THE EFFECT OF CREDIT REFERENCE BUREAU ON CREDIT RISK MANAGEMENT IN MICROFINANCE INSTITUTIONS IN GHANAIntroduction

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 build up assets and manage their highly irregular cash flows (Collins, et al. 2009). While profitability has increased the outreach of microfinance in Ghana, it has gradually been discriminating and reorienting towards wealthier clients (Labie, et al. 2009). Two fundamental requirements for the profitability of microfinance institutions (MFIs) are excellent loan portfolio quality and high efficiency of lending operations. Portfolio quality is mainly created and safeguarded by the credit worthiness of the prospective borrower which is mainly determined and managed by the credit reference bureaux or agencies (Holtmann 2001). A Credit Reference Agency or Credit Bureau (Credit Reporting Agency in the USA) is an organization 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 available on request to contributing companies for the purposes of credit assessment and rating (Wikipedia, 2011). Standard and Poors (S&P), one of the worlds leading credit rating agencies, defines credit rating as "a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation. The opinion evaluates the obligors capacity and willingness to meet its financial commitments" In other words credit report is an accumulation of information about how you pay your bills and repays loans, how much credit you have available, what your monthly debts are, and other types of information that can help a potential lender decide whether you are a good credit risk or a bad credit risk (Obringer, 2005). The report itself does not say whether you are a good or bad credit risk; it provides lenders with the data, which allows them to take the decision themselves. Lenders make their decisions based on their risk-reward trade-off. Having all the needed information helps the lenders ensure that they are making the right decision with regards to the assessment of the borrowers creditworthiness. Basically, the credit report would reflect the reputation collateral of that customer in some sense (Miller, 2003).The logic underlying the existence of credit reference bureaus (Henceforth, CRBs) is to solve the problem of the informative asymmetry between lenders and borrowers regarding the creditworthiness of the latter. Issuers with lower credit ratings pay higher interest rates embodying larger risk premiums than higher rated issuers (Millon and Thakor, 1985). Again, recent research based on information from several countries across the globe (Singapore, Iraq, China, Romania, Vietnam, Cambodia, Brazil, Hong Kong etc.) show that the existence of credit registries is associated with increased lending volume, growth of consumer lending, improved access to financing and a more stable financial sector (Larrain et al., 1997; Reisen and Maltzan, 1997).Problem StatementThe issuance of credit reference bureau licences by the Bank of Ghana to XDS Data Ghana and Dun and Bradstreet Ghana has heightened general interest in the credit rating industry in the country. Many have begun asking who the industry's firms are; what they do; how they do it; and what the consequences of their actions would have on the players and consumers within the microfinance industry in Ghana. Already a lot of questions are being asked about how credit risk is managed by Microfinance companies. However, the intriguing question on the minds of many financial industry players is whether or not the CRBs would have any effect on lending decisions in the Microfinance industry in Ghana.Even though many conducted researches outside the jurisdiction of Africa suggest that the existence of credit reference bureau (CRB) leads to a bigger credit market, lower default rates which leads to lower interest rates, improved profitability and increased competitiveness within the industry, not a single empirical study has systematically examined the effect of Credit Reference Bureaus on microfinance industry in Ghana. This research work will therefore attempt to fill this noticeable knowledge gap in literature. Research Questions

Evolving from the problem statement discussed above, the study aims at providing answers to the following questions:

1. What are the types of regulatory oversight to which CRBs are subjected to? How effective is this oversight?

2. Do Microfinance Companies access CRBs for information of their prospective borrowers? And are the lending decisions of the companies influenced by CRBs information provided?

3. Do the quality of the information disclosed by CRB to Microfinance companies sufficient for making lending decisions?4. How do the CRBs protect against the misuse and unauthorized disclosure of non-public information.

5. Do CRBs play any role on consumers accessibility of credit in the microfinance industries?

Research Objectives The study has a general objective of establishing how the credit reference bureau will affect the microfinance industry in Ghana. Specifically, the study has the following objectives:

1. To determine the types of regulatory oversight to which CRBs are subject, the effectiveness of this oversight and the types of qualifications regulators require of CRBs.

2. To determine whether the microfinance companies do access CRBs for information of the prospective borrowers and whether their lending decisions are influenced by CRBs information. 3. To find out whether the quality of the information disclosed by CRB to Microfinance companies is sufficient for making lending.4. To find out how CRBs protect against the misuse and unauthorized disclosure of non-public information.5. To determine the effect of CRBs on consumers accessibility of credit from the microfinance companies.Justification of the researchCertainly, microfinance is not a new concept in Ghana. It has always been common practice for people to save and/or take small loans from individuals and groups within the context of self-help in order to engage in small retail businesses or farming ventures. Over the years, the microfinance sector has thrived and evolved into its current state thanks to various financial sector policies and programmes such as the provision of subsidized credits, establishment of rural and community banks (RCBs), the liberalization of the financial sector and the promulgation of PNDC Law 328 of 1991. Currently, there are three broad types of microfinance institutions operating in Ghana. These include: Formal suppliers of microfinance (i.e. rural and community banks, savings and loans companies, commercial banks), Semi-formal suppliers of microfinance (i.e. credit unions, financial nongovernmental organizations (FNGOs), and cooperatives; Informal suppliers of microfinance (e.g. susu collectors and clubs, rotating and accumulating savings and credit associations ROSCAs and ASCAs, traders, moneylenders and other individuals). Considering that, the current level of interest rates is a combination of costs (information search costs), risk premium; most of it on realized goes to profits. High interest rates increase the level of default risks. With good credit track records through CRBs, the risk premiums and search costs imposed on customers will ideally shrink. In this regard, CRBs is expected to instill good credit behaviour that will attract competitive pricing of credit facilities.

Credit by the banking sector in Ghana has to a large extent been underwritten by physical collateral such as land and buildings and costs of evaluating that collateral with inappropriate definition of property rights. Borrowers without access to such collateral have been constrained from accessing credit and are therefore limited to these Microfinance institutions which by their definition are able to lend small amount of money at a time. This thesis will be attempting to fill the knowledge vacuum regarding the effect of CRBs on micro financing in Ghana. It will concentrates on the credit risk assessment and the decisions Microfinance Companies as well as how the CRBs impact on their lending decisions. Literature review

The structure and performance of the financial sector in Ghana

The finance services industry encompasses a broad range of organizations that deal with the management of money. In Ghana, the financial services industry is categorized into three main sectors (GIPC, 2009):

Banking and Finance (including Non-Bank Financial Services and Forex Bureau)

Insurance and

Financial market/capital markets

The operating institutions include both foreign and local major banks, Rural and Community Banks (RCBs), Savings and Loans Companies (SLCs) and other finance and leasing companies. Through the implementation of the Financial Sector Strategic Plan (FINSSP) the Government of Ghana 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 21st century, particularly given the prospect of greater international and regional competition and opportunity for Ghanaian financial market participants (GIPC, 2009).

