

system. In addition to the a ove, until 199" the discount houses remained the main institutions providing intermediary functions (secondary mar2et) etween the local an2s and the .an2 of %hana. The .an2s could only uy or sell securities to the discount houses. They provided the daily li'uidity needs of the an2s. They were the only institutions that served as the primary mar2et for the .an2 of %hana and secondary mar2et for the commercial an2s and other institutions for government of %hana stoc2s and onds, an2 of %hana ills, cocoa ills and an2 acceptances. In 199", there was a great change when the wholesale mar2et was esta lished to enhance competition in the secondary mar2et for these instruments. /nder this scheme, the an2s are now allowed to deal directly with the .an2 of %hana through the esta lishment of the -A*O Mar2et. The scheme also encouraged the esta lishment of the inter8 an2 mar2et to compete with the discount houses for short 8term funds. In addition, selected ro2erage firms have also een allowed to participate in the wee2ly wholesale Treasury ill auctions (.rown ridge and %oc2el 199J).

The conse'uence of the a ove institutional changes has een an increased competition in the money mar2et and led to the development of new instruments li2e the -A*O in 199". This new change and development has provided a means for the an2s to manage their li'uidity etter than efore ecause they can now trade directly with the .an2 of %hana. They can also trade among themselves in the inter8 an2 mar2et, and with ro2ers, and the discount houses. They now have a larger and etter primary and secondary money mar2et where they can easily orrow and lend when they are short of funds or have e)cess li'uidity. This is

important as it reduces an2 failures and systemic ris2 as a result of commercial an2s important role in the payment system. In order to further increase the si1e of the secondary mar2ets for the capital mar2ets, the %hana 0toc2 A)change was esta lished in 19:9 and started operations in 199#. ,fter its esta lishment, it introduced the %0A ,ll 0hare Inde) in 199E to help traders in the financial mar2ets especially those who are concerned with general price movements to measure mar2et trends. This is e)pected to help investors in their investment decision ma2ing in the financial mar2ets. ,lso, the %0A now serves as a secondary mar2et where especially non8 an2 financial institutions can oth lend and orrow money through the e'uity and the ond mar2ets. These have e)panded the secondary capital mar2et and also reduced the e)cessive reliance on an2s for orrowed funds (%oc2el 1996). In order to ring more financial institutions under the purview of the .an2 of %hana, a (inancial Institutions (Gon8.an2ing) &aw (*G?!& 9":) was also enacted in 1999. This law covered the activities of discount houses, finance houses, acceptance houses, uilding

societies, leasing and hire8purchase companies, venture capital companies, mortgage financing companies, savings and loans companies, and credit unions.

,s part of government financial sector reforms, a num er of laws have including (.O%, "#11)C a. The .an2ing ,ct, "##EC ,ct J=9 . *ayment 0ystem ,ct "##9 (,ct JJ") c. The &ong Term 0avings ,ct, "##EC (,ct J=9) d. ;enture !apital (und ,ct "##EC (,ct J:#) e. Insolvency ,ct "##J (,ct ="9) f. (oreign A)change ,ct "##J (,ct ="9) (A)change !ontrol ,ct) g. !redit -eporting ,ct "##J (="J) h. Insurance ,ct "##J (,ct ="E) i. ,-. ,pe) .an2 -egulations "##=C &I 1:"6 B. !entral ?epository 0ystem ,ct "##= (,ct =99), and 2. .an2ing ,mendment ,ct "##= (,ct =9:)

een enacted

The financial reforms also involved management and financial restructuring of the an2s. Gew oards were created for most of the an2s and there were sha2e8ups in the top

management positions as well. (inancial restructuring involved, in the main, the recapitali1ation of the an2s with e'uity inBection where li'uidity was low, and the cleaning up of their alance sheets of non8performing assets.

There was also institutional restructuring of the financial system involving the esta lishment of new institutions, and li'uidation of an2s and divestiture of pu lic sector shareholding in some of the an2s. /nder the (IG0,*, five new an2s and twenty non8 an2 institutions were esta lished. This was to encourage competition in the financial sector (%I*!, "#1#). In 1996, the 0ocial 0ecurity .an2 merged with the Gational 0avings and !redit .an2. /nder the institutional restructuring, the money mar2et was formali1ed in the creation in 1991 of a second discount house, the 0ecurity ?iscount !ompany (0?!) to compete with the !onsolidated ?iscount +ouse (!?+), which was created in 19:=. .oth were wholly owned y the an2s in %hana and charged with carrying out inter8 an2 operations. These institutions help optimise the allocation of resources within the an2ing sector and facilitate proper mo ili1ation of resources to the needy sector, thus, reducing structural im alances in the system (%oc2el 1996). In ?ecem er "###, an ,ct to amend some provisions of the 0ecurities Industry &aw 1999, *G?!& 999 was passed. This ,ct, ,ct 69#, ma2es fuller provisions for the operation and regulation of /nit Trusts and Mutual (unds. In (e ruary "##9, .o% formally introduced the /niversal .an2ing .usiness &icense (/..&), which has rought more competition within the industry. To operate under the /..&, e)isting an2s must have a minimum net worth of M=# illion (e)cluding statutory reserves), and new an2s should have a paid8up capital of M=# illion. .an2s are re'uired to hold 9N of the cedi and fore) deposit ase with .O% on daily asis as primary reserves and 96N of their deposit ase in cedi denominated assets as secondary reserves. The %overnment of %hana Inde)8&in2ed .onds (%%I&.s) was introduced in "##1, which was part of the reserve re'uirements and converted %overnment of %hana (%o%) short8term lia ilities into long8term loans. .O% re'uires an2s to hold 16N of their total deposits in

%%I&.s. The %%I&. is now eing phased out y the new "nd and 9rd year fi)ed or floating onds. %overnment proposed in "##= to esta lish an Independent Investment ,uthority to e 2nown as the %hana Investment !orporation (%I!) to encourage the private sector to participate in the financing of the energy, roads, and railway and water sectors. %I! will e)plore the possi ility of investing and ac'uiring shares in international and multinational companies that purchase and process %hana3s raw materials such as cocoa and gold, and their processing, to ena le the country hedge against falling commodity prices, through receipts of dividends and capital appreciation of the shares of these multinationals. , ill was passed y *arliament in March "##= to include provisions in the .an2ing ,ct to allow for the operation and regulation of the offshore an2ing services portion of the

