List of Tables and Figures

Abbreviations
Chapter One: Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Purpose and Rationale of the study
1.4 Research Questions
1.5 Research Methodology
1.6 Justification for the Study
1.7 Scope and Limitation of the Study
1.8 Chapter Disposition
Chapter Two: Literature Review
2.1 Introduction
2.2 The Right Credit Standards
2.3 General Principles of Lending
2.4. Banks and Trade Financing
2.5 Credit Standards for Large Personal Lending
2.6 Managing Risk in Lending to Small Corporate Organisation
2.7 General framework of Credit policies of some Banks in Ghana
2.8 Banks SME Finance Policy
2.9 Factors affecting Government Policy
2.10 Customers Request and Loan Documentation
Chapter Three: Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Population of the Study
3.4 Sampling Procedure
3.5 Research Instrument
3.6 Data Collection Procedure
3.7 Data Analysis
Chapter Four: Data Analysis and Presentation
4.1 Introduction
4.2 Distribution and Analysis of Responses received from Banks customers
4.3 Views on Mechanism for Safe Guarding Loans
4.4 Research Findings
Chapter Five: Summary, Conclusions and Recommendations
5.1 Introduction
5.2 Summary

5.3 Conclusion
5.4 Recommendations
References
Questionnaires

ABSTRACT
This study focused on the challenges of Credit Risk Management in Ghanaian Commercial
Banks with the searchlight on the operations of Barclays Bank Ghana (BBG), Ghana
Commercial Bank (GCB), Zenith Bank Ghana and Merchant Bank Ghana (MBG), all operating
in the Accra Business District. The study essentially had the objective of examining the loan
application appraisal processes of these banks as well as ascertaining the adequacy of their loan
monitoring mechanism.
In conducting the study, the researcher adopted the questionnaire technique as the research
instrument to solicit information from both customers and officials of the banks. Purposive
sampling technique was employed in selecting officials from the banks whose duties centered on
Credit Risk Management. Random sampling technique also helped the researcher in selecting the
sample size for the customers of the banks.
Findings made uncovered the fact that poor sales and exchange rate losses, product substitutes
due to trade liberalization and inability to enter into the foreign market and account for a chuck
of the loan default cases experienced by the banks. It is recommended, among others, that the
Governments information on Venture Capital Trust fund should be made more accessible to the
SMEs sectors through official sponsored workshops whilst the capacity and logistics of the
Eximguaranty Limited are strengthened to alleviate the credit requirement headaches of SMEs.
Conclusions drawn centered on the fact that some banks minimize risk factors in credit
management by entering into some covenants with borrowers under which certain figures and
ratios are periodically sent to the banks electronically. Most banks also dispatch their officials to
monitor and evaluate the loan disbursement schedules agreed with the customer to minimize bad
debt associated with SMEs.

LIST OF TABLES AND FIGURES

TABLES
Table 3.1: Distribution of Respondents
Table 4.1: Frequency Table on benefits derived from loans
Table 4.2: Frequency Table showing Views on Pre-Requisites for Bank Loan
Table 4.3: Frequency Distribution Table on the suitability of collaterals to guarantee repayment

Table 4.4: Frequency Table showing respondents view on reasons for loan default
Table 4.5: Awareness of Alternative Funding Facilities
Table 4.6: Approvals/Declined Rates of Requests Received

FIGURES
Figure 4.1: Pie Chart showing customer representation
Figure 4.2: Pie Chart showing respondents views on precautions
against bad debt
Figure 4.3: Bar Graph on Efforts to Minimize Bad Debt
Figure 4.4: Types of Facilities Demanded by SMEs
Figure 4.5: Maximum Amount of Credits Extended SMEs by Banks