Key players

Key players in the industry include banks and supporting institutions. The operating institutions include both foreign and local major banks, Rural and Community Banks (RCBs), Savings and Loans Companies (SLCs) and other finance and leasing companies. The number of institutions existing in the various categories at the end of April 2008 was as follows (GIPC, 2009):

Organization

Number

Banks

28

Rural and Community Banks

129

Non-Bank Financial Institutions

44

Forex Bureaux

273

Insurance Companies

17

Re-insurance Companies

2

Insurance Brokers

35

GSE Listed Companies

35

GSE Licensed Stockbrokers

16Banks

The banks currently operating in Ghana are; Standard Chartered Bank Ghana Limited; Ghana Commercial Bank Limited; SGSSB Limited; The Trust Bank Limited; BPI Bank Limited; International Commercial Bank Limited; UniBank Ghana Ltd; National Investment Bank Ltd; Agricultural Development Bank Limited; Prudential Bank Ltd; Merchant Bank (Ghana) Limited; CAL Bank Limited; HFC Bank Ltd; United Bank for Africa (Ghana) Ltd.; Stanbic Bank Ghana Ltd; Bank of Baroda (Ghana) Limited; Zenith Bank (Ghana) Limited; Guaranty Trust Bank (Ghana) Limited; Fidelity Bank; First Atlantic Merchant Bank Ltd; Amalgamated Bank Ltd; Intercontinental Bank Ghana Limited; Barclays Bank of Ghana Ltd.; ARB Apex Bank; Citibank N.A. Ghana Rep. Office; Ghana International Bank plc

Supporting Institutions

The following are the supporting institutions;

Bank of Ghana; Securities and Exchange Commission; ARB Apex Rural Bank; National Insurance Commission; Association of Rural Banks; Ghana Cooperative Credit Unions Association; the Ghana Microfinance Institutions Network

The Market

Developments in the banking system as of January 2008 show a continuous surge in asset growth resulting mainly from credit expansion. Banks deposits and borrowings were used to fund the growth in assets. Total assets of the banking industry grew on an annual basis by 46.2 per cent to GH7,807.0 million as of January 2008, compared with 38.1 per cent growth for same period in 2007. As of January 2008 net loans and advances had reached GH3,868.7 million, recording an annual growth of 59.2 per cent compared with growth of 37.6 per cent a year earlier. Banks investments reached GH1,363.1 million in January 2008 recording a year-on-year deceleration of 0.4 per cent compared with 37.5 per cent in the 12-month period to January 2007. The growth in banks foreign assets picked up in January 2008 reaching 54.7 per cent compared with the 20.7 per cent recorded during the same period in 2007. Credit-deposit ratio increased to 81.5 per cent as of January 2008 from 73.4 per cent in the same period in 2007.Evolution in Ghanas Financial Industry

Ghanas financial sector has undergone significant changes over the years. In the 1970s, the Bank of Ghana promoted the establishment of rural banks and the government of Ghana also embarked on an extensive regulatory reform programme in 1983 (Gockel, 1995).

The first generations of financial sector reforms were launched under the Financial Sector Adjustment Program (FINSAP) in 1988. The government promulgated the Banking Act in 2004. Such developments have brought a number of new institutions into the sector. The Banking Law (PNDCL 225) was revised in 1989. The innovations in the new law included (Brownbridge and Gockel 1996);

i. The tightening of risk exposure limits,

ii. Establishment of tighter capital adequacy ratios,

iii. Strengthening of accounting standards and making them uniform for all banks,

iv. Broadening the scope for audits of the banks,

v. Imposition of stringent reporting requirements, and

vi. Improvement of on-site and off-site supervision of banks by the Bank of Ghana.

A revised Bank of Ghana Law (PNDCL 291) was also enacted in 1992 to give more supervisory powers to the central bank. These two laws together provide the legal and regulatory framework for the banking business in Ghana. One major development was the establishment of the Home Finance Company that has brought about a great change in the loan portfolios of banks in Ghana (Brownbridge and Gockel 1996). Since the introduction of Banks in Ghana, their loan portfolios have consisted of short-term facilities granted to their customers who were mostly international traders. But since the mid-1980s, most of the banks started to expand their loan portfolios by granting mortgage facilities to customers. In order to provide secondary markets for the banks in this direction, the Home Finance Company Ltd (HFC) was established in 1987 to provide secondary mortgage finance (SMF) to the banks. Thus it can be said that, the SMF scheme provides the banks with the opportunity to manage their asset-liabilities and liquidity efficiently thereby preventing failures in the banking system. In addition to the above, until 1992 the discount houses remained the main institutions providing intermediary functions (secondary market) between the local banks and the Bank of Ghana. The Banks could only buy or sell securities to the discount houses. They provided the daily liquidity needs of the banks. They were the only institutions that served as the primary market for the Bank of Ghana and secondary market for the commercial banks and other institutions for government of Ghana stocks and bonds, bank of Ghana bills, cocoa bills and bank acceptances. In 1992, there was a great change when the wholesale market was established to enhance competition in the secondary market for these instruments. Under this scheme, the banks are now allowed to deal directly with the Bank of Ghana through the establishment of the REPO Market. The scheme also encouraged the establishment of the inter-bank market to compete with the discount houses for short -term funds. In addition, selected brokerage firms have also been allowed to participate in the weekly wholesale Treasury bill auctions (Brownbridge and Gockel 1996).

The consequence of the above institutional changes has been an increased competition in the money market and led to the development of new instruments like the REPO in 1992. This new change and development has provided a means for the banks to manage their liquidity better than before because they can now trade directly with the Bank of Ghana. They can also trade among themselves in the inter-bank market, and with brokers, and the discount houses. They now have a larger and better primary and secondary money market where they can easily borrow and lend when they are short of funds or have excess liquidity. This is important as it reduces bank failures and systemic risk as a result of commercial banks important role in the payment system.

In order to further increase the size of the secondary markets for the capital markets, the Ghana Stock Exchange was established in 1989 and started operations in 1990. After its establishment, it introduced the GSE All Share Index in 1994 to help traders in the financial markets especially those who are concerned with general price movements to measure market trends. This is expected to help investors in their investment decision making in the financial markets. Also, the GSE now serves as a secondary market where especially non-bank financial institutions can both lend and borrow money through the equity and the bond markets. These have expanded the secondary capital market and also reduced the excessive reliance on banks for borrowed funds (Gockel 1995).

In order to bring more financial institutions under the purview of the Bank of Ghana, a Financial Institutions (Non-Banking) Law (PNDCL 328) was also enacted in 1993. This law covered the activities of discount houses, finance houses, acceptance houses, building societies, leasing and hire-purchase companies, venture capital companies, mortgage financing companies, savings and loans companies, and credit unions.

As part of government financial sector reforms, a number of laws have been enacted including (BOG, 2011):

a. The Banking Act, 2004: Act 673

b. Payment System Act 2003 (Act 662)

c. The Long Term Savings Act, 2004: (Act 679)

d. Venture Capital Fund Act 2004: (Act 680)

e. Insolvency Act 2006 (Act 723)

f. Foreign Exchange Act 2006 (Act 723) (Exchange Control Act)

g. Credit Reporting Act 2006 (726)

h. Insurance Act 2006 (Act 724)

i. ARB Apex Bank Regulations 2007: LI 1825

j. Central Depository System Act 2007 (Act 733), and

k. Banking Amendment Act 2007 (Act 738)

The financial reforms also involved management and financial restructuring of the banks. New boards were created for most of the banks and there were shake-ups in the top management positions as well. Financial restructuring involved, in the main, the recapitalization of the banks with equity injection where liquidity was low, and the cleaning up of their balance sheets of non-performing assets.

