CREDIT RISK AND BANK PROFITABILITY OF COMMERCIAL BANKS IN GHANA

Abstract

This study attempted to explore the connection between credit risk management and the profitability of the Ghana Stock Exchange (GSE) listed commercial banks. The study specifically sought to examine the relationship between credit risk and the profitability of the firms as measured by ROA. The study adopted these variables to measure credit risk (non-performing loan ratio, cost per loan asset, capital reserved 0.1ratio and asset growth ratio) and return on asset (ROA) as a profitability estimator. Following some diagnostic and specification studies to address the fundamental assumptions of the Classical Linear Regression Model (CLRM). The study uncovered that NPLR had a significantly negative effect on the firms’ profitability as measured by ROA [β=-0.1671, (p=0.1360)>0.05]. Also, the cost per loan asset (CPLA) had a positive influence on the firms’ profitability as measured by ROA [β= 0.0249, (p=0.8252)>0.05]. For the other variables of credit risk measurements, capital reserved ratio, and assets growth ratio. The capital reserve ratio had a significant positive association with ROA [β=0.2867, (p=0.0095) <0.05. Similarly, asset growth ratio had a statistically significant negative connection with firm’s profitability measured by ROA [β=-0.3835, (p=0.0004) <0.05. Based on the results, the study suggested that since credit risk had a negative association with the firm’s profitability, the companies should adopt efficient credit risk management methods to assist guide their profitability. This point is raised because, as demonstrated by the results of the study, an increase in credit risk led to a decrease in the profitability of the companies. KEYWORDS: Credit risk, Commercial banks, Loans, Profitability, Ghana Stock Exchange.