Effect of Credit Risk and Liquidity Risk on the Performance of Commercial Banks in Ghana

Tan Ming ,Angelina Kissiwaa Twum ,Andrew Osei Agyemang ,Isaac Akpemah Bathuure

doi:10.7176/rjfa/11-17-11

Abstract

In recent years, commercial banks in Ghana have seen great development in assets and profitability and have been playing increasingly important roles on national economy and social development which has become irreplaceable in a wide range. However, financial risks have been identified as the cause of hinderances to the banks’ normal development and has rendered some banks to fail. In recent years, Ghana’s commercial banks have faced vigorous challenges. An important setback is the collapsing and merging of commercial banks and the increment of the minimum capital requirement. The cause of these misfortunes can be attributed to the combine effect of liquidity risk and credit risk since bank managements, supervisory authorities and government overlooked their impact. The focus of this paper is to study the impact of credit risk and liquidity risk on the performance of commercial banks in Ghana. The paper studied the annual and financial reports of licensed commercial banks in Ghana over a period of 14 years. The hypotheses generated for the study was tested using the OLS regression. The results revealed a negative relationship between non-performing loans and performance (ROA). Similarly, credit ratio and loan to deposit ratio also had a negative effect on ROA of banks in Ghana. On the contrary, liquidity ratio revealed to have a positive relationship with the dependent variable. The study recommended that, Ghanaian commercial banks must adopt a general framework for liquidity risk and credit risk management to ensure avoidance or reduction in the occurrence of these risks. Control variables help to check the robustness and also explain the objectives of the study in a more precise way. Keywords : Credit Risk; Liquidity Risk; Commercial Banks: Performance; Ghana DOI: 10.7176/RJFA/11-17-11 Publication date: October 31 st 2020

Highlights

Financial institutions, especially commercial banks, play a very important role in a nation’s economy. (Berger et al, 1995) defined financial institutions in precise as enterprises such as a bank whose primary function is to collect money from the public and invest it in financial assets such as stocks and bonds, loans and mortgages, leases as well as insurance policies
The recent global recession started as a credit problem and manifested swiftly as a critical problem, resulting from liquidity risk
The key finding arising from the financial meltdown was the exposure of the ineffective and incompetent management of liquidity risk and credit risk

Summary

Introduction

Especially commercial banks, play a very important role in a nation’s economy. (Berger et al, 1995) defined financial institutions in precise as enterprises such as a bank whose primary function is to collect money from the public and invest it in financial assets such as stocks and bonds, loans and mortgages, leases as well as insurance policies. For the purpose of this study, emphasis is laid on commercial banks as a key example of financial institution. They accept deposits and provide financial security to their customers. According to numerous researchers including (Padilla-Pérez and Ontañon, 2014, Cebenoyan and Strahan, 2004, Olalekan et al, 2018, Bülbül et al, 2019), commercial banks face diverse types of risk which include market risk, operational risk, liquidity risk, credit risk, business risk, reputational risk and systemic risk. Credit and liquidity risks are known to be the most pertinent risks in the operational activities of commercial banks. According to (Olalekan et al, 2018), credit risk and liquidity risk are the most important risks that banks face, they are unswervingly associated to the activities of banks and their causes of failure

Objectives

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Discussion

Conclusion