There was also institutional restructuring of the financial system involving the establishment of new institutions, and liquidation of banks and divestiture of public sector shareholding in some of the banks. Under the FINSAP, five new banks and twenty non-bank institutions were established. This was to encourage competition in the financial sector (GIPC, 2010).

In 1995, the Social Security Bank merged with the National Savings and Credit Bank. Under the institutional restructuring, the money market was formalized in the creation in 1991 of a second discount house, the Security Discount Company (SDC) to compete with the Consolidated Discount House (CDH), which was created in 1987. Both were wholly owned by the banks in Ghana and charged with carrying out inter-bank operations. These institutions help optimise the allocation of resources within the banking sector and facilitate proper mobilization of resources to the needy sector, thus, reducing structural imbalances in the system (Gockel 1995).

In December 2000, an Act to amend some provisions of the Securities Industry Law 1993, PNDCL 333 was passed. This Act, Act 590, makes fuller provisions for the operation and regulation of Unit Trusts and Mutual Funds. In February 2003, BoG formally introduced the Universal Banking Business License (UBBL), which has brought more competition within the industry. To operate under the UBBL, existing banks must have a minimum net worth of 70billion (excluding statutory reserves), and new banks should have a paid-up capital of 70billion. Banks are required to hold 9% of the cedi and forex deposit base with BOG on daily basis as primary reserves and 35% of their deposit base in cedi denominated assets as secondary reserves.

The Government of Ghana Index-Linked Bonds (GGILBs) was introduced in 2001, which was part of the reserve requirements and converted Government of Ghana (GoG) short-term liabilities into long-term loans. BOG requires banks to hold 15% of their total deposits in GGILBs. The GGILB is now being phased out by the new 2nd and 3rd year fixed or floating bonds.

Government proposed in 2007 to establish an Independent Investment Authority to be known as the Ghana Investment Corporation (GIC) to encourage the private sector to participate in the financing of the energy, roads, and railway and water sectors. GIC will explore the possibility of investing and acquiring shares in international and multinational companies that purchase and process Ghanas raw materials such as cocoa and gold, and their processing, to enable the country hedge against falling commodity prices, through receipts of dividends and capital appreciation of the shares of these multinationals.

A bill was passed by Parliament in March 2007 to include provisions in the Banking Act to allow for the operation and regulation of the offshore banking services portion of the International Financial Services Centre. Barclays Bank of Ghana has since been the first to be issued with a license to operate offshore banking services. Ghana on September 27th 2007 became the first Sub-Saharan African sovereign country (except South Africa) to access the International Bond Market with a benchmark issue of US$750 million, 10-year tenure and at a coupon rate of 8.5 percent. The deal was about four times (4 times) oversubscribed with a high quality book of investors made up of about 40 percent from the US market, 36 percent from the UK market, and the rest from other European countries, the Middle Eastern region and Asia. The Venture Capital Trust fund (VCTF) was established by Act 680 passed in November 2004, with the objective to provide investment capital to Small and Medium Enterprises (SMEs). In most cases loans granted by VCTF carry an interest rate that is actually below the market rate or what the normal banking institutions offer. The Bank of Ghana has proposed a review of the minimum requirements of banks and non-bank financial institutions: (A) Banks minimum paid up capital is to increase from GH7.0 million to between GH50-60 million; and (B) Minimum capital requirements for deposit taking non-bank financial institutions (NBFIs) and finance houses would increase from GH1.0 million and GH1.5 million respectively, to between GH5-8 million (GIPC, 2010).

The Bank of Ghana launched the E-Zwich biometric smart card on 28th April 2008. The E-Zwich is expected to bring electronic payment to the doorstep of all Ghanaians, whether unbanked, non-banked, or under banked, and can be accessed even in the remotest parts of the country where electricity and telecommunication facilities are unavailable. The EZwich biometric payment system has a low transaction cost with limited infrastructure needs and is able to work in the rural and informal sectors (GIPC, 2010).

In what could be described as a landmark policy initiative, the Bank of Ghana in July 2007 redenominated the Ghanaian currency by setting the current ten thousand cedis (10,000) to one Ghana cedi (1GH). This was intended to address the lingering legacy of past inflation and macroeconomic instability, which resulted in increases in the numerical value of prices in local currency terms. The multiple zeros accompanying the local currency caused difficulties in expressing monetary values. It placed significant deadweight burden on the economy which comes in several forms such as the high transaction costs at the cashiers, general inconvenience and high risks involved in carrying loads of currency for transaction purposes, difficulties in maintaining bookkeeping and statistical records, and ensuring compatibility with data processing software, and the strain on the payments system, particularly the ATMs. These necessitated the need to remove four zeros from the domestic local currency to restore credibility of the currency, particularly with the transition towards a single digit inflationary regime. The re-denomination exercise was completed in December 2007.

In 2007, the Ghana Stock Exchange (GSE) went through an international competitive bidding process, selected a winning bid and signed a contract which hopefully will see the Exchange go automated trading in June 2008. Also in 2007, the GSE continued but stepped up discussions among the three West African Exchanges (Nigeria, BRVM in Cote dIvoire and Ghana) on harmonization including the harmonization of regulations and rules as well as operational procedures. The aim is to ultimately allow investors and issuers access to all of the West African Markets.

The year 2008 will be a watershed for Ghanas capital market in view of major changes that will come along in 2008. First of all, the Ghana Stock Exchange by June 2008 would have gone live with an automated trading platform. It will at that point do away with the white boards that are currently in use on the Trading Floor.

Also in 2008, the market will move all paper share certification of listed companies into a Depository regime and thereby resort to electronic clearing, settlements and keeping of shareholding records. Under these arrangements which will be carefully and widely publicized for utmost participation, every investor who trades on the Exchange will be required to open an account with the Depository. The account investors open will show records of shareholdings of investors (balances, purchases and sales of shares, etc.) so that on receipt of regular statements, every shareholder can know all his ownership of listed shares. The goal is to reduce risks (of loss, impersonation, forgery, etc.) associated with the present paper certification and make it easier for investors to trade in listed securities thereby improving liquidity on the market.

In 2008, the Exchange also expects to focus attention on a number of prospective listings and facilitate their primary market offer and subsequent listing on the Exchange preferably before the end of the third quarter of 2008. These will include equities and debt instruments. Finally, as part of efforts to ensure the smooth take off and wide acceptance of these innovations, the Exchange will step up public education among the investing public throughout 2008 while seeking the support of the media in that direction.

International Financial Service Centre (IFSC) at its simplest form is the provision of financial services by banks and other agents to non-residents. These services include the borrowing of money from non-residents and lending to non-residents. This can take the form of lending to corporate and other financial institutions, funded by liabilities to offices of the lending bank elsewhere, or to market participants. It can also take the form of the taking of deposits from non-residents, and investing the proceeds in financial markets elsewhere. The existence of IFSC affects the work of the Central Bank in several ways. First, a better understanding of the activities taking place in IFSC can contribute to the strengthening of the financial system surveillance by improving abilities to identify and deal with risks at an early stage. Second, IFSC are generally used not only by major industrial countries, but also by emerging market economies whose financial systems are perhaps more vulnerable than others to reversals in capital flows, rapid accumulation of short-term debt, unhedged exposure to currency fluctuations, and selective capital account liberalization. Finally, the operation of IFSC has implications for the Central banks work on the promotion of good governance because it can reduce transparency, including through the exploitation of complex ownership structures and relationships among different jurisdictions involved.