International (inancial 0ervices !entre. .arclays .an2 of %hana has since een the first to e issued with a license to operate offshore an2ing services. %hana on 0eptem er "=th "##= ecame the first 0u 80aharan ,frican sovereign country (e)cept 0outh ,frica) to access the International .ond Mar2et with a enchmar2 issue of /0O=6# million, 1#8year tenure and at a coupon rate of :.6 percent. The deal was a out four times (E times) oversu scri ed with a high 'uality oo2 of investors made up of a out E# percent from the /0 mar2et, 9J percent from the /< mar2et, and the rest from other Auropean countries, the Middle Aastern region and ,sia. The ;enture !apital Trust fund (;!T() was esta lished y ,ct J:# passed in Govem er "##E, with the o Bective to provide investment capital to 0mall and Medium Anterprises (0MAs). In most cases loans granted y ;!T( carry an interest rate that is actually elow the mar2et rate or what the normal an2ing institutions offer. The .an2 of %hana has proposed a review of the minimum re'uirements of an2s and non8 an2 financial institutionsC (,) .an2s minimum paid up capital is to increase from %+M=.# million to etween %+M6#8J# million7 and (.) Minimum capital re'uirements for deposit ta2ing non8

an2 financial institutions (G.(Is) and finance houses would increase from %+M1.# million and %+M1.6 million respectively, to etween %+M68: million (%I*!, "#1#). The .an2 of %hana launched the A8Kwich iometric smart card on ": th ,pril "##:. The A8 Kwich is e)pected to ring electronic payment to the doorstep of all %hanaians, whether un an2ed, non8 an2ed, or under an2ed, and can e accessed even in the remotest parts of the country where electricity and telecommunication facilities are unavaila le. The AKwich iometric payment system has a low transaction cost with limited infrastructure needs and is a le to wor2 in the rural and informal sectors (%I*!, "#1#). In what could e descri ed as a landmar2 policy initiative, the .an2 of %hana in Luly "##= redenominated the %hanaian currency y setting the current ten thousand cedis (M1#,###) to one %hana cedi (1%+M). This was intended to address the lingering legacy of past inflation and macroeconomic insta ility, which resulted in increases in the numerical value of prices in local currency terms. The multiple 1eros accompanying the local currency caused difficulties in e)pressing monetary values. It placed significant deadweight urden on the economy which comes in several forms such as the high transaction costs at the cashiers, general inconvenience and high ris2s involved in carrying loads of currency for transaction purposes, difficulties in maintaining oo22eeping and statistical records, and ensuring compati ility with data processing software, and the strain on the payments system, particularly the ,TMs. These necessitated the need to remove four 1eros from the domestic local currency to restore credi ility of the currency, particularly with the transition towards a single digit inflationary regime. The re8denomination e)ercise was completed in ?ecem er "##=. In "##=, the %hana 0toc2 A)change (%0A) went through an international competitive idding process, selected a winning id and signed a contract which hopefully will see the A)change go automated trading in Lune "##:. ,lso in "##=, the %0A continued ut stepped up

discussions among the three $est ,frican A)changes (Gigeria, .-;M in !ote d3Ivoire and %hana) on harmoni1ation including the harmoni1ation of regulations and rules as well as operational procedures. The aim is to ultimately allow investors and issuers access to all of the $est ,frican Mar2ets. The year "##: will e a watershed for %hana3s capital mar2et in view of maBor changes that will come along in "##:. (irst of all, the %hana 0toc2 A)change y Lune "##: would have gone live with an automated trading platform. It will at that point do away with the white oards that are currently in use on the Trading (loor. ,lso in "##:, the mar2et will move all paper share certification of listed companies into a ?epository regime and there y resort to electronic clearing, settlements and 2eeping of shareholding records. /nder these arrangements which will e carefully and widely e

pu lici1ed for utmost participation, every investor who trades on the A)change will

re'uired to open an account with the ?epository. The account investors open will show records of shareholdings of investors ( alances, purchases and sales of shares, etc.) so that on receipt of regular statements, every shareholder can 2now all his ownership of listed shares. The goal is to reduce ris2s (of loss, impersonation, forgery, etc.) associated with the present paper certification and ma2e it easier for investors to trade in listed securities there y improving li'uidity on the mar2et. In "##:, the A)change also e)pects to focus attention on a num er of prospective listings and facilitate their primary mar2et offer and su se'uent listing on the A)change prefera ly efore the end of the third 'uarter of "##:. These will include e'uities and de t instruments. (inally, as part of efforts to ensure the smooth ta2e off and wide acceptance of these innovations, the A)change will step up pu lic education among the investing pu lic throughout "##: while see2ing the support of the media in that direction.

International (inancial 0ervice !entre (I(0!) at its simplest form is the provision of financial services y an2s and other agents to non8residents. These services include the orrowing of money from non8residents and lending to non8residents. This can ta2e the form of lending to corporate and other financial institutions, funded y lia ilities to offices of the lending an2 elsewhere, or to mar2et participants. It can also ta2e the form of the ta2ing of deposits from non8residents, and investing the proceeds in financial mar2ets elsewhere. The e)istence of I(0! affects the wor2 of the !entral .an2 in several ways. (irst, a etter understanding of the activities ta2ing place in I(0! can contri ute to the strengthening of the financial system surveillance y improving a ilities to identify and deal with ris2s at an early stage. 0econd, I(0! are generally used not only y maBor industrial countries, ut also y emerging mar2et economies whose financial systems are perhaps more vulnera le than others to reversals in capital flows, rapid accumulation of short8term de t, unhedged e)posure to currency fluctuations, and selective capital account li erali1ation. (inally, the operation of I(0! has implications for the !entral an23s wor2 on the promotion of good governance ecause it can reduce transparency, including through the e)ploitation of comple) ownership structures and relationships among different Burisdictions involved. The an2 and non8 an2 financial institutions recorded significant growth during the year "##= due to the relatively sta le macroeconomic environment. In the face of stiff competition, an2s introduced new products, services and strategies in the mar2et for

customer funds. In this regard, most of them e)tended their wor2ing hours and provide services on 0aturdays. To enhance transparency, .O% commenced the pu lication of an2s3 interest rates and charges in the newspapers and on its we site. .O% also colla orated with the %hana ,ssociation of .an2ers with respect to the introduction of the ,nnual *ercentage -ate (,*-) system for pricing of credit to ensure full disclosure. .an2s are now re'uired to display the

full cost of orrowing on the customer3s loan sheet. .an2 of %hana has introduced its framewor2 for -is28.ased 0upervision to meet the new challenges in the an2ing industry with respect to new technologies, ranch e)pansion, product innovation, si1e and speed of financial transactions, and as a precursor to the full implementation of the .asel II accord. This framewor2 involves the critical identification of ris2s associated with the operations of an2s, and the assessment of management oversight functions of ris2s, in order to ascertain the effectiveness of these oversight functions to mitigate the impact of ris2s. In the process, an2s would e compelled to focus more on their ris2 management systems to facilitate their improvement and there y improve the overall ris2 management functions within the institutions. The .an2 introduced a new licensing policy, which allows only well esta lished foreign an2s into the domestic an2ing system. The policy is geared towards supporting the

development of a well8capitali1ed and ro ust financial system. !apacity uilding of -!.s is eing continued in terms of computeri1ation, logistics support and training of ,-. ,pe) .an2 and -!. staff. In "##J, total assets of an2s grew y E#.9 per cent to M6,:9=.: illion, which represented 9#.= per cent of the total assets of the an2 and non8 an2 financial institutions. The rural and community an2s accounted for 6.# per cent while the share of G.(Is was E.: per cent. %rowth was funded mainly y deposits, which increased y