ABBREVIATIONS
illustration not visible in this excerpt

CHAPTER ONE INTRODUCTION

1.1 Background of the Study
The study investigated the credit risk management practices within the financial services
environment with special emphasis on the operations of four commercial banks in the Accra
Business District namely; Barclays Bank Ghana (BBG), Ghana Commercial Bank (GCB), Zenith
Bank Ghana and Merchant Bank Ghana (MBG). Risk involves the threat or probability that an
action or event will adversely affect an organizations ability to achieve its objective. Commercial
banks globally face various forms of risk in pursuant of their goals and objectives with the
commonest being credit risk.
Credit risk is the potential loss by a lender, from the refusal or inability of the borrower/counter
party to pay what is owed in full and on time, by way of expected payments. This failure to repay
loan results in the lender incurring losses from bad debt which negatively affects their bottomline, a situation, which may lead to the collapse of banks, withdrawal of license by the regulator
as well as tarnishing the reputation of these organizations.
Local banks continue to play the traditional role as providers of credit to the industrial and other
sectors of the economy. Civil servants, public servants and other identifiable employee groups
also require financial support to procure houses, vehicles and other consumer items. Players in

the financial services industry have therefore designed suitable products to meet the taste of all
sectors of the economy. The business of providing finance does not lie solely in the court of
traditional banks.
International finance groups such as the Japan International Co-operation Agency (JICA) Danish
Development Agency (DANIDA) International Finance Corporation (IFC), United States
Agency for International Development (USAID) United Kingdoms Development (DFID) the
German GTZ, OPEC fund for Development, Canadian International Development Agency
(CIDA), UNDP funds, International Fund for Agric Development (IFAD) have all been
disbursing funds towards the growth sectors of the economy using the traditional banks and
financial agencies as conduits for accessing these facilities. With the above facilities in place, one
should expect business houses and individuals within the economy to enjoy appreciably level of
funding from the financial institution thereby performing their expected roles within the
economy and repay these facilities as and when payment is due.
Unfortunately, this is not the case; Adu-Mante (2007) notes that banks are really nursing huge
bad debts as the result of loan default by borrowers. According to Aryeetey (2002) not much
study has been conducted in this area with respect to reasons why customers in Ghana are unable
to honour their repayment promises. Most of the literature in this domain is characterized by the
context of the Western world and therefore does not adequately address the problem at hand.
Some local research is mandatory to help indigenous banks in tackling this canker of bad debt
plaguing our banks.

1.2 Statement of the Problem

According to Essien (2005) the failure of most banks to achieve their targeted profits emanate
from huge bad debts which results from loan repayment default. What could be the reasons
behind such huge bad debts? What credit risk management processes have been established at
the various banks to minimise loan repayment reasons behind such huge bad debts? What credit
risk management processes have been established at the various banks to minimise loan
repayment default? How do the banks appraise loan propositions prior to lending funds? What
monitoring mechanisms have been built into the credit risk management practices of the
commercial banks to minimise bad debts? What other factors account for loan default by the
business communities especially the SMEs? These and other problems constitute the thrust of the
study.

1.3 Purpose and Rationale of the study

The purpose of the study is to evaluate the credit risk management mechanisms of commercial
banks in Ghana so as to make appropriate recommendations. The specific objectives of the study
include:
i. To examine the loan application appraisal processes of commercial banks.
ii. To ascertain the adequacy of loan monitoring mechanism at commercial banks.
iii. To evaluate the adequacy of collateral security in guaranteeing loan repayment.

iv. To analyse the impact of commercial banks credit policy in minimising bad debts.
v. To ascertain the reasons behind the failure of borrowers to repay loans.

1.4 Research Questions

- What items do banks scrutinise on customers loan application proposals?
- How do bank monitor its loans?
- What are the main factors that precipitate loan default by customers?
- How effective are collateral securities in ensuring loan repayment?
- What arrangements have been put in place to manage the SME sector of the banks effectively?
- How do the credit policies of the banks help minimise bad debts?