The bank and non-bank financial institutions recorded significant growth during the year 2007 due to the relatively stable macroeconomic environment. In the face of stiff competition, banks introduced new products, services and strategies in the market for customer funds. In this regard, most of them extended their working hours and provide services on Saturdays.

To enhance transparency, BOG commenced the publication of banks interest rates and charges in the newspapers and on its website. BOG also collaborated with the Ghana Association of Bankers with respect to the introduction of the Annual Percentage Rate (APR) system for pricing of credit to ensure full disclosure. Banks are now required to display the full cost of borrowing on the customers loan sheet. Bank of Ghana has introduced its framework for Risk-Based Supervision to meet the new challenges in the banking industry with respect to new technologies, branch expansion, product innovation, size and speed of financial transactions, and as a precursor to the full implementation of the Basel II accord.

This framework involves the critical identification of risks associated with the operations of banks, and the assessment of management oversight functions of risks, in order to ascertain the effectiveness of these oversight functions to mitigate the impact of risks. In the process, banks would be compelled to focus more on their risk management systems to facilitate their improvement and thereby improve the overall risk management functions within the institutions.

The Bank introduced a new licensing policy, which allows only well established foreign banks into the domestic banking system. The policy is geared towards supporting the development of a well-capitalized and robust financial system. Capacity building of RCBs is being continued in terms of computerization, logistics support and training of ARB Apex Bank and RCB staff. In 2006, total assets of banks grew by 40.9 per cent to 5,837.8 billion, which represented 90.7 per cent of the total assets of the bank and non-bank financial institutions. The rural and community banks accounted for 5.0 per cent while the share of NBFIs was 4.8 per cent. Growth was funded mainly by deposits, which increased by 9,901.80 billion, representing 65.80 per cent of the growth in assets. The increase in total assets of the industry reflected mainly in net loans and advances which increased by 7,346.85 billion. Cash and bank balances and investments also went up by 4,470.78 billion and 2,375.8 billion respectively. The sources of funding for the expansion in assets were shareholders funds, deposits and borrowings. Expansion reflected in mainly loans and advances (526.32 billion) cash and bank balances (84.7 billion) and fixed assets (8.62 billion).

Growth in total liquidity and monetary aggregates remained strong in the third quarter of 2007. Broad money supply (M2+) growth picked up from 32.8 per cent at the end of the second quarter to 33.9 per cent at the end of the third quarter. This was on account of strong growth in demand deposits (33.2%) as well as savings and time deposits (41.8%). Domestic credit experienced strong growth on an annual basis and for the second successive quarter in line with robust economic activity. Outstanding credit extended by banks to public and private institutions rose by 59.9 per cent (GH1,348.5 million) at the end of the third quarter from 55.4 per cent in the previous quarter and 31.7 per cent a year ago. Aggregate outstanding credit stood at GH3,600.3 million at the end of the third quarter. Of this total, the private sector accounted for 80.1 per cent while the public sector received 19.9 per cent. Interest rates remained broadly stable during the quarter after the MPC maintained the prime rate at 12.5 per cent in August. Interest rate movements in money market instruments varied between short-term and medium to long term instruments during the third quarter. The rates on 91-day and 182-day treasury bills increased by 9 and 1 basis points to 9.83 and 10.24 per cent respectively, whereas interest rates on 2, 3 and 5 year treasury notes and bonds declined by 235, 342 and 80 basis points to 12.8, 12.1 and 13.7 percent respectively. Interbank market weighted average rates ranged between 11.6 and 12.49 per cent. The stock market recorded significant improvements. On a year on year basis, the GSE All-Share index increased by 13.4 per cent compared with 3.7 per cent in the corresponding period of 2006. Increases in equity prices and additional listings during the third quarter marginally pushed up market capitalization by 0.4 per cent to GH11,750.7 million. Outstanding credit extended by banks to public and private institutions continued to surge with an annual growth rate of 59.9 per cent (GH1,348.5 million) registered at the end of the third quarter. This compares with 55.4 per cent (GH1,098.1 million) in the previous quarter and 31.7 per cent (GH542.2 million) a year ago. Outstanding credit at the end of the third quarter stood at GH3,600.3 million. Out of this, GH2,883.4 million (80.1%) went to the private sector while the public sector accounted for GH716.9 million (19.9%). Outstanding credit to the private sector also rose by 56.9 per cent (GH1,045.4 million) on annual basis during the third quarter from 52.5 per cent (GH874.1 million) in the second quarter and 38.9 per cent (GH514.8 million) in the corresponding period in 2006. Banks credit to the private sector continued to be concentrated in the Services (23.0% or GH663.0 million), Manufacturing (16.9% or GH487.0 million) and Commerce & Finance (16.3% or GH471.1 million) sectors (BOG, 2010).

Credit Risk

Would you lend your money to this? This hoary question has been asked by loan providers, investors, and credit analysts all over the world as an assessment of the commitment of the one (Ganguin, 2004). Every business face credit risk as it exists whenever payment or performance to a contractual agreement by another entity is expected, and it is the likelihood of a loss arising from default or failure of another entity. Credit risk is defined as the Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms (BIS 1999; Reto 2003; Banks 2004).

In particular, financial institutions generally have considerable credit exposure due to their prominence on lending and trading (Horcher, 2005), and the international interbank market is not an exception. According to Aikman (2008), interbank markets are subject to types of risk i.e. borrower default and market risk, which will be discussed in details below (Aikman (2008).

According to Anson et al. (2004) credit risk is specified as three types of risk i.e. default, downgrade and credit risk (Anson et al. (2004).

Default Risk

Horcher (2005) stresses that, traditionally, credit risk is associated with lending, investing, and credit granting activities and concerns the return of borrowed money. However, a great source of credit risk in financial markets arises from the performance of counterparties in contractual agreements e.g. given a financial obligation, which is not fully discharged, either due to the counterparty disability to fulfil his or her obligations which may result in a loss. In the literature, these credit risks are referred to as counterparty risks since they arise from transactions with counterparties (Horcher, 2005). Yet, according to Anson et al. (2004) counterparty risk is defined as default risk, where the issues of a bond or the debtor on a loan would not replay the outstanding debt in full. Default risk can be complete given that no amount of the bond or loan would be repaid or partial, given that some part of the original debt would be recovered (Anson et al. 2004). The likelihood of the default occurring is recognised as the probability of default. The likelihood 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 obligations or losses, later collections may be difficult or impossible (Horcher, 2005).

Credit Bureaus

A credit bureau (U.S.), or credit reference agency (UK) is a company (typically called a "consumer reporting agency" or CRA) 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 ability to pay back a loan, and can affect the interest rate and other terms of a loan. Interest rates are not the same for everyone, but instead can be based on risk-based pricing, a form of price discrimination based on the different expected risks of different borrowers, as set out in their credit rating or credit score. Consumers with poor credit repayment histories or court adjudicated debt obligations like tax liens or bankruptcies will pay a higher annual interest rate than consumers who don't have these factors.