M9,9#1.:# illion, representing J6.:# per cent of the growth in assets. The increase in total assets of the industry reflected mainly in net loans and advances which increased y

M=,9EJ.:6 illion. !ash and an2 alances and investments also went up y ME,E=#.=: illion and M",9=6.: illion respectively. The sources of funding for the e)pansion in assets were shareholders3 funds, deposits and orrowings. A)pansion reflected in mainly loans and

advances (M6"J.9" illion) cash and an2 alances (M:E.= illion) and fi)ed assets (M:.J" illion).

%rowth in total li'uidity and monetary aggregates remained strong in the third 'uarter of "##=. .road money supply (M"P) growth pic2ed up from 9".: per cent at the end of the second 'uarter to 99.9 per cent at the end of the third 'uarter. This was on account of strong growth in demand deposits (99."N) as well as savings and time deposits (E1.:N). ?omestic credit e)perienced strong growth on an annual asis and for the second successive 'uarter in line with ro ust economic activity. Outstanding credit e)tended y an2s to pu lic and private institutions rose y 69.9 per cent (%+M1,9E:.6 million) at the end of the third 'uarter from 66.E per cent in the previous 'uarter and 91.= per cent a year ago. ,ggregate outstanding credit stood at %+M9,J##.9 million at the end of the third 'uarter. Of this total, the private sector accounted for :#.1 per cent while the pu lic sector received 19.9 per cent. Interest rates remained roadly sta le during the 'uarter after the M*! maintained the prime rate at 1".6 per cent in ,ugust. Interest rate movements in money mar2et instruments varied etween short8term and medium to long term instruments during the third 'uarter. The rates on 918day and 1:"8day treasury ills increased y 9 and 1 asis points to 9.:9 and 1#."E per cent respectively, whereas interest rates on ", 9 and 6 year treasury notes and onds declined y "96, 9E" and :# asis points to 1".:, 1".1 and 19.= percent respectively. Inter an2 mar2et weighted average rates ranged etween 11.J and 1".E9 per cent. The stoc2 mar2et recorded significant improvements. On a year on year asis, the %0A ,ll80hare inde) increased y 19.E per cent compared with 9.= per cent in the corresponding period of "##J. Increases in e'uity prices and additional listings during the third 'uarter marginally pushed up mar2et capitali1ation y #.E per cent to %+M11,=6#.= million. Outstanding credit e)tended y an2s to pu lic and private institutions continued to surge with an annual growth rate of 69.9 per cent (%+M1,9E:.6 million) registered at the end of the third 'uarter. This compares with 66.E per cent (%+M1,#9:.1 million) in the previous 'uarter and 91.= per cent (%+M6E"." million) a year ago. Outstanding credit at the end of the third 'uarter stood at %+M9,J##.9 million. Out

of this, %+M",::9.E million (:#.1N) went to the private sector while the pu lic sector accounted for %+M=1J.9 million (19.9N). Outstanding credit to the private sector also rose y 6J.9 per cent (%+M1,#E6.E million) on annual asis during the third 'uarter from 6".6 per cent (%+M:=E.1 million) in the second 'uarter and 9:.9 per cent (%+M61E.: million) in the corresponding period in "##J. .an2s3 credit to the private sector continued to e concentrated in the 0ervices ("9.#N or %+MJJ9.# million), Manufacturing (1J.9N or %+ME:=.# million) and !ommerce 4 (inance (1J.9N or %+ME=1.1 million) sectors (.O%, "#1#).

Cr#dit Ri%k Q$ould you lend your money to thisDR This hoary 'uestion has een as2ed y loan providers, investors, and credit analysts all over the world as an assessment of the commitment of the one (%anguin, "##E). Avery usiness face credit ris2 as it e)ists whenever payment or performance to a contractual agreement y another entity is e)pected, and it is the li2elihood of a loss arising from default or failure of another entity. !redit ris2 is defined as the Q!redit ris2 is most simply defined as the potential that a an2 orrower or counterparty will fail to meet its o ligations in accordance with agreed termsR (.I0 19997 -eto "##97 .an2s "##E). In particular, financial institutions generally have considera le credit e)posure due to their prominence on lending and trading (+orcher, "##6), and the international inter an2 mar2et is not an e)ception. ,ccording to ,i2man ("##:), inter an2 mar2ets are su Bect to types of ris2 i.e. orrower default and mar2et ris2, which will e discussed in details elow (,i2man ("##:). ,ccording to ,nson et al. ("##E) credit ris2 is specified as three types of ris2 i.e. default, downgrade and credit ris2 (,nson et al. ("##E).

D#fau"t Ri%k +orcher ("##6) stresses that, traditionally, credit ris2 is associated with lending, investing, and credit granting activities and concerns the return of orrowed money. +owever, a great source of credit ris2 in financial mar2ets arises from the performance of counterparties in contractual agreements e.g. given a financial o ligation, which is not fully discharged, either due to the counterparty disa ility to fulfil his or her o ligations which may result in a loss. In the literature, these credit ris2s are referred to as counterparty ris2s since they arise from transactions with counterparties (+orcher, "##6). Set, according to ,nson et al. ("##E) counterparty ris2 is defined as default ris2, where the issues of a ond or the de tor on a loan would not replay the outstanding de t in full. ?efault ris2 can e complete given that no amount of the ond or loan would e repaid or partial, given that some part of the original de t would e recovered (,nson et al. "##E). The li2elihood of the default occurring is recognised as the pro a ility of default. The li2elihood of a recovery depends on several factors as well as the legal status of the creditor, hence if an institution fails due to large outstanding o ligations or losses, later collections may e difficult or impossi le (+orcher, "##6). Cr#dit Bur#au% , credit ureau (/.0.), or credit reference agency (/<) is a company (typically called a 5consumer reporting agency5 or !-,) that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. This helps lenders assess credit worthiness, the a ility to pay ac2 a loan, and can affect the interest rate and other terms of a loan. Interest rates are not the same for everyone, ut instead can e ased on ris28 ased pricing, a form of price discrimination ased on the different e)pected ris2s of different orrowers, as set out in their credit rating or credit score.

