Credit Risk Management and Profitability: A Case of Commercial Banks in Ghana

Abstract

The study focused on credit risk management and profitability of local banks in Ghana. Profitability (return on equity) was the dependent variable and it was used to reveal the attitude of banks toward risk management. To achieve the overall purpose, credit risk management was measured using loan loss reserves, capital adequacy and credit solvency. The study followed quantitative analytical research approach and causal/explanatory design. The study used secondary source data compiled from audited financial statements of the local banks in Ghana. Data construction was undertaken to measure the relevant study variables using financial ratios. The data span from 2008 to 2019. Thus, annual data frequency was used for the investigation. Ordinary least square (OLS) econometric technique was employed to estimate the relationships the variables formulated in this study. The result from the findings revealed that loan loss provision showed a negative effect on the profitability of local banks as well as credit solvency. On the other hand, capital adequacy ratio had a positive impact on profitability. The study therefore concluded that following the high loan loss provision and the consequential effect on profitability, it is incumbent on the banks (local banks) to put up stringent measures to curtail the occurrence of non-performing loans. It is further recommended that owing to the negative effect of loan loss provision and credit solvency exposure, local banks in Ghana are expected to develop and implement credit policy aim at understanding the antecedents of loan loss and counteract these antecedents with prudent credit clearance prior to granting loans to prospective loan applicants.