In the U.S., credit bureaus collect and collate personal information, financial data, and alternative data on individuals from a variety of sources called data furnishers with which the bureaus have a relationship. Data furnishers are typically creditors, lenders, utilities, debt collection agencies and the courts (i.e. public records) that a consumer has had a relationship or experience with. Data furnishers report their payment experience with the consumer to the credit bureaus. The data provided by the furnishers as well as collected by the bureaus are then aggregated into the credit bureau's data repository or files. The resulting information is made available on request to customers of the credit bureau for the purposes of credit assessment, credit scoring or for other purposes such as employment consideration or leasing an apartment.

A brief history of the credit ratings industry Historically, CRBs developed from mercantile credit agencies that supported business and trade creditors. The first of these agencies was The Mercantile Agency, established in 1841, followed by R.G. Dun and Company in 1859, which became Dun and Bradstreet, Inc., the owner of Moodys until 2001 (Sinclair, 2005). The first individual to focus on debt issuers was Henry Poor in his History of Railroads and Canals of the United States. Poors Publishing Company later merged with the Standard Statistics Bureau (founded 1906) in 1941. The only other suppliers of debt ratings information were Fitch Publishing Company, established in 1924 and Duff and Phelps Credit Rating Co., which specialised in public utilities. Duff and Phelps merged with Fitch in 2000. Fitch had previously acquired some smaller CRBs that attempted to challenge Moodys and S&P, such as IBCA in 1992 and Thomson BankWatch in 2000 (Sinclair, 2005).

Contents of credit reporting agency records

Credit reporting agencies gather information on the experiences of individuals with credit, leases, non-credit-related bills, monetary-related public records, and enquiries and compile it in a credit record. Credit reporting agencies attempt to collect comprehensive information on all lending to individuals in the country in which they operate.

Credit account information

Credit account records contain a wide range of details about each account. The data generally fall into five broad categories: account identification, account dates, account balances, account description, and payment performance. Each credit account record includes an account number, a unique identifier for each credit provider, and account ownership status (in particular, single or joint account or authorised user). Pertinent date information includes the date the account was established; the date it was closed or transferred (to collection or other major change in status); the date the account balance was paid down to zero; and the date when information was last reported to the credit reporting agency. The account records also provide current balance information, the largest amount ever owed on the account, the size of any credit limit applicable to the account and any amount past due. Credit account records include a variety of account descriptive information, including identification of the type of account for example, a closed-end loan (mortgage or instalment) or open-end loan (revolving, non-revolving, or cheque credit); and the nature or purpose of the account for example, credit card, charge account, automobile loan, or student loan. Finally, the credit account record provides information on the extent of current and historical payment delinquencies extending back months as well as information on other account derogatories. Payment delinquency information is recorded in four classes of increasing severity 30 to 59 days, 60 to 89 days, 90 to 119 days, and 120 or more days past due. Other derogatories refer to accounts that have been charged off or are in collection, or those associated with a judgment, bankruptcy, foreclosure or repossession. Typically, accounts that are 120 or more days past due and accounts with other derogatories are grouped together and termed major derogatories or seriously delinquent. Accounts with less severe delinquencies are typically termed minor delinquencies.

Public records and collection agency actions

In addition to personal characteristics and credit account information, credit reporting agency data include information derived from monetary-related public records and reports from collection agencies (Avery, et al. 2004). Credit evaluators typically consider public records and collection agency actions to be adverse information on a par with credit account major derogatories when assessing the credit quality of individuals. The importance of these items is significant. Over one half of the individuals in our sample with at least one major derogatory (historical or current) did not have any credit account major derogatories; the only major derogatory items they had were collection agency actions or adverse public records.

Public record information includes records of bankruptcy filings, liens, judgments, and some foreclosures and lawsuits (Avery, et al. 2004). The data distinguish (albeit imperfectly) between federal, state, and local tax liens and other liens. Otherwise, unlike credit account data, the public record data do not provide a classification code for the type of creditor or plaintiff (Avery, et al. 2004). Although public records include some details about the action, such as the date filed, the information available is much narrower in scope than that available on credit accounts. Credit reporting agency records also include information on non-credit-related bills in collection that are reported by collection agencies. In some cases, collections on credit-related accounts also are reported by collection agencies rather than by the original creditor. In this case, the information is grouped with the collection actions on non-credit-related bills rather than with the credit account information. The most common types of collection actions reported involved unpaid bills for medical or utility services. Collection agency records include only limited details about the action, including the date acquired by the collection agency, the original collection balance, and an indicator of whether the collection has been paid in full. There is no code indicating the type of original creditor (Avery, et al. 2004)

Credit Scores

A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. The term "credit reputation" can either be used synonymous to credit history or to credit score. A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus (Sinclair, 2005).

The factors which may influence a person's credit rating are:

ability to pay a loan

interest

amount of credit used

saving patterns

spending patterns

debt

Given the large number of consumer borrowers, these credit scores tend to be mechanistic. To simplify the analytical process for their customers, the different credit bureaus can apply a mathematical algorithm to provide a score the customer can use to more rapidly assess the likelihood that an individual will repay a given debt given the frequency that other individuals in similar situations have defaulted. This means there is no one credits score, but several (or more): each credit bureau creates their own credit score for each individual (Sinclair, 2005).

Most credit scores go up to about 800, with anything over 700 being a pretty good score. While there are different methods of calculating credit scores, FICO is the most widely known type of credit score. FICO is a credit score developed by Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models (Sinclair, 2005).

Ratings processes The processes used by individual CRAs vary considerably. It is important to distinguish between two types of rating. Solicited ratings occur where the issuer has invited the CRA to rate it, usually for a fee, or has at least participated in the rating. Unsolicited ratings are undertaken by the CRA without reference to the companys management. Such unsolicited ratings are usually carried out by CRAs to improve market coverage of their ratings, or as a marketing device to encourage the company to commission a rating (Sinclair, 2005).

At the start of the rating, a lead analyst is appointed by the CRA. The lead analyst requests information from the issuer and collects other available sources of information to undertake an assessment of the issuers industry and economic environment. The lead analyst will meet with the companys management and visit its offices and production facilities. A rating is usually based on an assessment of quantitative and qualitative indicators, which are reported to a ratings committee. Individual CRAs have their own methodologies, which they disclose to a greater or lesser degree to the public via their websites. The ratings committee usually consists of the lead analyst, senior managers at the CRA and junior analysts who work on the rating. The final decision is made by a ratings committee, not by a sole individual. A report is then prepared with a draft recommendation. Issuers are allowed to comment on the report to ensure the information collated by the lead analyst is correct. If the CRA has relied on incorrect information or is able to present new evidence, the CRA may reconsider its decision (Sinclair, 2005).

The demand for ratings services Issuers seeking to market a debt issue commission the services of a CRA to grade their securities. This is undertaken primarily for five reasons, described below:

To define investment eligibility, as many investment organisations will have policies which specifically prohibit investment in non- investment grade bonds. Therefore, the value of ratings has become institutionalised into organisational practice. Without an appropriate rating, investor appetite for an issue will be thin. Consequently, some commentators (Langohr, 2006) suggest CRAs provide a gate-keeping function to enter global capital markets, where the rating provides the ticket for entry.

