The Link between Credit Risk and Profitability of Universal Banks in Ghana

Seyram Kawor, Divine Atinyo

Abstract


Credit risk has been cited by scholars and reputable credit rating organisations as one of the major contributory factors to financial crisis – especially, within the banking sector – due to its pronounced effect on firms’ profitability. Nevertheless, stakeholders within Ghana’s financial sector seemed to lose grip of the relationship between credit risk and profitability; possibly due to paucity of empirical literature in this area. Thus, this study assessed the relationship between credit risk and profitability of universal banks in Ghana, employing annual data for the period 2011 – 2020 from 22 universal banks selected using the criterion sampling technique. The Ordinary Least Squares (OLS) was used for estimation of the relationship between credit risk and profitability. Credit risk was proxied by nonperforming loans to loans and advances (NP/LA), loans and advances to total deposits (LA/TD) and provision for loan loss to net loans (PLL/NL), whilst profitability was measured by return on assets (ROA). Results revealed NP/LA and LA/TD to have significantly positive effects on ROA, whilst PLL/NL was negatively associated with ROA. Overall, the findings pointed out that credit risk influences firm profitability, and thus, management of universal banks in Ghana are required to take pragmatic steps towards minimising the threats posed by credit risk.


Keywords


Credit risk, profitability, universal banks, crisis, Ghana, financial sector

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DOI: http://dx.doi.org/10.52155/ijpsat.v30.1.3893

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