1.5 Research Methodology

Both quantitative and qualitative data were required for the study. Primary data will emanate
from customers and officials of the headquarters of four banks and four of their branches in the
Accra business district. The questionnaires helped me to find answers to questions like how do
bank appraise its loan applications? What strategies have be put in place to ensure monitoring
and controlling of drawn down facilities? How adequate are the risk management policies of the
bank in fighting financial linkages? How adequate are the collateral security arrangements
towards minimizing bad debts? Etc. Secondary data came from seminar papers, financial
statement, credit policy manual of these banks, articles and pertinent publications on credit risk
management.
Stratified random sampling technique was employed in arriving at required sample for the
customers and officials of the banks. However purposive or non-probability sampling technique
will enable the investigator to directly approach senior officials of the headquarters for the views
of the subject. Basic Statistical Package for Social Sciences (SPSS) was used to analyse data
captured from the field and relevant pie charts, graphs, frequency tables etc was featured
appropriately.

1.6 Justification for the Study

The study is important in that:
- It will sensitize credit providers to beef up their loan monitoring mechanisms
- It will enable management of the four banks to augment its credit policy
- The Central Bank, being the regulator of the financial services environment will be compelled
to make amendments in its bank inspection and monitoring apparatus.
- It will serve as a reference material for research along similar topics.
- The researchers knowledge on credit risk management will be deepened.

1.7 Scope and Limitation of the Study

According to their financial statement (2010) the four banks together have two hundred and fifty
(250) branches in the country and using only twenty (20) and their headquarters in such a study
obviously placed some limitation on the adequacy of information. Owing to secrecy, oath sworn

by employees of the bank it was difficult divulging some kind of information which touch on
competition to the researcher and this also limited the adequacy of information. As a family
person, a student, the researcher sensed his limitation in terms of time and other relevant logistics
in conducting a much wider scale study. Notwithstanding the afore-mentioned constraints, the
researcher was able to produce a report worth appreciating by all.

1.8 Chapter Disposition

To facilitate reading and comprehension of the report, the study was structured into five distinct
chapters.
Chapter one was the transformation of research proposal and featured background information,
problem statement, objectives of the study, research questions, significance of the study, research
methodology as well scope and limitations of the study.
Chapter two featured the literature review and reviewed publications on credit risk management
including loan application appraisal procedures, risk management in export business, risk factor
associated with lending to small scale enterprises etc.
Chapter three focused on the details of the research methodology as well as outlined the credit
policy of some commercial banks in Ghana.
Chapter four presented the analyzed data together with their interpretation as well as discussion
of findings.
Chapter five summarized the study made recommendations and drew very useful conclusions.

CHAPTER TWO LITERATURE REVIEW

2.1 Introduction
This chapter reviews contemporary articles and publications on credit risk management in the
financial services environment. It begins by examining theories and concepts associated with
right credit standards. It goes on to review general principles on lending as well as discuss
specialized financing arrangements prevailing in the export and construction sectors. Credit risk
factors relating to the export business are highlighted in addition to examining the trade finance
framework within commercial banks.

2.2 The Right Credit Standards

Before examining the techniques of individual credit appraisal, it is worth reflecting on the
context in which lending decisions are taken. According to Weston (2000), there is a widely held
view that banks never learn from their past mistakes and that no matter what happened in the last
recession whenever that was the pressures to do new business in better times and the pull of
the marketers inevitably leads to imprudent lending and more disasters. Adams et al (2002), the