!onsumers with poor credit repayment histories or court adBudicated de t o ligations li2e ta) liens or an2ruptcies will pay a higher annual interest rate than consumers who don@t have these factors. In the /.0., credit ureaus collect and collate personal information, financial data, and

alternative data on individuals from a variety of sources called data furnishers with which the ureaus have a relationship. ?ata furnishers are typically creditors, lenders, utilities, de t collection agencies and the courts (i.e. pu lic records) that a consumer has had a relationship or e)perience with. ?ata furnishers report their payment e)perience with the consumer to the credit ureaus. The data provided y the furnishers as well as collected y the ureaus are then aggregated into the credit ureau@s data repository or files. The resulting information is made availa le on re'uest to customers of the credit ureau for the purposes of credit

assessment, credit scoring or for other purposes such as employment consideration or leasing an apartment.

A !ri#f &i%tory of t&# cr#dit rating% indu%try +istorically, !-.s developed from mercantile credit agencies that supported usiness and trade creditors. The first of these agencies was The Mercantile ,gency, esta lished in 1:E1, followed y -.%. ?un and !ompany in 1:69, which ecame ?un and .radstreet, Inc., the owner of Moody3s until "##1 (0inclair, "##6). The first individual to focus on de t issuers was +enry *oor in his +istory of -ailroads and !anals of the /nited 0tates. *oor3s *u lishing !ompany later merged with the 0tandard 0tatistics .ureau (founded 19#J) in 19E1. The only other suppliers of de t ratings information were (itch *u lishing !ompany, esta lished in 19"E and ?uff and *helps !redit -ating !o., which specialised in pu lic utilities. ?uff and *helps merged with (itch in "###. (itch had previously ac'uired some

smaller !-.s that attempted to challenge Moody3s and 04*, such as I.!, in 199" and Thomson .an2$atch in "### (0inclair, "##6).

Cont#nt% of cr#dit r#-orting ag#ncy r#cord% !redit reporting agencies gather information on the e)periences of individuals with credit, leases, non8credit8related ills, monetary8related pu lic records, and en'uiries and compile it in a credit record. !redit reporting agencies attempt to collect comprehensive information on all lending to individuals in the country in which they operate. Cr#dit account infor$ation !redit account records contain a wide range of details a out each account. The data generally fall into five road categoriesC account identification, account dates, account alances,

account description, and payment performance. Aach credit account record includes an account num er, a uni'ue identifier for each credit provider, and account ownership status (in particular, single or Boint account or authorised user). *ertinent date information includes the date the account was esta lished7 the date it was closed or transferred (to collection or other maBor change in status)7 the date the account alance was paid down to 1ero7 and the date when information was last reported to the credit reporting agency. The account records also provide current alance information, the largest amount ever owed on the account, the si1e of any credit limit applica le to the account and any amount past due. !redit account records include a variety of account descriptive information, including identification of the type of account for e)ample, a closed8end loan (mortgage or instalment) or open8end loan (revolving, non8revolving, or che'ue credit)7 and the nature or purpose of the account for e)ample, credit card, charge account, automo ile loan, or student loan. (inally, the credit account

record provides information on the e)tent of current and historical payment delin'uencies e)tending ac2 months as well as information on other account derogatories. *ayment

delin'uency information is recorded in four classes of increasing severity 9# to 69 days, J# to :9 days, 9# to 119 days, and 1"# or more days past due. Other derogatories refer to accounts that have een charged off or are in collection, or those associated with a Budgment,

an2ruptcy, foreclosure or repossession. Typically, accounts that are 1"# or more days past due and accounts with other derogatories are grouped together and termed QmaBor derogatoriesR or Qseriously delin'uentR. ,ccounts with less severe delin'uencies are typically termed Qminor delin'uenciesR.

u!"ic r#cord% and co""#ction ag#ncy action% In addition to personal characteristics and credit account information, credit reporting agency data include information derived from monetary8related pu lic records and reports from collection agencies (,very, et al. "##E). !redit evaluators typically consider pu lic records and collection agency actions to e adverse information on a par with credit account maBor derogatories when assessing the credit 'uality of individuals. The importance of these items is significant. Over one half of the individuals in our sample with at least one maBor derogatory (historical or current) did not have any credit account maBor derogatories7 the only maBor derogatory items they had were collection agency actions or adverse pu lic records. *u lic record information includes records of an2ruptcy filings, liens, Budgments, and some foreclosures and lawsuits (,very, et al. "##E). The data distinguish (al eit imperfectly) etween federal, state, and local ta) liens and other liens. Otherwise, unli2e credit account data, the pu lic record data do not provide a classification code for the type of creditor or plaintiff (,very, et al. "##E). ,lthough pu lic records include some details a out the action,

such as the date filed, the information availa le is much narrower in scope than that availa le on credit accounts. !redit reporting agency records also include information on non8credit8 related ills in collection that are reported y collection agencies. In some cases, collections on credit8related accounts also are reported y collection agencies rather than y the original creditor. In this case, the information is grouped with the collection actions on non8credit8 related ills rather than with the credit account information. The most common types of collection actions reported involved unpaid ills for medical or utility services. !ollection agency records include only limited details a out the action, including the date ac'uired y the collection agency, the original collection alance, and an indicator of whether the

collection has een paid in full. There is no code indicating the type of original creditor (,very, et al. "##E)

Cr#dit Scor#% , credit score is a numerical e)pression ased on a statistical analysis of a person@s credit files, to represent the creditworthiness of that person. The term 5credit reputation5 can either e used synonymous to credit history or to credit score. , credit score is a numerical e)pression ased on a statistical analysis of a person@s credit files, to represent the

creditworthiness of that person. , credit score is primarily ased on credit report information typically sourced from credit ureaus (0inclair, "##6). The factors which may influence a person@s credit rating areC

a ility to pay a loan interest amount of credit used

saving patterns spending patterns de t

%iven the large num er of consumer orrowers, these credit scores tend to e mechanistic. To simplify the analytical process for their customers, the different credit ureaus can apply a mathematical algorithm to provide a score the customer can use to more rapidly assess the li2elihood that an individual will repay a given de t given the fre'uency that other individuals in similar situations have defaulted. This means there is no one credits score, ut several (or more)C each credit ureau creates their own credit score for each individual (0inclair, "##6). Most credit scores go up to a out :##, with anything over =## eing a pretty good score. $hile there are different methods of calculating credit scores, (I!O is the most widely 2nown type of credit score. (I!O is a credit score developed y (air Isaac !orporation. It is used y many mortgage lenders that use a ris28 ased system to determine the possi ility that the orrower may default on financial o ligations to the mortgage lender. The credit ureaus all have their own credit scoresC A'uifa)@s 0core*ower, A)perian@s *&/0 score, and Trans/nion@s credit score, and each also sells the ;antage0core credit score. In addition, many large lenders, including the maBor credit card issuers, have developed their own proprietary scoring models (0inclair, "##6).

