Credit Risk Management as a Good Measure of Financial Performance of Banks in Ghana

Abstract

Banks are exposed to several forms of risks that affect their performance. The main objective of banking management is to maximize wealth. In efforts to realize this goal managers and shareholders should evaluate the cash flows and risks to direct its financial resources in different areas of use. This paper aims to investigate the effect of credit risk management (CRM) on financial performance (FP) of banks in Ghana. The indicators used in the study are CRM, bank credit (BC), liquidity risk (LR) and capital risk (CR) are regressed on FP. The CADF and CIPS panel unit root tests report that, the variables are non-stationary at their levels but become stationary at their first difference. The Westerlund-Edgerton panel bootstrap cointegration test show that, the variables are cointegrated and hence possess a structural long-run relationship. Also the Granger causality through the ARDL model show; (1) A two-way causality between bank credit and FP in the long-period and short-period; (2) A positive and significant one-way cause running from liquidity to FP, a one-way causality between capital risk and FP, lastly one-way causality in the long-period for LR and bank credit are evidenced; (3) The ARDL framework is evidenced to be very significantly effective to the application of Granger causativeness test.

Keywords: bank credit; credit risk management; financial performance; liquidity risk.

DOI: 10.7176/JESD/11-4-04

Publication date: February 29^th 2020