Email this article 
The Link between Credit Risk and Profitability of Universal Banks in Ghana
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
Full Text:
PDFReferences
Allen, F. (2011). The effects of the financial crisis on Sub-Saharan Africa. Review of
a. Development Finance, 1(1), 1-27.
Ago, P. S. (2012). The impact of credit risk management on financial performance of
a. commercial banks in Nepal. International Journal of Arts and Commerce, 1(5), 9-15.
Asamoah, J. Y., & Owusu-Agyei, L. (2020). The impact of ICT on Financial Sector Policy
a. Reforms in Post-Financial crisis era in Ghana. International Journal of Finance & Banking Studies (2147-4486), 9(2), 82-100.
Atinyo, D. (2021). Financial sector crisis in Ghana: A study of underlying the causes. Unpublished master’s thesis, Department of Finance, University of Cape Coast, Cape Coast, Ghana.
Berríos, M. R. (2013). The relationship between bank credit risk and profitability and liquidity. The International Journal of Business and Finance Research, 7(3), 105-118.
Boadi, I. (2018). Income Diversification and Banks’ Profitability from an African Market
a. Perspective: A Relief for SMEs?. In African Entrepreneurship (pp. 153-188). Palgrave Macmillan, Cham.
Corporate Financial Institute. (2020). Accessed from https://corporatefinanceinstitute.com/resources/knowledge/finance/bank-rating/
Cucinelli, D. (2015). The impact of non-performing loans on bank lending behavior: evidence
a. from the Italian banking sector. Eurasian Journal of Business and Economics, 8(16), 59-71.
Creswell, J. W. (2013). Educational research: Planning, conducting, and evaluating. W. Ross
a. MacDonald School Resource Services Library.
Danson, M., & Kadubo, A. S. (2012). The impact of credit risk management on the financial
a. performance of banks in Kenya for the period. International Journal of Business and Public Management, 2(2), 72-80.
Garson, G. D. (2012). Testing statistical assumptions. Asheboro, NC: Statistical Associates
a. Publishing.
Godlewski, C. J., & Ziane, Y. (2008). How many banks does it take to lend? Empirical evidence from Europe. Empirical Evidence from Europe, 1-35.
Hearit, K. M., & Hearit, L. B. (2020). Commentary—A dimon in the rough:
a. Apologetic crisis management at JPMorgan chase. International Journal of Business Communication, 2329488420932303.
Kargi, H. S. (2011). Credit risk and the performance of Nigerian banks. Ahmadu Bello
a. University, Zaria.
Leung, S., & Horwitz, B. (2010). Corporate governance and firm value during a financial
a. crisis. Review of Quantitative Finance and Accounting, 34(4), 459-481.
Nyavor, G. (2018, August 10). UT Bank collapse: ¢30m loan for ¢1m collateral; MP cited. My Joy Online. Retrieved from www.myjoyonline.com
Owusu, I. (2019, February 14). New capital requirement by BoG - Panacea for bank failures?. Business Ghana.
Polat, A. (2012). Corporate letters of credit and their usage as an instrument for fraud. Journal of
a. Financial Crime, 23(3), 12-33.
PwC. (2018). 2018 Ghana banking survey: Having secured the new capital; what next for banks? Accra, Ghana: PricewaterhouseCooper.
Patnaik, I., & Vasudevan, D. (1999). Interest rate determination: An error correction model.
a. National Council of Applied Economic Research.
Roy, S., & Kemme, D. M. (2012). Causes of banking crises: Deregulation, credit booms and
a. asset bubbles, then and now. International Review of Economics & Finance, 24, 270-294.
Sikasem, K. (2017). UT and Capital Bank takeover: A few clarifications for stakeholders. Sikasem. Retrieved from www.sikasem.org
Stephenson, P. K. (2018 August 23). Why Bank of Ghana is ‘complicit’ in current
a. banking crises. My Joy Online. Retrieved www.myjoyonline.com
Stubley, D. J. (2018). An investigation into the price transmission between producers and
a. retailers within the UK milk market. Advances in Business-Related Scientific Research Journal, 9(1), 14-43.
Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The
a. American Economic Review, 71(3), 393-410.
Ueda, K., & di Mauro, B. W. (2010). The value of the too-big-to-fail subsidy to financial
a. institutions. Stijn Claessens, Michael Keen und Ceyla Pazarbasioglu (eds.), Financial Sector Taxation: The IMF's Report to the G-20 and Background Material.
Veronesi, P., & Zingales, L. (2010). Paulson's gift. Journal of Financial Economics, 97(3), 339-
a. 368.
DOI: http://dx.doi.org/10.52155/ijpsat.v30.1.3893
Refbacks
- There are currently no refbacks.
Copyright (c) 2022 Seyram Kawor, Divine Atinyo
This work is licensed under a Creative Commons Attribution 4.0 International License.