Rating% -roc#%%#% The processes used y individual !-,s vary considera ly. It is important to distinguish etween two types of rating. 0olicited ratings occur where the issuer has invited the !-, to

rate it, usually for a fee, or has at least participated in the rating. /nsolicited ratings are underta2en y the !-, without reference to the company3s management. 0uch unsolicited ratings are usually carried out y !-,s to improve mar2et coverage of their ratings, or as a mar2eting device to encourage the company to commission a rating (0inclair, "##6). ,t the start of the rating, a lead analyst is appointed y the !-,. The lead analyst re'uests information from the issuer and collects other availa le sources of information to underta2e an assessment of the issuer3s industry and economic environment. The lead analyst will meet with the company3s management and visit its offices and production facilities. , rating is usually ased on an assessment of 'uantitative and 'ualitative indicators, which are reported to a ratings committee. Individual !-,s have their own methodologies, which they disclose to a greater or lesser degree to the pu lic via their we sites. The ratings committee usually consists of the lead analyst, senior managers at the !-, and Bunior analysts who wor2 on the rating. The final decision is made y a ratings committee, not y a sole individual. , report is then prepared with a draft recommendation. Issuers are allowed to comment on the report to ensure the information collated y the lead analyst is correct. If the !-, has relied on incorrect information or is a le to present new evidence, the !-, may reconsider its decision (0inclair, "##6).

T&# d#$and for rating% %#r)ic#% Issuers see2ing to mar2et a de t issue commission the services of a !-, to grade their securities. This is underta2en primarily for five reasons, descri ed elowC To define investment eligi ility, as many investment organisations will have policies which specifically prohi it investment in non8 investment grade onds. Therefore, the

value of ratings has ecome institutionalised into organisational practice. $ithout an appropriate rating, investor appetite for an issue will e thin. !onse'uently, some commentators (&angohr, "##J) suggest !-,s provide a gate82eeping function to enter glo al capital mar2ets, where the rating provides the tic2et for entry.

To reduce the information asymmetry effects (Myers and MaBluf, 19:E) etween the issuer and investors. In underta2ing an independent review of the pro a ility of default of a de t issue, the !-, is a le to provide o Bective and independent information to the mar2et a out the issuer3s future prospects. (urthermore, the !-, has access to the company3s management and is a le to access information a out the organisation3s future strategy and prospects not availa le to the mar2et. Therefore, the information gap etween issuers and investors is reduced. The effect of reducing this information asymmetry is to reduce the ris2 premium associated with a de t issue, lowering the margin paya le on the issue and reducing the organisation3s overall cost of capital.

!-,s are a le to provide an advisory role to management, offering feed ac2 a out the long8term effects of their approach to ris2. !-,s can advise management of the effect of changes in strategy to their perceived ris2 profile, and the effect such a change would have on their credit rating, and conse'uently cost of capital.

-atings are used y regulators, for e)ample, the !ommittee of Auropean .an2ing -egulators in the Auropean /nion (A/) and the 0ecurities and A)change !ommission in the /nited 0tates (/0) to assess capital ade'uacy and permitted investments for regulatory purposes. ,s well as providing information upon which investors can ase investment decisions, ratings are used to evaluate trading partners, financial counterparties, for e)ample, in financial instruments such as swaps, and usiness

partners, for e)ample, where an organisation enters into a Boint venture agreement or strategic alliance.

(or internal treasury purposes, such as assessing counterparty ris2. Typically a corporate will have an internal policy which will set a solute and relative limits to the amount that can e invested with one of the counterparty. This limit may vary

according to the nature of counterparty, with higher limits applying to counterparty with higher credit ratings.

T&# Eff#ct of Infor$ation S&aring on +#nding and D#fau"t% -ecent theoretical research suggests a threefold effect of lenders3 e)changing information on the credit history of orrowers. (irst, credit ureaus improve an2s3 2nowledge a out

applicants3 characteristics and permit more accurate prediction of repayment pro a ility. This allows lenders to target and price their loans etter, easing adverse selection pro lems. In this respect the enefit of esta lishing a credit ureau is greatest where each an2 is confronted y a large num er of customers on which it has no previous information, i.e., where orrowers are very mo ile. 0econd, credit ureaus reduce the informational rents that an2s could otherwise e)tract from their customers. They tend to level the informational playing field within the credit mar2et and force lenders to price loans more competitively. &ower interest rates increase orrowers3 net return and augment their incentive to perform. Third, credit ureaus wor2 as a orrower discipline deviceC every orrower 2nows that if he defaults his reputation with all other potential lenders is ruined, cutting him off from credit or ma2ing it much more e)pensive. This mechanism also heightens orrowers3 incentive to repay, reducing moral ha1ard.

In the adverse selection model developed y *agano and Lappelli (1999), information sharing improves the pool of orrowers, decreases defaults and reduces interest rates. It can also lead to an e)pansion of lending. $hen an2s are local monopolists, however, in some cases lending diminishes, ecause the e)change of information increases the an2s3 possi ility of price discrimination etween safe and ris2y orrowers and the increase in lending to safe orrowers does not fully compensate for the reduction in that too ris2y types. $hen credit mar2ets are contesta le, lending activity is more li2ely to increaseC competition limits the an2s3 a ility to e)tract rents from their customers, and information sharing

increases an2ing competition. Moral ha1ard models also imply that information sharing should reduce default rates and interest rates and increase lending, either ecause credit ureaus foster competition y reducing informational rents (*adilla and *agano, 199J) or ecause they discipline orrowers (*adilla and *agano, 199=). In e)treme cases, information e)change may ma2e lending feasi le in mar2ets where no credit would e e)tended

otherwise. In these models, whenever an2s choose to communicate they ring a out a *areto improvement y raising customers3 welfare along with their own profits. *adilla and *agano (199=) point out that the disciplinary effect of credit ureaus arises only from the e)change of lac2 information. Information a out past defaults generates fear of social

stigma. 0haring white information, i.e. data on orrowers3 characteristics, while attenuating adverse selection effects, may actually reduce the disciplinary effect of information sharing. Therefore, the comparative enefit of sharing lac2 and white information depends on the relative importance of moral ha1ard and adverse selection pro lems in the mar2et. One way to chec2 these predictions is to relate total lending or default rates to measures of the development of credit ureaus, such as their presence, the 'uality of information, the population covered, the num er of reports issued and the num er of years they have een in operation. *erforming this e)ercise poses several data pro lems. (irst, missing values and

non8responses have limited the num er of countries for which we have data on information sharing. 0econd, data on lending and especially defaults are hard to collect and compare internationally. Third, one must control for legal and institutional varia les that are only availa le for a few countries. Bank of G&ana R#gu"ation for t&# Cr#dit R#f#r#nc# Bur#au0 !redit -eporting ,ct Go. ="J of "##= is the main law governing credit ureaus and

esta lishes the conditions for credit reporting in %hana. The act aims to set up a credit reporting system to reduce the ris2s of lending and share data on the de t profile and repayment history of orrowers while protecting orrowers3 rights as far as possi le.

