Abstract:
ABSTRACT
Credit risk and liquidity risk management practices are very critical for efficient
operations and survival of banks. This is because they have the tendency to affect
the core existence of banks (profitability). However, the impact of credit risk and
liquidity risk on the performance of banks is yet to be fully explored in Ghana. The
recent takeover of UT bank Ltd and Capital bank Ltd by GCB bank Ltd; where
issues of insolvency were cited by BoG as reason for the takeover is a proof of
credit risk and liquidity risk management challenges in Ghana. This study
investigated the effect of credit risk and liquidity risk on the performance of
universal banks in Ghana. The study used a quantitative research approach in the
analysis of the data. Annual secondary data from the financial statements of
universal banks were analysed for the period 2011 to 2015. A fixed effect model
was used in the analysis. The results conclusively showed that the capital adequacy
ratio, cost per loan assets ratio and loan advance total deposit ratio had significant
negative effect on universal banks’ liquidity risk. The results also showed that
liquidity risk had significant negative effect on the performance of universal banks
but credit risk generally had insignificant effect on universal banks’ performance.
The study recommends management to be cautious in setting up a credit policy that
will not negatively affects liquidity risk and liquidity of universal banks. BoG for
policy purposes should regularly assess the lending attitudes of universal banks;
one direct way is to assess the degree of credit crunch by isolating the impact of
supply side of loan from the demand side taking into account the opinion of firms
about universal banks’ lending attitude.
