Abstract
Credit risk management has become an instrument for the survival and growth of financial institutions. The major cause of banking problems has been identified as ineffective credit risk management. The Ghanaian banking sector is currently undergoing significant reforms which have led to some banks being collapse whiles others consolidated. This study seeks to re-examine the impact of credit risk on the profitability of Banks in Ghana. Panel data covering the period of 2010-2015 was gathered from 20 banks. Three determinants of credit risk were selected. These are asset quality, non-performing loan, and liquidity. Return on Asset (ROA) was employed as a measure of profitability. We found that that while the relationship between asset quality, non-performing loan and profitability were statistically significant, the relationship between liquidity ratio and banks’ profitability was found to be insignificant. This shows that banks with huge non- performing loans are less profitable and prone to a high rate solvency rate. Based on the result of the study, it is recommended that banks should adopt and implement effective credit risk management strategies as it will enhance their profitability. Keywords : Asset Quality Credit risk, Ghana, Non- performing loans. Liquidity Risk. DOI : 10.7176/EJBM/11-5-03
Highlights
The banking industry has been earmarked as a key pillar to the achievement of vision 2030(Munge, Rotich and Wamukoya, 2014)
The major cause of banking problems has been identified as ineffective credit risk management(Koju, Koju and Wang, 2018)
Non-performing Loan has an industry average 4.10%. This www.iiste.org indicates that non- performing loan forms a lesser portion of the total loans and advances granted
Summary
The banking industry has been earmarked as a key pillar to the achievement of vision 2030(Munge, Rotich and Wamukoya, 2014). A long long-term strategy to achieve this is by increasing savings, encouragement of foreign direct investment (FDI) and safeguarding the economy from external shocks. The major cause of banking problems has been identified as ineffective credit risk management(Koju, Koju and Wang, 2018). For a healthy banking sector, proper credit control measures should be in place. Credit risk is the likelihood of default by the borrower or counterparty such that loans, bonds or leases will not be repaid in time / in full, or the counterparty will fail to perform an obligation to the institution(Basle Committee on Banking Supervision, 2017)
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