right credit standards and a good credit culture in which to apply them are essential for the
satisfactory management of credit risk. What does a good credit culture and good credit
standards look like?
2.2.1 Credit Culture
Credit culture, according to Kamath et al (2005) can be defined as a banks attitude to all matters
relating to its management of credit risk. If it is to produce a sound credit risk portfolio it must:
Fit with the overall business and organization of the bank. The culture must be capable of
delivering the service the bank requires to meet the needs of its customers. It can only do this if it
is compatible with the overall business strategy of the bank and is championed by top
management of the bank. Because the credit culture must be a balance between taking new risks
and also limiting the amount of risk, it is bound to run into opposition of various types. Top
management is the only source that can ensure that the culture supports appropriate credit
standards, but also is commercial enough not to cost the bank good business.
Solid credit standards, in the view of Rouse (2002), will inevitably cost the bank some business,
which in hindsight would have been good. But at the time of the decision 20/20 hindsight is not
available. There must be agreement throughout the bank that there is some business it is willing
to lose and a consensus as to the criteria to be used in deciding which business to do away with.
This policy has to be laid down by top management and should cover the type and level of risk
the bank is prepared to take and the reward it expects to earn for given levels of risk, both at the
individual lending and portfolio level. Establishing the relative status and authority of the credit
risk function in the bank means that there must be clarity over the extent that credit has a veto
over the activities of the business developers.
The support of top management in maintaining the agreed authority according to Phelan (1997)
is essential as well as the willingness to pay the cost of maintaining the culture. This includes
training, analysis, monitoring the quality of decision-takers, computer systems and other
elements. However, the cost here cannot simply be calculated in cash terms. It also covers
willingness to overcome customer resistance as well as to educate both colleagues and customers
as to the benefits of a sound credit structure and ultimately to lose business if the consumer
proves uneducable. Being robust enough not to be affected by economic cycles, a work culture
that changes in responses to different economic conditions is a weak one.
In the view of Gallinger and Ifflander (2002), credit standards convert the culture into actions.
They must take account of the nature of the banks business, its structure and the quality and
training of staff involved in credit decisions.
2.2.2 Standards
Standards include factors such as the depth of analysis required and how far this is adapted to the
needs of the borrower. There is a trade off to be made between a wish to understand all aspects of
a proposition and cost. How far facilities are to be standardized and how far they are to be
tailored to customers individual needs; all are important in creating sustainable credit standards.
Moreover, Santomero (1995) says structuring facilities to protect the bank should be done in

such a way and as far as possible that benefits eventually accrues to the customer as well. A
repayment schedule for a term loan according to Dyer (1995) should match customer cash flow,
not just meet some predetermined arbitrary benchmark.
Setting standards also means recognizing how far customer sensibilities are going to be balanced
against the banks need to protect itself against loss. For example, when a customers resistance
to giving or improving security or providing information is going to be allowed, then there is the
need to educate the customer so as to build their capacity to be able to understand the issues at
stake. In creating sound credit standards, Andrew and Victor (2003) believe that it is important to
include a proper degree of monitoring and control. The point of monitoring according to Hester
and Pierce (2002) is to identify deterioration as soon as possible and to take constructive
remedial action. Its effectiveness depends not only on the ability to spot deterioration, but also
the quality of the reaction. It is as important to avoid a panic reaction as a complacent one.
Wee and Lee (1995), are of the opinion that credit standards need to be sustained across the
economic cycle. They should not be relaxed in good times or over-tightened in bad. In general,
companies look better at the top of the cycle and weaker at the bottom than they really are.
Therefore logically, monitoring needs to be most strictly applied as the cycle reaches its peak;
but this is just the time when companies are tending to seek to drop or weaken covenants as they
flex their muscles in the more competitive market place as far as lenders are concerned. The
temptation for banks to look at the favorable surface factors and ignore the longer-term risks is
greatest, as is the pressure not to lose good business.
Mial and Smith (2004) have noted that to succumb to this pressure, as banks historically have, is
to sow the seeds of losses in the next recession. The losses in recession reflect the mistakes banks
make during booms. Conversely, at the bottom of a recession, Gentry (2004) believes that
survival can be the best proof of management quality and the ultimate robustness of a business
that there is. Companies are likely to be at their most chastened by their recent experience and
unlikely to be going for over-expansive and risky plans. Even if they do, they have several years
of improved economic conditions ahead of them in which they can pay off their borrowings and
get away with all but the most damaging mistakes
However, this is the time when banks are at their most defensive, chaste rend by their own losses
and more likely to be risk averse as opposed to risk aware. This is when the loan conditions are
tightened beyond what is reasonable or the banks simply refuse to lend. Sometimes they almost
actually add to losses by refusing to support battered but fundamentally sound companies that
could recover if only they had sufficient finance. It is difficult, but necessary, to remain
objectives.
In the past, lending skills were regarded as essential for all bankers and the most senior members
of a banks management would have them. Times have changed and the credit function within
banks is usually one of the less glamorous places to work. Lending is often regarded as value
destroying because of the amount of scarce capital it uses and business that generates fees and
other non-interest income is seen as more attractive. The problem with this is that customers
have a need to borrow. May be the bigger ones access capital markets direct through bond issues

