QUESTION 1

1. The following information on credit and advances are found in the book of Jack and Jane bank:

1. Letter of credit GHC40000.00 ii. Mortgage GHC23000.00 iii. Personal loan GHC2400

iv. Bankers acceptance GHC 3400.00

You are required to classify the above credit and advances in the banks book under the following heading and provide justification for your classification

1. Fund-based lending
2. Non -Fund- base lending 10 marks

2. The following transactions are found in the books of Faja Bank and Danga Bank.
   1. Faja Bank has advanced Credit to Mr. Dany Tee at 25% fixed interest rate ii. Danga Bank has advanced Credit to Maafio at 20% floating interest rate. If interest rate in the country goes up by 5%:
   1. What will be the effect on the interest income of the banks? 4 marks
   2. Which of these two banks will gain from the rising interest rate, and why? 2 marks
   3. What will be the effect on each of the customers? 4 marks

QUESTION2

Over the last few years, the Bank of Ghana (BoG) has cracked the whip at the banking industry in a bid to restore sanity in the industry. In August 2017, the UT and Capital Banks were liquidated for failing to meet the

BoGs minimum capital ratio. The operations of UniBank, Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank ended. In their place the BoG announced a new bank called the Consolidated Bank, as part of measures to ensure the banking sector becomes robust.. Asset Quality Review (AQR) of banks conducted in 2015 and 2016 by Bank of Ghana found that some indigenous banks had inadequate capital, high levels of nonperforming loans, and weak corporate governance which compelled BoG to crack the whip.

1. Critically assess the causes of the credit risks in the books of the Banks 8 marks
2. To what extent do you agree that the primary cause of bank failure is credit risk? 12 marks

QUESTION 3

1. Citadel Bank desires to give its shareholders a return of 30% and the bank has an asset of GHC100 000.

00 and capital of GHC 10000.00.

You are to determine the desired profit margin. 5 marks

2. A prime customer of a bank wants a loan of GHC5000.00. The banks cost of fund is 12.5% and service charge is 2.5 %. Use the profit margin derived from question 2(a) above as the desired profit margin. You are to determine the price of the loan using the service cost model. 5 marks
3. Citadel Bank has made a risk assessment of one of its customers who has applied for a loan. The Bank is confident that there is 95% probability of the borrower repaying the principal and interest as schedule. It also estimated that in case of default the bank will recover about 85% of the principal and interest due. The bank quotes 14 rate on the loan, the cost of fund is 12% and cost of servicing the loan is 0.50. Using the profit margin determined from question 2(a) above you are required to:
   1. Determine the risk premium 8 marks
   2. Determine the price of the loan 2 marks

PART B (ANSWER ANY ONE QUESTION)

QUESTION 4

Miss Bajadu is one of your cherished customers who has maintained a satisfactory account for the past 12 years. She has been promoted and wants to relocate to an area that befits her current status. Her monthly salary amounts to GHC 12000.00.

Today you saw her loan application request among days collections. She indicates that she intends to sell her current house located in the out sketch of the city and use the money to acquire a new one. She wants your bank to assists her acquire her dream house. According to her, the existing house valued at GHC 75,000. 00 and her dream house is valued at GHC 95,000.00. The existing house has no an outstanding mortgage. She has been able to obtain a mortgage of GHC 30,000 for the new house. She has not been able to identify a buy for her house.

You are required to indicate your banks position to her request 20 marks

QUESTION 5

Mr Djanduo has been a customer of your branch for just two years. He is married with two young children who are not yet in school. For most of the time, he has operated a satisfactory account with occasional overdrafts before receipt of his salary. However, the last few months have witnessed an increasing tendency in the overdraft, which is now standing at GHC 900.00. His monthly salary is usually GHC 2,000.00.

He calls to see you in response to letters written by the bank to him demanding in relation to the payment of the overdraft. At the meeting with him he admits having some financial difficulties. A check from the banks system shows that his monthly standing orders to his wife for housekeeping is GHC 900.00; monthly hire purchase payment amount to GHS 300.00.

The bank has not paid his building society standing order for four months and he is GHC 1000.00 in arrears; he has other bills totalling GHC 250.00 to pay and his car, requires repairs likely to cost another GHC 100.00. He tells you that the problems started a year ago, when he moved house and increased his monthly mortgage payments to GHC 250.00. This together with expenditure on the new house has caused the deterioration in his finances. Fortunately, he is about to be promoted in his job and this should increase his net monthly salary to GHC 2600.00.

He asks you to give him a loan of GHC 2,500.00 to enable him settle his outstanding financial obligations. He offers to repay the loan at the rate of GHC 100 per month inclusive of interest.

You are required to evaluate his request and state your banks position. 20 marks

PART C (ANSWER ONLY ONE QUESTION)

QUESTION 6

As at the end of 2019 one notable bank among the first three banks which were affected by the banking sector clean-up had large number of cars and mortgages which it had taken lien over as collateral. Despite these securities, one of the major causes identified for the collapse of the bank was non-performing assets. This contributed to the bankruptcy of the bank since it was badly affected by ill-liquidity.

You are required to explain why the securities could not protect the bank from bankruptcy?

20 marks

QUESTION 7

K & P Construction company won a contract from the government to construct a road. They approached your bank for credit advance to enable them execute the contract. They pledge the contract sum as security.

What due diligent should your bank perform to safeguard itself? 20 marks