Abstract:
Credit creation process exposes banks to high default risk which could lead to
financial distress including bankruptcy. The objective of the study is to identify the
key determinants of credit risk faced by the banks in Ghana and to assess its impact
on their financial performance in terms of profitability. The study is based on data
from seven banks operating in Ghana for a 15-year period ranging 2001 to 2015.
The study showed an inverse relationship between capital adequacy and credit risk
at 1% validating the hypothesis. Also business operation efficiency measured by
Management efficiency ratio (MER) and trading income to total revenue ratio
showed a negative significant relationship with credit risk at 5% and at 10% level
of significance respectively which also provided a strong argument for the stated
hypothesis. Return on equity and return on asset showed a significant inverse
relationship with credit risk at 1% significant level. similar observation was made
on net interest ratio which also showed a significant inverse relationship with credit
risk at 5% level of significance but was against the expected positive relationship
from the literature. Considering the identified determinants of bank credit risk,
combined with how credit risk impacts bank profitability, an efficient operational
expense management of banks would not only increase the profit margin of these
banks but also reduce the tendency of threat on the survival of these banks. This is
due to the significant relationship between management expense ratio and credit
risk and also with profitability. From the result of the study, conclusion was arrived
on the basis that, though there may be other factors that affect the credit risk of
banks in Ghana, capital adequacy, management operational efficiency,
management of liquidity risk and the size of the bank, annualised changes in
inflation and changes in GDP are major determinants of credit risk due to their high
statistical significance level.
