Credit Risk and Profitability of Selected Banks in Ghana

Abstract

This study attempts to reveal the relationship between credit risk and profitability of some selected banks in Ghana. A panel data from six selected commercial banks covering the five-year period (2005-2009) was analyzed within the fixed effects framework.  In Ghana, the average lending/interest rate is about 30% - 35% per annum. From the results credit risk (non-performing loan rate, net charge-off rate, and the pre-provision profit as a percentage of net total loans and advances) has a positive and significant relationship with bank profitability. This indicates that banks in Ghana enjoy high profitability in spite of high credit risk, contrary to the normal view held in previous studies that credit risk indicators are negatively related to profitability.  Our results can be attributed to the prohibitive lending/interest rates, fees and commission (non- interest income) charged. Also, we found support for previous empirical works which depicted that bank size, bank growth and bank debt capital influence bank profitability positively and significantly.

Keywords: Credit Risk, Profitability, Banks, Ghana.