or commercial paper, but there is a lot of research to show that the service that most customers
especially business ones- most value from their banker is the willingness to grant credit.
According to Dyer (2004), banks face a genuine dilemma in that if they ignore the market and
apply standards rigidly, they will avoid credit losses but will have to lose the good business and
market share. This must be balanced against the need to meet shareholder aspirations. Whiles
models of risk-adjusted capital are widely used and returns related to them, shareholders
contribute actual real money capital and want returns on that. It is hard for banks to sit with a lot
of real capital and keep ignoring the demand to leverage it. A strong credit culture can help
achieve the right balance. If the bank genuinely understand its customers and has the right sort of
relationship with them, Adams (2002) thinks it can choose when to bend standards a little and
when to adhere to them, if possible, in the context of a strong customer relationship to persuade
even the most macho of customers to see the banks point of view.
Relationship banking according to Hollensen (2003) is a two way street and customers will
expect support when they need it. But where transactional banking is the norm, the risks are
greater in boom time shown the marketers are driving and reasonable protections are being
sacrificed to market conditions. If one wants to get something outside the market in the good
times, you need to be prepared to give something back when the customer is in a less strong
position. Rouse (2004) admonishes that relationship banking is not a complete panacea against
bad debts, but it is likely to make losses less in recession, albeit at the price of not doing as much
business in the boom times as some more aggressive transaction getters in other banks.

2.3 General Principles of Lending

In this segment, the ground rules for the credit assessment of individual lending propositions will
be considered. Rules is perhaps not the right word because Robbins and Stobaugh (2000)
indicate that experienced lenders use a mixture of technical knowledge and common sense rather
than rules. Each lending case has to be treated on its merits, but Essiem (2005), explains that
there are a number of general principles, which should be applied in all cases. This subject will
be dealt with under two headings: A philosophy for lending and a methodical approach to
appraisal.
2.3.1 A Philosophy for Lending: Art or Science?
According to Dyer (2004), a lender does lend money and does not give it away. There is a
judgment therefore that at some future date repayment will take place. The lender needs to look
into the future and ask: will the customer repay by the agreed date? there will always be some
risk that the customer will be unable to repay, and it is in assessing this risk that the lender needs
to demonstrate both skill and judgment. The lenders objective will be to assess the extent of the
risk and to try to reduce the amount of uncertainty that will exist over the prospect of repayment.
While there are guidelines to follow, there is no magic formula. The lender must gather
together all the relevant information and then apply his or her skills to making a judgment.
Number crunching will never be enough, and this is why many experienced lenders describe
lending as an art rather than a science.