To reduce the information asymmetry effects (Myers and Majluf, 1984) between the issuer and investors. In undertaking an independent review of the probability of default of a debt issue, the CRA is able to provide objective and independent information to the market about the issuers future prospects. Furthermore, the CRA has access to the companys management and is able to access information about the organisations future strategy and prospects not available to the market. Therefore, the information gap between issuers and investors is reduced. The effect of reducing this information asymmetry is to reduce the risk premium associated with a debt issue, lowering the margin payable on the issue and reducing the organisations overall cost of capital.

CRAs are able to provide an advisory role to management, offering feedback about the long-term effects of their approach to risk. CRAs can advise management of the effect of changes in strategy to their perceived risk profile, and the effect such a change would have on their credit rating, and consequently cost of capital.

Ratings are used by regulators, for example, the Committee of European Banking Regulators in the European Union (EU) and the Securities and Exchange Commission in the United States (US) to assess capital adequacy and permitted investments for regulatory purposes. As well as providing information upon which investors can base investment decisions, ratings are used to evaluate trading partners, financial counterparties, for example, in financial instruments such as swaps, and business partners, for example, where an organisation enters into a joint venture agreement or strategic alliance.

For internal treasury purposes, such as assessing counterparty risk. Typically a corporate will have an internal policy which will set absolute and relative limits to the amount that can be 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.

The Effect of Information Sharing on Lending and Defaults

Recent theoretical research suggests a threefold effect of lenders exchanging information on the credit history of borrowers. First, credit bureaus improve banks knowledge about applicants characteristics and permit more accurate prediction of repayment probability. This allows lenders to target and price their loans better, easing adverse selection problems. In this respect the benefit of establishing a credit bureau is greatest where each bank is confronted by a large number of customers on which it has no previous information, i.e., where borrowers are very mobile.

Second, credit bureaus reduce the informational rents that banks could otherwise extract from their customers. They tend to level the informational playing field within the credit market and force lenders to price loans more competitively. Lower interest rates increase borrowers net return and augment their incentive to perform. Third, credit bureaus work as a borrower discipline device: every borrower knows that if he defaults his reputation with all other potential lenders is ruined, cutting him off from credit or making it much more expensive. This mechanism also heightens borrowers incentive to repay, reducing moral hazard.

In the adverse selection model developed by Pagano and Jappelli (1993), information sharing improves the pool of borrowers, decreases defaults and reduces interest rates. It can also lead to an expansion of lending. When banks are local monopolists, however, in some cases lending diminishes, because the exchange of information increases the banks possibility of price discrimination between safe and risky borrowers and the increase in lending to safe borrowers does not fully compensate for the reduction in that too risky types.

When credit markets are contestable, lending activity is more likely to increase: competition limits the banks ability to extract rents from their customers, and information sharing increases banking competition. Moral hazard models also imply that information sharing should reduce default rates and interest rates and increase lending, either because credit bureaus foster competition by reducing informational rents (Padilla and Pagano, 1996) or because they discipline borrowers (Padilla and Pagano, 1997). In extreme cases, information exchange may make lending feasible in markets where no credit would be extended otherwise. In these models, whenever banks choose to communicate they bring about a Pareto improvement by raising customers welfare along with their own profits. Padilla and Pagano (1997) point out that the disciplinary effect of credit bureaus arises only from the exchange of black information. Information about past defaults generates fear of social stigma. Sharing white information, i.e. data on borrowers characteristics, while attenuating adverse selection effects, may actually reduce the disciplinary effect of information sharing. Therefore, the comparative benefit of sharing black and white information depends on the relative importance of moral hazard and adverse selection problems in the market.

One way to check these predictions is to relate total lending or default rates to measures of the development of credit bureaus, such as their presence, the quality of information, the population covered, the number of reports issued and the number of years they have been in operation. Performing this exercise poses several data problems. First, missing values and non-responses have limited the number of countries for which we have data on information sharing. Second, data on lending and especially defaults are hard to collect and compare internationally. Third, one must control for legal and institutional variables that are only available for a few countries.

Bank of Ghana Regulation for the Credit Reference Bureaux

Credit Reporting Act No. 726 of 2007 is the main law governing credit bureaus and establishes the conditions for credit reporting in Ghana. The act aims to set up a credit reporting system to reduce the risks of lending and share data on the debt profile and repayment history of borrowers while protecting borrowers rights as far as possible.

The Acts restricts the access to credit reports and contains numerous provisions on data protection. Financial institutions shall not report customers information to a licensed credit bureau unless the prior consent in writing of the borrower has been obtained for the submission of the information to the credit bureau and the storage, processing and dissemination of the information by the credit bureau in accordance with the act. Only financial institutions who submit credit information to a credit bureau and who show evidence of the customer's prior written consent to the issuance of a credit report will be eligible to access a credit bureau's data. Consumers have the right to inspect and challenge their own file in the act;

All credit bureaus are required to establish an Inquiry Service Unit that shall attend to persons affected by information contained in the database of the credit bureau and who challenge the information on the grounds that it is illegal, inaccurate, erroneous or out-dated.

Complaints shall be submitted to the Bank of Ghana which shall investigate the matter and settle the dispute to the satisfaction of the parties in accordance with the provisions in the act. A person dissatisfied with a decision of the Bank of Ghana may appeal to the High Court; and

A person who suffers harm arising from the supply of inaccurate or incomplete information about the person is entitled to commence an action in court.

The act covers the following topics:

Supervisory and regulatory role of the Bank of Ghana;

Licensing and regulation of credit bureau operations;

Operation of credit bureau;

Data protection provisions including:

Submission of information to credit bureau;

Information to be provided by financial institution with consent of borrower;

Offence of disclosure of confidential information;

Other sources of information for credit bureau;

Retention period of credit information database;

Dissemination and usage of credit information by credit bureau;

Payment for the provision of credit information and credit report services;

Privacy and secrecy requirements;

Duties of a data provider in relation to consent obtained;

Consumers rights related to credit records and information;

Complaints, redress and penalties;

Investigation, inspection and court orders;

Miscellaneous matters including:

Liquidation of credit bureau;

Database in event of liquidation, suspension or revocation of a license;

Technical and financial audit; and

Bank of Ghana annual report on licensed credit bureaus.

For instance, the Bank of Ghana (BOG) under section one of the Credit Reporting Act, 2007 (Act 726), has the following supervisory and regulatory roles;

1. The Bank of Ghana shall have overall supervisory and regulatory authority to:

a. Register, license and regulate credit bureaus, data providers and credit information recipients and their agents;

b. Control and supervise activities of the credit bureaus, data providers, credit information recipients and their agents;

c. Maintain proper standards of conduct and acceptable credit reporting practices under the scheme;

d. make regulations and rules for institutions under this Act;

e. Take measures to protect the interests of credit information subjects;

f. Protect the integrity of the credit reporting system against abuses;

g. Impose penalties for contravention of this Act;

h. Undertake other activities necessary or expedient to give full effect to the provisions of this Act; and

i. Perform other functions specified under this Act.

