Influence of Credit Risk Identification on the Financial Performance of Commercial Banks in South Sudan

Abstract

Banks rely on their profitability to mitigate the chaotic nature of the dynamic environment. High financial performance contributes to the financial institutions and market development of nations. Banks’ primary function is financial intermediation, but this function entails a risk of its own which is the risk of default. The purpose of this study was to determine the influence of credit risk identification on the financial performance of commercial banks in South Sudan. The research was anchored on the following three theories: Asymmetric information theory, portfolio theory, and credit risk theory. The study adopted an explanatory research design. The target population for the study was 711 employees of the 28Commercial Banks in South Sudan. The sample size was 195 respondents comprising Branch Managers, Credit Risk Managers, and Loan Officers of the Commercial Banks selected using the purposive sampling method since they are the ones exclusively dealing with lending matters daily. Primary data was used. Structured questionnaires were used, which included closed-ended to collect the primary data. The study conducted validity and reliability analysis and found a Cronbach of 0.708. Kaiser-Meyer-Olkin (KMO) Measured of Sampling Adequacy of credit risk identification was at 0.732 which was above 0.5. Data was analyzed using descriptive statistics involves the use of mean, standard deviations, percentages, and frequencies, while inferential statistics involves the use of correlation and multiple regression analysis through Statistical Package for Social Sciences (SPSS). The confidence level was 95% with an error margin of 5%. The findings showed that the combined effect of credit risk identification activities influenced the financial performance of commercial banks in South Sudan positively. The study concluded that credit risk identification activities significantly influence the financial performance of commercial banks. This study recommends commercial banks’ managers and loan officers focus on enhancing their credit risk identification practices by implementing comprehensive and effective risk assessment frameworks. This can include facilitating the understanding of credit risk identification based on the products the banks offer, conducting thorough credit assessments before offering credit, evaluating potential risks associated with new loan services or products before launching the product, and engaging external experts to ensure a holistic approach to risk identification.