Liquidity risk, credit risk and performance of listed banks in Ghana

Abstract

Credit risk and liquidity risk management practices have become 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 prove 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 listed banks in Ghana. The study used a quantitative research approach in the analysis of the data. Annual secondary data from the financial statements of listed banks were analysed for the period 2011 to 2014. A fixed effect model was used in the analysis. The results showed that the capital adequacy ratio, cost per loan assets ratio and loan advance total deposit ratio had significant negative effect on listed banks’ liquidity risk. The results also showed that liquidity risk had significant negative effect on the performance of listed banks but credit risk generally had insignificant effect on listed 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 listed banks. BoG for policy purposes should regularly assess the lending attitudes of listed 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 listed banks’ lending attitude.