2.3.2 The Professional Approach

It is the conviction of Rouse (2005) that lenders must seek to arrive at an objectives decision.
This is not as easy as it sounds as there will always be pressures from customers and elsewhere,
for example, the need to meet profit targets that may sway the lenders judgment. A customer
may press for a quick answer when the lender does not feel there is adequate information. The
approach of the true professional is to resist outside pressures and to insist on sufficient time and
information to understand and evaluate the proposition. It is the lender who is taking the risk and
it is not professional to reach the wrong decision.
The professional lender who is confident in his or her ability, according to Jorion (1997) will
always apply the, following principles includes: State time to reach decision- detailed financial
information takes time to absorb. If possible, it is preferable to get the paperwork before the
interview, so that it can be assessed and any queries identified; Do not be too proud to ask for a
second opinion; some of the smallest lending decision can be the hardest; Get full information
from the customer and not make unnecessary assumptions or fill in missing detail; Do not take
a customers statements at face value and ask for evidence that will provide independent
corroboration; Distinguish between facts, estimates and opinion when forming a judgment;
Think again when the gut reaction suggests caution, even though the factual assessment looks
satisfactory.
2.3.3 A Methodical Approach to Appraisal
In the views of Havrilesky and Boorman (2001), there are five stages to any analysis of new
lending propositions namely introduction of the customer, the application by the customer,
review of the application, evaluation, monitoring and control.
2.3.4 Introduction of the Customer
Lenders do not have to do business with people they do not feel comfortable with. The account
opening procedures should be such as to establish, as for as possible, that the customer is honest
and trustworthy. This is especially important when the customer wishes to borrow at a later stage.
Approaches for borrowing from customers of other banks, in the view of Hester and Pierce
(2002), merit special caution; why is the approach being made at all? Has the proposal already
been rejected by the other bank? If the potential customer ought to have financial fact record, but
does not appear to have one, a degree of suspicion is in order.
An important source of new business for most lenders according to Hodgman (2001) is
introductions form professional advisers such as accountants and solicitors. This is not to say that
a bank is obliged to lend to customers introduced in this way. Indeed, there is no evidence to
suggest that such customers are generally of better quality than others. The bank should treat
such case on its merits and subject each proposition to an objective assessment. Some
introducers try to put pressure on the lender, for example suggesting that further introductions
may be dependent on agreement to a specific proposition. The lender, in the view of Fallon
(1996) must not succumb to such pressure and needs to avoid relying too heavily on any
individual source of new business. A good introducer will respect a lender who shows

objectivity, while caving in under pressure will only result in being considered a soft touch and
generate the introduction of other less attractive prospects.
2.3.5 The Application
This, according to Phelan (1997) can take many forms but should include a plan for repayment
by the borrowing and an assessment of the contingencies that might reasonably arise and how the
borrower would intend to deal with them. It might be in detailed written form or merely verbal.
There are many instances when the lender will have to draw out sufficient further information to
enable the risks in the proposition to be fully assessed.
2.3.6 Review of the Application
At this stage, Dyer (2002) recommends that all the relevant information that is required need to
be tested and other data sought if necessary. Either formally or informally the lender applies what
are generally known as the canon of good lending. The main areas common to all lending
propositions are examined in some detail. It is sometimes difficult to remember all the points to
be covered during an interview and many lenders use a mnemonic as a check list. There are a
number of mnemonics in common use, but the most prevalent are probably CCCPARTS
(Character, Capital, Capability, Purpose, Amount, Repayment, Terms, and Security) PARSER
(Persons, Amount, Repayment, Security, Expediency, remuneration) and CAMPARI which is
used by two of the major clearing banks, is probably the most popular of the mnemonics and is
the one described in detail here. It stands for: Character, Ability, Margin, Purpose, Amount,
Repayment, Insurance (Security).
- Character
Saunders and (1996), explains that although some might claim otherwise, it is virtually
impossible to assess an individuals character after just one meeting. It is an extremely difficult
area but a vital one to get right. Facts, not opinion, are crucial, e.g. How reliable is the
customers word as regards the details for the proposition and the promise or repayment? Does
the customer make exaggerated claims that are far too optimistic or is a more modest and
reasonable approach adopted; is the customers tract record good? Was there any previous
borrowing, and if so, was it repaid without trouble. If the customer is new, why are we being
approached? Can bank statements be seen to assess the conduct of the account?
- Ability
This aspect relates to the borrowers ability in managing financial affairs and is similar to
character as far as personal customers are concerned. Further points in respect of business
customers, according to Marshal and Siegel (1996) would include: Is there a good spread of skill
and experience among the management team in, for example, production, marketing and finance,
Does the management team hold relevant professional qualifications? Are they committed to
making the company successful? Where the finance is earmarked for a specific area of activity,
do they have the necessary experience in that area?

