Credit Risk Management as a Good Measure of Financial Performance of Banks in Ghana

Isaac Paintsil ,Zhao Xicang ,Emmanuel Manu

doi:10.7176/jesd/11-4-04

Abstract

Banks are exposed to several forms of risks that affect their performance. The main objective of banking management is to maximize wealth. In efforts to realize this goal managers and shareholders should evaluate the cash flows and risks to direct its financial resources in different areas of use. This paper aims to investigate the effect of credit risk management (CRM) on financial performance (FP) of banks in Ghana. The indicators used in the study are CRM, bank credit (BC), liquidity risk (LR) and capital risk (CR) are regressed on FP. The CADF and CIPS panel unit root tests report that, the variables are non-stationary at their levels but become stationary at their first difference. The Westerlund-Edgerton panel bootstrap cointegration test show that, the variables are cointegrated and hence possess a structural long-run relationship. Also the Granger causality through the ARDL model show; (1) A two-way causality between bank credit and FP in the long-period and short-period; (2) A positive and significant one-way cause running from liquidity to FP, a one-way causality between capital risk and FP, lastly one-way causality in the long-period for LR and bank credit are evidenced; (3) The ARDL framework is evidenced to be very significantly effective to the application of Granger causativeness test. Keywords: bank credit; credit risk management; financial performance; liquidity risk. DOI: 10.7176/JESD/11-4-04 Publication date: February 29 th 2020

Highlights

Banks are exposed to various types of risks, that affect their performance and activity in their efforts to attain profitability
The outcomes likewise infer that liquidity risk (LR) has a moderate positive association with credit (r=0.904, P
This study considered the effect of credit risk management on financial performance and examine the causal link amid the measurement variables for 15 banks in Ghana covering the period 2007 to 2017

Summary

Introduction

Banks are exposed to various types of risks, that affect their performance and activity in their efforts to attain profitability. The management of credit risk affect a bank’s profitability (Li and Zou, 2014). Musyoki and Kadubo (2012) suggest that the global banking industry has made improvement in credit risk management. Until the early 1990s, credit risk assessment was generally limited to individual loan reviews, as banks maintained most of the loan proceedings in their books until maturity. Credit risk management incorporates both loan reviews and portfolio analysis. The growth of new technologies for risk analysis has allowed many banks to move away from the traditional bookkeeping and maintain credit practice in favor of a more innovative approach. Much more than in the past, today's banks can manage and control concentrations of debtors and portfolios, maturities and loans, and even eliminate problematic assets before they generate losses. Through the adoption of technology banks are able to banks to classify, evaluate, resolve and reduce risk in a way that was not possible ten years ago

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