The ,cts restricts the access to credit reports and contains numerous provisions on data protection. (inancial institutions shall not report customer3s information to a licensed credit ureau unless the prior consent in writing of the su mission of the information to the credit orrower has een o tained for the

ureau and the storage, processing and

dissemination of the information y the credit ureau in accordance with the act. Only financial institutions who su mit credit information to a credit ureau and who show

evidence of the customer@s prior written consent to the issuance of a credit report will e eligi le to access a credit ureau@s data. !onsumers have the right to inspect and challenge their own file in the act7 ,ll credit ureaus are re'uired to esta lish an In'uiry 0ervice /nit that shall attend to persons affected y information contained in the data ase of the credit ureau and who challenge the information on the grounds that it is illegal, inaccurate, erroneous or out8dated.

!omplaints shall e su mitted to the .an2 of %hana which shall investigate the matter and settle the dispute to the satisfaction of the parties in accordance with the provisions in the act. , person dissatisfied with a decision of the .an2 of %hana may appeal to the +igh !ourt7 and , person who suffers harm arising from the supply of inaccurate or incomplete information a out the person is entitled to commence an action in court.

The act covers the following topicsC

0upervisory and regulatory role of the .an2 of %hana7 &icensing and regulation of credit ureau operations7 Operation of credit ureau7 ?ata protection provisions includingC
o

0u mission of information to credit ureau7 Information to e provided y financial institution with consent of orrower7 Offence of disclosure of confidential information7 Other sources of information for credit ureau7 -etention period of credit information data ase7 ?issemination and usage of credit information y credit ureau7 *ayment for the provision of credit information and credit report services7 *rivacy and secrecy re'uirements7

?uties of a data provider in relation to consent o tained7

!onsumers rights related to credit records and information7 !omplaints, redress and penalties7 Investigation, inspection and court orders7 Miscellaneous matters includingC
o

&i'uidation of credit ureau7 ?ata ase in event of li'uidation, suspension or revocation of a license7 Technical and financial audit7 and .an2 of %hana annual report on licensed credit ureaus.

(or instance, the .an2 of %hana (.O%) under section one of the !redit -eporting ,ct, "##= (,ct ="J), has the following supervisory and regulatory roles7 12 The .an2 of %hana shall have overall supervisory and regulatory authority toC a. -egister, license and regulate credit ureaus, data providers and credit information recipients and their agents7 . !ontrol and supervise activities of the credit information recipients and their agents7 c. Maintain proper standards of conduct and accepta le credit reporting practices under the scheme7 d. ma2e regulations and rules for institutions under this ,ct7 ureaus, data providers, credit

e. Ta2e measures to protect the interests of credit information su Bects7 f. *rotect the integrity of the credit reporting system against a uses7 g. Impose penalties for contravention of this ,ct7 h. /nderta2e other activities necessary or e)pedient to give full effect to the provisions of this ,ct7 and i. *erform other functions specified under this ,ct. ,mongst other thing the .an2 of %hana has also esta lished the following guidelines for the licensing of credit reference ureau) in %hana (.O%, "##9)C R#%tricting E"igi!i"ity to Cor-orat# Bodi#% Go person other than a ody corporate incorporated in %hana shall e eligi le to apply for a licence to engage solely in credit reference ureau activities in %hana. Go person(s) shall engage in credit reference ureau activities in %hana e)cept y or under the authority of licence issued in accordance with the !redit -eporting ,ct, "##= (,ct ="J). Go licence would e granted for the operation of a credit reference ureau, if a financial institution or a de t collection agency has ten (1#) per cent or more of the voting rights in the proposed credit reference ureau.

A--"ication for +ic#nc# ,n application for a licence to operate a credit reference ureau in %hana shall e made in writing to the .O% and accompanied y the followingC

i. !ertified true copies of the -egulations, and certificate of incorporation or other Instrument relating to the proposed usiness. ii. ?ocuments that support the value of applicant3s capital ase as well as sources of funds iii. , feasi ility study y the applicant3s company that shows the usiness plan,

organisational structure, and internal monitoring procedures of the company and information on the followingC a. Mission statement and goals . Mar2et analysis c. Ownership structure d. %overnance structure e. Management structure f. , description of proBected investments g. *roBected financial statements for a minimum of three years h. ,nalysis of profita ility i. .usiness !ontinuity *lan iv. ?etails of applicant3s shareholder(s), directors and other officers v. , description of the applicant3s premises and suita ility for credit reference activities ureau

vi. *articulars of the directors and 2ey management personnel concerned with the management of the ac2ground vii. Information necessary for assessing the trustworthiness of applicant viii. ,n overview of operations including a description of systems, design of data collection and dissemination and management processes includingC The development schedule of the software re'uired for operation !haracteristics of products and services to e provided to users *olicy on service provision *roposed security and control measures to prevent improper access to information *roposed security and control measures to prevent improper access to management of information Operational manuals designed to ensure accuracy of information contained in the data ase and its update, and The proposed fee and cost structure of products I). In addition to the a ove, applicants may also collect personal 'uestionnaire forms for ?irectors of the proposed credit ureau for completion and su mission to the .an2 of %hana, and any ). 0uch other particulars as the !entral .an2 may re'uire an2ing usiness, including their educational and professional

#r$i%%i!"# Acti)iti#% of Cr#dit R#f#r#nc# Bur#au0

, credit reference ureau shall e permitted to carry on any of the following activitiesC (a) %ather and maintain data for the formation of credit histories (b) *rocess credit related data (c) ?eliver credit reports ased partly or fully on information not in the pu lic domain. Ca-ita"i%ation , credit reference ureau is re'uired to have a minimum paid8up capital of %+M 6##,###.## I%%uanc# of Cr#dit R#f#r#nc# Bur#au +ic#nc# The .an2 of %hana shall grant a licence to carry on the usiness of credit reference ureau after the .an2 of %hana is satisfied that the proposed entityC (a) has the human, financial and operational resources to ena le it function efficiently and perform its functions effectively in accordance with the !redit -eporting ,ct, "##= (,ct ="J) ( ) proposed credit reference ureau office premises is suita le for the intended lines of usiness (c) has put in place ade'uate security systems to protect data (d) presents plans to adopt mechanisms to gather, input, integrate, update, validate and provide ade'uate security for data (e) presents a credi le plan to develop and adopt procedures to ensure thatC 'uestions, concerns and complaints of credit information su Bects, or data providers are treated e'uita ly and consistently in a timely and efficient manner. R#fu%a" of "ic#nc# The .an2 of %hana may refuse an application for a licence to carry on credit reference ureau usiness where (a) an applicant fails to pay the stipulated fees ( ) there is an error in the application, or (c) an applicant fails to satisfy any pre8condition for the granting of the licence The .an2 of %hana shall within three months after receiving the application, notify the applicant to rectify the situation within thirty (9#) days after the receipt of notification.