- Margin
Agreement should be reached at the outset with the borrower in respect of interest margin,
commissions and other relevant fees. The interest margin, according to Allen and Santomero
(1997), will be a reflection of the risk involved in the lending, while commission and other fees
will be determined by the amount and complexity of the work involved. It should never be
forgotten that banks are in business to make profits and to give shareholders a fair return on their
capital.
- Purpose
The lender will want to verify that the purpose is acceptable. Perhaps the facility would not be in
the customers best interest. According to Edward and Millet (2002), customers do tend to
overlook problems in their optimism and, if the bank can bring a degree of realism to the
proposition at the outset, it may be more beneficial to the customer than agreeing to the
requested advance.
- Amount
Dyer (2004), notes that this is important to verify whether the customer is asking for either too
much or too little. There are dangers in both and it is important, therefore, to establish that the
amount requested is correct and that all incidental expenses have been considered. The good
borrower will have allowed for contingencies. The amount requested should be in proportion to
the customers own resources and contribution. A reasonable contribution from the borrower
shows commitment and a buffer is provided by the customers stake should problems arise.
- Repayment
The real risk in lending, in the view of Rouse (2005) is to be found in the assessment of the
repayment proposals. It is important that the source of repayment is made clear from the outset
and the lender must establish the degree of certainty that the promised funds will be received.
Where the source of repayment is income/cash-flow, the lender will need projections to ensure
that there are surplus fund to cover repayment after meeting other commitments.
- Insurance/Security
Ideally, the canons of lending in the view of Berger and Udell (1995) should be satisfied
irrespective of available security, but security is often considered necessary in case the
repayment proposals fail to materialize. It is vital that the provider of security, especially third
party security, understands fully the consequences of charging it to the bank. It is equally
important that no advance is made until security procedures have been completed, or are at least
at a stage where completion can take place without the need to involve the borrower any further.

2.4 Banks and Trade Financing

Historically; banks have been involved in a single step in international trade transaction such as
actions providing a loan or letter of credit. However, as financing has become an integral part of
many trade transactions, banks especially major money central banks have evolved as well.
According to Sharpiro (2002), they have gone from financing individual trade deals to providing
comprehensive solution to trade needs. Such comprehensive services include combining leasing,
and other nonbank financing souse, along with political and economic risk insurance.
2.4.1 Collecting overdue Accounts
Typically, 1% to 3% of a companys export sales go uncollected. Small business, however, take
more risks than do large ones, often selling on terms on terms other than a confirmed letter of
credit. One reason is that they are eager to develop a new market opportunity; another reason is
that they are not as well versed in the mechanics of foreign sales. Thus, their percentage of
uncollected export sales may be higher than that of large companies.
Once an account becomes delinquent, sellers have options: (1) They can try to collect the
account themselves; (2) they can hire an attorney who is experienced in international law;
(3) they can engage the services of a collection agency.
The first step is for sellers to attempt to recover the money themselves. Turning the bill over to a
collection agency or a lawyer too quickly will hurt the customer relationship. However, after
several telephone calls, telexes, and/or personal visits, the firm must decide whether to write the
account off or pursue it further. The cost of hiring a high-priced U.S. lawyer, who then contacts
an expensive foreign lawyer, is deterrent to following the second option for receivables of less
than $100,000. With such a restively small amount, a collection agency usually would be more
appropriate. Unlike lawyers, who charge by the hour for their services, regardless of the amount
recovered, collection agencies work on a percentage basis. A typical fee is 20% to 25% of the
amount collected, but if the claim is more than $25,000 or so, the agency will often negotiate a
more favourable rate.
Even with professional help, there are no guarantees of collecting on foreign receivables. This
reality puts a premium on checking a customers credit before filling an order. But, getting credit
information on specific foreign firms is often difficult. One good source of credit information is
the U.S. Department of Commerces International Trade Administration (ITA). Its Word Data
Reports covers nearly 200,000 foreign establishments and can be obtained from district offices of
ITA for $75. Other places to check on the creditworthiness of foreign companies and
governments are export management companies and the international departments of commercial
banks. Also, Dun & Bradstreet International publishes Principal International Business, a book
with information on about 50,000 foreign enterprises in 133 countries.
[...]