Amongst other thing the Bank of Ghana has also established the following guidelines for the licensing of credit reference bureaux in Ghana (BOG, 2009):

Restricting Eligibility to Corporate Bodies No person other than a body corporate incorporated in Ghana shall be eligible to apply for a licence to engage solely in credit reference bureau activities in Ghana.

No person(s) shall engage in credit reference bureau activities in Ghana except by or under the authority of licence issued in accordance with the Credit Reporting Act, 2007 (Act 726).

No licence would be granted for the operation of a credit reference bureau, if a financial institution or a debt collection agency has ten (10) per cent or more of the voting rights in the proposed credit reference bureau.

Application for Licence An application for a licence to operate a credit reference bureau in Ghana shall be made in writing to the BOG and accompanied by the following:

i. Certified true copies of the Regulations, and certificate of incorporation or other Instrument relating to the proposed business.

ii. Documents that support the value of applicants capital base as well as sources of funds

iii. A feasibility study by the applicants company that shows the business plan, organisational structure, and internal monitoring procedures of the company and information on the following:

a. Mission statement and goals

b. Market analysis

c. Ownership structure

d. Governance structure

e. Management structure

f. A description of projected investments

g. Projected financial statements for a minimum of three years

h. Analysis of profitability

i. Business Continuity Plan

iv. Details of applicants shareholder(s), directors and other officers

v. A description of the applicants premises and suitability for credit reference bureau activities

vi. Particulars of the directors and key management personnel concerned with the management of the banking business, including their educational and professional background

vii. Information necessary for assessing the trustworthiness of applicant

viii. An overview of operations including a description of systems, design of data collection and dissemination and management processes including:

The development schedule of the software required for operation

Characteristics of products and services to be provided to users

Policy on service provision

Proposed security and control measures to prevent improper access to information

Proposed security and control measures to prevent improper access to management of information

Operational manuals designed to ensure accuracy of information contained in the database and its update, and

The proposed fee and cost structure of products

Ix. In addition to the above, applicants may also collect personal questionnaire forms for Directors of the proposed credit bureau for completion and submission to the Bank of Ghana, and any

x. Such other particulars as the Central Bank may require

Permissible Activities of Credit Reference Bureaux A credit reference bureau shall be permitted to carry on any of the following activities: (a) Gather and maintain data for the formation of credit histories (b) Process credit related data (c) Deliver credit reports based partly or fully on information not in the public domain.

Capitalisation A credit reference bureau is required to have a minimum paid-up capital of GH 500,000.00

Issuance of Credit Reference Bureau Licence The Bank of Ghana shall grant a licence to carry on the business of credit reference bureau after the Bank of Ghana is satisfied that the proposed entity: (a) has the human, financial and operational resources to enable it function efficiently and perform its functions effectively in accordance with the Credit Reporting Act, 2007 (Act 726) (b) proposed credit reference bureau office premises is suitable for the intended lines of business (c) has put in place adequate security systems to protect data (d) presents plans to adopt mechanisms to gather, input, integrate, update, validate and provide adequate security for data (e) presents a credible plan to develop and adopt procedures to ensure that: questions, concerns and complaints of credit information subjects, or data providers are treated equitably and consistently in a timely and efficient manner.

Refusal of licence The Bank of Ghana may refuse an application for a licence to carry on credit reference bureau business where (a) an applicant fails to pay the stipulated fees (b) there is an error in the application, or (c) an applicant fails to satisfy any pre-condition for the granting of the licence The Bank of Ghana shall within three months after receiving the application, notify the applicant to rectify the situation within thirty (30) days after the receipt of notification. Where the applicant fails to rectify the situation, BOG shall not process the application. BOG shall state the reasons for the refusal in the notice of refusal to the applicant.

Time limit for decision on application The Bank of Ghana shall communicate its decision on an application for a credit reference bureau licence within three months from the date of receipt of application.

Borrowers and Lenders Act No. 773 of 2008

Borrowers and Lenders Act No. 773 of 2008 provides a legal framework for the provision of credit in Ghana including standards of disclosure and provisions for the establishment of a collateral registry. The act provides a detailed description of rights and obligations of borrowers and credit providers.

Supervision lies with the Bank of Ghana, which ensures compliance with the act through investigation and monitoring, and receives written complaints about alleged interventions of the act. The Bank of Ghana may impose an administrative fine in case of non-compliance.

The act contains various provisions on consumer protection, including the following:

Clauses 13-17 provides for borrowers rights. The rights include the right to apply for credit, protection against discrimination in respect of credit on grounds of race, sex and ethnicity. Other rights include the rights of political affiliation, the right to receive documents, and the protection of borrower credit rights and confidentiality, personal information and borrower credit record. A person aggrieved by a decision of a lender may make a complaint to the Bank of Ghana.

Clause 18 states that a lender has to provide a prospective borrower with a pre-agreement statement and quotation in the form of a schedule specified in the act. The schedule can be found on the last page of the act.

Clause 19 specifies the use of marketing to induce a person to apply for or obtain credit.

Bank of Ghana is required to submit an annual report to the Minister of Finance within six months after the expiration of each financial year. The report must include information on violations and remedial action, volumes of different types of credit products and proposals for on-going improvement for the effective implementation of the act.Research MethodologyResearch Design and Research Methodology A research methodology references the procedural rules for the evaluation of research claims and the validation of the knowledge gathered, while research design functions as the research blueprint (Creswell, 2003). As Sekaran (2003) further clarifies, a research methodology may be defined as academias established regulatory framework for the collection and evaluation of existent knowledge for the purpose of arriving at, and validating, new knowledge. Cooper and Schindler (1998) 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 justification of resource expenditure. In other words, given that research is ultimately defined as constructive, the resources that it utilizes must fulfil explicit purposes and withstand critical scrutiny. Research methodology occupies a position of unique importance. A methodology does not simply frame a study but it identifies the research tools and strategies (i.e. resources) that will be employed, and relates their use to specified research aims. As Sekaran (2003) 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.

Research Purpose

Research scholars have identified three main purposes to the research activity. These are the exploratory, the descriptive and the explanatory purposes (Saunders et al., 2000). Proceeding from Jacksons (1994) contention that the researcher should identify the purpose(s) by correlating the research questions to the research objectives, this is precisely the strategy that the current research shall adopt.

Exploratory

Exploratory research unfolds through focus group interviews, structured or semi- structured interviews with experts and a search of the relevant literature (Saunders et al., 2000). Its primary purpose is the exploration of a complex research problem or phenomenon, with the objective being the clarification of the identified complexities and the exposition of the underlying nature of the selected phenomenon. In other words, and as Robson (2002) explains, exploratory research investigates a specified problem/phenomenon for the purpose of shedding new light upon it and, consequently, uncovering new knowledge. The first and second research questions directly tie in with, and complement one another and, additionally, are fundamentally explorative in nature.

Descriptive

Punch (2000) explains the purpose of the descriptive research as the collection, organisation and summarisation of information about the research problem and issues identified therein. Similar to the descriptive research, it renders complicated phenomenon and issues more understandable. Danes (1990) definition of the descriptive research and its purposes coincides with the stated. Descriptive research entails the thorough examination of the research problem, for the specified purpose of describing the phenomenon, as in defining, measuring and clarifying it (Dane, 1990). Jackson (1994) contends that all research is partly descriptive in nature. The descriptive aspect of a research is, simply stated, the (1) who, (2) what, (3) when, (4) where, (5) why, and (6) how of the study.