$here the applicant fails to rectify the situation, .O% shall not process the application. .O% shall state the reasons for the refusal in the notice of refusal to the applicant.

Ti$# "i$it for d#ci%ion on a--"ication The .an2 of %hana shall communicate its decision on an application for a credit reference ureau licence within three months from the date of receipt of application.

Borro,#r% and +#nd#r% Act No2 334 of 5667 .orrowers and &enders ,ct Go. ==9 of "##: provides a legal framewor2 for the provision of credit in %hana including standards of disclosure and provisions for the esta lishment of a collateral registry. The act provides a detailed description of rights and o ligations of orrowers and credit providers. 0upervision lies with the .an2 of %hana, which ensures compliance with the act through investigation and monitoring, and receives written complaints a out alleged interventions of the act. The .an2 of %hana may impose an administrative fine in case of non8compliance. The act contains various provisions on consumer protection, including the followingC

!lauses 1981= provides for orrowers3 rights. The rights include the right to apply for credit, protection against discrimination in respect of credit on grounds of race, se) and ethnicity. Other rights include the rights of political affiliation, the right to receive documents, and the protection of orrower credit rights and confidentiality, personal

information and orrower credit record. , person aggrieved y a decision of a lender may ma2e a complaint to the .an2 of %hana.

!lause 1: states that a lender has to provide a prospective orrower with a pre8 agreement statement and 'uotation in the form of a schedule specified in the act. The schedule can e found on the last page of the act.

!lause 19 specifies the use of mar2eting to induce a person to apply for or o tain credit.

.an2 of %hana is re'uired to su mit an annual report to the Minister of (inance within si) months after the e)piration of each financial year. The report must include information on violations and remedial action, volumes of different types of credit products and proposals for on8going improvement for the effective implementation of the act.

R#%#arc& M#t&odo"ogy R#%#arc& D#%ign and R#%#arc& M#t&odo"ogy , research methodology references the procedural rules for the evaluation of research claims and the validation of the 2nowledge gathered, while research design functions as the research lueprint (!reswell, "##9). ,s 0e2aran ("##9) further clarifies, a research methodology may e defined as academia3s esta lished regulatory framewor2 for the collection and evaluation of e)istent 2nowledge for the purpose of arriving at, and validating, new 2nowledge. !ooper and 0chindler (199:) maintain that the determination of the research methodology is one of the more important challenges which that confronts the researcher. In essence, the research activity is a resource consumptive one, and must maintain its purposeful or functional activity

through the Bustification of resource e)penditure. In other words, given that research is ultimately defined as constructive, the resources that it utili1es must fulfil e)plicit purposes and withstand critical scrutiny. -esearch methodology occupies a position of uni'ue importance. , methodology does not simply frame a study ut it identifies the research tools and strategies (i.e. resources) that will e employed, and relates their use to specified research aims. ,s 0e2aran ("##9) suggests, its importance emanates from the fact that it defines the activity of a specified research, its procedural methods, strategies, for progress measurement and criteria for research success.

R#%#arc& ur-o%# -esearch scholars have identified three main purposes to the research activity. These are the e)ploratory, the descriptive and the e)planatory purposes (0aunders et al., "###). *roceeding from Lac2son3s (199E) contention that the researcher should identify the purpose(s) y

correlating the research 'uestions to the research o Bectives, this is precisely the strategy that the current research shall adopt.

E0-"oratory A)ploratory research unfolds through focus group interviews, structured or semi8 structured interviews with e)perts and a search of the relevant literature (0aunders et al., "###). Its primary purpose is the e)ploration of a comple) research pro lem or phenomenon, with the o Bective eing the clarification of the identified comple)ities and the e)position of the underlying nature of the selected phenomenon. In other words, and as -o son ("##")

e)plains, e)ploratory research investigates a specified pro lemFphenomenon for the purpose of shedding new light upon it and, conse'uently, uncovering new 2nowledge. The first and second research 'uestions directly tie in with, and complement one another and, additionally, are fundamentally e)plorative in nature.

D#%cri-ti)# *unch ("###) e)plains the purpose of the descriptive research as the collection, organisation and summarisation of information a out the research pro lem and issues identified therein. 0imilar to the descriptive research, it renders complicated phenomenon and issues more understanda le. ?ane3s (199#) definition of the descriptive research and its purposes coincides with the stated. ?escriptive research entails the thorough e)amination of the research pro lem, for the specified purpose of descri ing the phenomenon, as in defining, measuring and clarifying it (?ane, 199#). Lac2son (199E) contends that all research is partly descriptive in nature. The descriptive aspect of a research is, simply stated, the (1) who, (") what, (9) when, (E) where, (6) why, and (J) how of the study.

E0-"anatory Miles and +u erman (199E) define the function of e)planatory research as the clarification of relationship etween varia les and the componential elements of the research pro lem.

A)planatory research, in other words, functions to highlight the comple) interrelationships e)istent within, and around, a particular phenomenon and contained within the research pro lem (Miles and +u erman, 199E). A)pounding upon this, *unch ("###) asserts that e)planatory, or causal research, elucidates upon the nature of the pro lem under investigation

and e)plains the asis for the proposed solution. It is an e)planation of the comple) we of interrelated varia les identified and follows directly from a clearly stated central research hypothesis and research 'uestion. This research would e an e)ploratory study ased on the under listed research 'uestionsC 1. $hat are the types of regulatory oversight to which !-.s are su Bected toD +ow effective is this oversightD ". ?o Microfinance !ompanies access !-.s for information of their prospective orrowersD ,nd are the lending decisions of the companies influenced information providedD 9. ?o the 'uality of the information disclosed sufficient for ma2ing lending decisionsD E. +ow do the !-.s protect against the misuse and unauthori1ed disclosure of non8 pu lic information. 6. ?o !-.s play any role on consumer3s accessi ility of credit in the microfinance industriesD y !-. to Microfinance companies y !-.s

R#%#arc& A--roac& The selection of the research approach is, according to !reswell ("##9) a critically important decision. The research approach does not simply inform the research design ut it gives the researcher the opportunity to critically consider how each of the various approaches may contri ute to, or limit, his study, allow himFher to satisfy the articulated o Bectives and design an approach which est satisfies the research3s re'uirements (!reswell, "##9).

