Operational Risk Management in the Banking Industry of Ghana

Abstract

This research examines the management of operational risk by Ghanaian Banks with special emphasis on operational risk disclosures by the banks. The research design involved the use of both qualitative and quantitative techniques. Qualitative techniques involved the use of disclosure index to assess the extent of number of words used by the banks to disclose the management of operational risk. Logistic regression was used to examine the effect of capital asset ratio and return on assets on the disclosure index of the banks. The study revealed that over the survey period from 2006 to 2009 the coverage of financial risk in the annual reports of Ghanaian banks generally increased by 50% from 2006 to 2007. Operational risk disclosure had also realized the same increase by the banking institutions with the exception of 2009 when 50% disclosed information on operational risk. On the extent of operational risk disclosure evaluation using the number of words, Ecobank Ghana was the only bank that had information on operational risk in 2006 and 2007. The number of words banks used in the disclosure context increased by about 100% between 2006 and 2007. The number of pages used to disclose operational risk by the various banks did not see a significant increase with the exception of Ecobank Ghana that increased the number of pages used to disclose its operational risk. The results did not support the hypothesized inverse relationship between banks’ disclosure and their equity ratio and profitability, thus lower capitalized and/or less profitable banks do not necessarily choose higher levels of operational risk disclosure. Capital ratio (NP/A) had negative influences on both no disclosure and low disclosure levels. However, there was a positive influence of capital ratio on high disclosure level. On the other hand the influence of return to asset was positive in all the cases even though it did not exhibit significant influences. It is recommended that Banks in Ghana must not be only interested in reporting credit and interest rate risk as identified in the study but a major interest should be devoted to the management and disclosure of operational risk.