Explanatory

Miles and Huberman (1994) define the function of explanatory research as the clarification of relationship between variables and the componential elements of the research problem. Explanatory research, in other words, functions to highlight the complex interrelationships existent within, and around, a particular phenomenon and contained within the research problem (Miles and Huberman, 1994). Expounding upon this, Punch (2000) asserts that explanatory, or causal research, elucidates upon the nature of the problem under investigation and explains the basis for the proposed solution. It is an explanation of the complex web of interrelated variables identified and follows directly from a clearly stated central research hypothesis and research question.

This research would be an exploratory study based on the under listed research questions:

1. What are the types of regulatory oversight to which CRBs are subjected to? How effective is this oversight?

2. Do Microfinance Companies access CRBs for information of their prospective borrowers? And are the lending decisions of the companies influenced by CRBs information provided?

3. Do the quality of the information disclosed by CRB to Microfinance companies sufficient for making lending decisions?

4. How do the CRBs protect against the misuse and unauthorized disclosure of non-public information.

5. Do CRBs play any role on consumers accessibility of credit in the microfinance industries?

Research Approach The selection of the research approach is, according to Creswell (2003) a critically important decision. The research approach does not simply inform the research design but it gives the researcher the opportunity to critically consider how each of the various approaches may contribute to, or limit, his study, allow him/her to satisfy the articulated objectives and design an approach which best satisfies the researchs requirements (Creswell, 2003).

The research approach, as explained by Hair et al. (2003) embraces the quantitative versus the qualitative and the deductive versus the inductive. Each set of approaches is commonly perceived of as referring to polar opposites (Hair et al., 2003). Jackson (1994) takes issue with this perception and contends that a researcher should not limit himself to a particular approach but, instead should use a variety of approaches, if and when required by his study.

The Deductive versus the Inductive Approach

Marcoulides (1998) 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 studys hypotheses on their basis. Following 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, 1998). While not disputing the value of the deductive approach, this research will opt for the inductive approach, or the `bottom-up, as opposed to the `top-bottom method.

The Qualitative versus the Quantitative Approach

The quantitative tools for data analysis generally borrow from the physical sciences, in that they are structured in such a way so as to guarantee (as far as possible), objectivity, generalizability and reliability (Creswell, 2003). Here the researcher is viewed as external to the research and results are expected to be constant if the study is replicated, regardless of the identity of the researcher. Accordingly, the matrix of quantitative research techniques is inclusive of random and unbiased selection of respondents. It is primarily used for the production of generalizable data for such purposes as evaluation of outcomes, tending towards the near total decentralization of human behaviour. It is such decentralization that raises criticisms amongst those who tend to exhibit preference for qualitative tools, arguing that these offer insight into perceptions and interactions (Creswell, 2003). Accordingly, whereas questionnaires are leading tools for the first, qualitative methods include interviews, observations and focus groups, are designed to explicate the underlying meaning/cause behind selected phenomenon. In other words, while qualitative tools analyze the reasons behind a particular phenomenon, quantitative tools analyze the phenomenon itself, independent of human perceptions of reasons why (Creswell, 2003).

As touched upon in the above, qualitative analysis usually precedes from qualitative research techniques employing, for example, interviews. The content analysis tool is primarily employed for thematic summarization of interview data and is very useful in reducing a large volume of interview data into manageable themes, reflecting upon group attitudes and perceptions of certain aspects of the organization. The second tool, force field analysis, is employed for analysis of data pertaining to organizational change. Primarily deriving from Lewins change model, it categorizes data into pro and anti-change forces. As such, it offers the researcher an insight into the factors that work towards the maintenance of the status quo and those that aid change (Creswell, 2003). Accordingly, one may surmise that specific conditions demand employment of qualitative analysis tools, with those being the availability of qualitative data and the desire to analyze the underlying attitudes and perceptions regarding organizational structure and change, as expressed by the relevant stakeholders. In other words, the human behavioural factor is central here. Quantitative methods tend to be relatively low in cost and time requirements (Punch, 1998) since they enable a large quantity of relevant data to be amassed and subjected to statistical analysis in a short space of time; it is therefore going to be used for this study.

Research Strategy Robson (2002) identifies three research strategies, or plans for responding to the research question. These are the experimental, the survey and the case study strategies. A researcher may select one, or even all three of these strategies, depending on the requirements of the research itself and the nature of the study. Naturally, and as Yin (1989) concurs, scientific researches exploit the experimental 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 by Yin (1989).

Sampling TechniqueIt is not good enough, though, to assume that findings for the sample will be replicated in the rest of the population, so therefore the sample in the first place needs to be carefully selected if there is to be any confidence that the findings from the sample are similar to those found among the rest of the category under investigation.

Social researchers have been using two types of sampling techniques. The first is known as probability sampling, the second as non-probability. Probability sampling, as the name suggests, is based on the idea that the people or events that are chosen as the sample because the researcher has some notion of the probability that these will be representative cross-section of the people or events in the whole population being studied. On the other hand non-probability sampling is conducted without such knowledge about whether those included in the sample are representative of the overall population.

Because the researcher will not a have sufficient knowledge about the sample to undertake probability sampling and may not know how many people make up the population, under these circumstances, the researcher will turn to the forms of non-probability sampling as the basis for selecting the sample.

The most defining characteristics of non-probability sampling method are that, however form it may take, the choice of people or events to be included in the sample is definitely not a random selection. Streubert and Carpenter (1995) point out that there is no need to randomly select individuals because manipulation and control are not the purpose of the exercise. By using the non-probability sampling, this does not mean the researcher will know absolutely nothing about what goes on at the various pharmacy departments in the hospitals, but rather, not enough knowledge to use the probability sampling.

Purposive sampling is a form of non-probability sampling (Polit and Hunglar, 1999). This is the type of sampling that was used to select the respondents (Banks or financial). With this type, the sample is "hand-picked" for the research. Dane (1990) 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 believe, will be critical for the research. Instead of going for the typical instances, a cross-section or a balanced choice, the researcher will be able to concentrate on instances which display wide variety possible even focus on extreme cases to illuminate the research question at hand. In this sense it might not only be economical but might also be informative in a way that conventional probability sampling cannot be (Descombe, 1998).

One justification for using the non-probability purposive sampling is that it stems from the idea that the research process is one of "discovery" rather than testing of hypotheses. It is a strategy where Lincoln & Guba (1985) describe as emergent and sequential. Almost like detective, the researcher follows a trail of clues, which leads the researcher in a particular direction until the questions have been answered and things can be explained (Robson, 1993).

Data Collection

The research would be carried out at Microfinance institutions in Accra (names would be supplied upon approval) with a total of 15 respondents microfinance istitutions. The same questionnaire would be administered to all of them. Credit officers at these institutions would be the respondents of the questionnaires issued.

Method of Analysis

Data analysis tool SPSS 17 for windows would be used to analyse the data obtained. Frequency tables, tabulations and cross tabulations would be done with results presentation in the chapter four.