Re-Examining the Impact of Credit Risk on Profitability of Banks:Panel Evidence from Ghana

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