The research approach, as e)plained y +air et al. ("##9) em races the 'uantitative versus the 'ualitative and the deductive versus the inductive. Aach set of approaches is commonly perceived of as referring to polar opposites (+air et al., "##9). Lac2son (199E) ta2es issue with this perception and contends that a researcher should not limit himself to a particular approach ut, instead should use a variety of approaches, if and when re'uired y his study.

T&# D#ducti)# )#r%u% t&# Inducti)# A--roac& Marcoulides (199:) defines the deductive approach as a testing of theories. The researcher proceeds with a set of theories and conceptual precepts in mind and formulates the study3s hypotheses on their asis. (ollowing from that, the research proceeds to test the proposed hypotheses. The inductive approach, on the other hand, follows from the collected empirical data and proceeds to formulae concepts and theories in accordance with that data (Marcoulides, 199:). $hile not disputing the value of the deductive approach, this research will opt for the inductive approach, or the T ottom8up,3 as opposed to the Ttop8 ottom3 method.

T&# 'ua"itati)# )#r%u% t&# 'uantitati)# A--roac& The 'uantitative tools for data analysis generally orrow from the physical sciences, in that they are structured in such a way so as to guarantee (as far as possi le), o Bectivity, generali1a ility and relia ility (!reswell, "##9). +ere the researcher is viewed as e)ternal to the research and results are e)pected to e constant if the study is replicated, regardless of the identity of the researcher. ,ccordingly, the matri) of 'uantitative research techni'ues is inclusive of random and un iased selection of respondents. It is primarily used for the

production of generali1a le data for such purposes as evaluation of outcomes, tending towards the near total decentrali1ation of human ehaviour. It is such decentrali1ation that raises criticisms amongst those who tend to e)hi it preference for 'ualitative tools, arguing that these offer insight into perceptions and interactions (!reswell, "##9). ,ccordingly, whereas 'uestionnaires are leading tools for the first, 'ualitative methods include interviews, o servations and focus groups, are designed to e)plicate the underlying meaningFcause ehind selected phenomenon. In other words, while 'ualitative tools analy1e the reasons ehind a particular phenomenon, 'uantitative tools analy1e the phenomenon itself, independent of human perceptions of reasons why (!reswell, "##9). ,s touched upon in the a ove, 'ualitative analysis usually precedes from 'ualitative research techni'ues employing, for e)ample, interviews. The content analysis tool is primarily employed for thematic summari1ation of interview data and is very useful in reducing a large volume of interview data into managea le themes, reflecting upon group attitudes and perceptions of certain aspects of the organi1ation. The second tool, force field analysis, is employed for analysis of data pertaining to organi1ational change. *rimarily deriving from &ewin3s change model, it categori1es data into pro and anti8change forces. ,s such, it offers the researcher an insight into the factors that wor2 towards the maintenance of the status 'uo and those that aid change (!reswell, "##9). ,ccordingly, one may surmise that specific conditions demand employment of 'ualitative analysis tools, with those eing the availa ility of 'ualitative data and the desire to analy1e the underlying attitudes and perceptions regarding organi1ational structure and change, as e)pressed y the relevant sta2eholders. In other words, the human ehavioural factor is central here. Uuantitative methods tend to e relatively low in cost and time re'uirements (*unch, 199:) since they ena le a large 'uantity of relevant data to e amassed and su Bected to statistical analysis in a short space of time7 it is therefore going to e used for this study.

R#%#arc& Strat#gy -o son ("##") identifies three research strategies, or plans for responding to the research 'uestion. These are the e)perimental, the survey and the case study strategies. , researcher may select one, or even all three of these strategies, depending on the re'uirements of the research itself and the nature of the study. Gaturally, and as Sin (19:9) concurs, scientific researches e)ploit the e)perimental strategy while the social sciences tend towards the survey and the case study strategies. The current research shall adopt the conceptual model approach, as discussed and defined y Sin (19:9).

Sa$-"ing T#c&ni8u# It is not good enough, though, to assume that findings for the sample will e replicated in the rest of the population, so therefore the sample in the first place needs to e carefully selected if there is to e any confidence that the findings from the sample are similar to those found among the rest of the category under investigation. 0ocial researchers have een using two types of sampling techni'ues. The first is 2nown as pro a ility sampling, the second as non8pro a ility. *ro a ility sampling, as the name suggests, is ased on the idea that the people or events that are chosen as the sample ecause the researcher has some notion of the pro a ility that these will e representative cross8 section of the people or events in the whole population eing studied. On the other hand non8 pro a ility sampling is conducted without such 2nowledge a out whether those included in the sample are representative of the overall population.

.ecause the researcher will not a have sufficient 2nowledge a out the sample to underta2e pro a ility sampling and may not 2now how many people ma2e up the population, under these circumstances, the researcher will turn to the forms of non8pro a ility sampling as the asis for selecting the sample. The most defining characteristics of non8pro a ility sampling method are that, however form it may ta2e, the choice of people or events to e included in the sample is definitely not a random selection. 0treu ert and !arpenter (1996) point out that there is no need to randomly select individuals ecause manipulation and control are not the purpose of the e)ercise. .y using the non8pro a ility sampling, this does not mean the researcher will 2now a solutely nothing a out what goes on at the various pharmacy departments in the hospitals, ut rather, not enough 2nowledge to use the pro a ility sampling. *urposive sampling is a form of non8pro a ility sampling (*olit and +unglar, 1999). This is the type of sampling that was used to select the respondents (.an2s or financial). $ith this type, the sample is 5hand8pic2ed5 for the research. ?ane (199#) points out the advantage of purposive sampling is that it allows the researcher to home in on people or events, which have good grounds in what they elieve, will e critical for the research. Instead of going for the typical instances, a cross8section or a alanced choice, the researcher will e a le to concentrate on instances which display wide variety H possi le even focus on e)treme cases to illuminate the research 'uestion at hand. In this sense it might not only e economical ut might also e informative in a way that conventional pro a ility sampling cannot e

(?escom e, 199:). One Bustification for using the non8pro a ility purposive sampling is that it stems from the idea that the research process is one of 5discovery5 rather than testing of hypotheses. It is a strategy where &incoln 4 %u a (19:6) descri e as Vemergent and se'uential3. ,lmost li2e

detective, the researcher follows a trail of clues, which leads the researcher in a particular direction until the 'uestions have een answered and things can e e)plained (-o son, 1999).

Data Co""#ction The research would e carried out at Microfinance institutions in ,ccra (names would e supplied upon approval) with a total of 16 respondents3 microfinance istitutions. The same 'uestionnaire would e administered to all of them. !redit officers at these institutions would e the respondents of the 'uestionnaires issued. M#t&od of Ana"y%i% ?ata analysis tool 0*00 1= for windows would e used to analyse the data o tained.

(re'uency ta les, ta ulations and cross ta ulations would e done with results presentation in the chapter four.