Impact of credit risk on the financial performance of commercial banks in ghana

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The survival of financial institutions lies in their ability to strike a balance between their deposits and credit portfolios. For this reason, the attention of extant literature is focused on examining the interplay between credit risk and the performance of banks. The current study contributes to knowledge by investigating the impact of different credit risk variables on the financial performance of commercial banks in Ghana. It also assesses the trend of credit risk among the GSE-listed banks. NPL, capital adequacy ratio, and loan and advance ratios are used to proxy credit risk, while profitability is measured with ROA and ROE. The study data is gleaned from the annual reports of the nine listed commercial banks over a period of 11 years (2010-2020). With the purposive sampling technique, 99 observations are used to perform a static regression model. After the Hausman test, the RE model is employed using the Eviews version 10. The outcome of the study shows that there are boom and bust trends in the credit risks of banks due to several prevailing bank-specific, environmental and economic conditions. As such, during the periods of 2015 and 2016, banks experienced heightened NPL ratios. Likewise, between 2019 and 2020, banks recorded significant increases in all their credit risk variables. The study further reveals that the capital adequacy ratio positively impacts bank performance (ROA), and TLAR also relates positively to the performance of banks (ROA and ROE). Meanwhile, NPL relates negatively to bank performance (ROA and ROE). These findings support the pecking order theory, signalling theory and capital buffer theory. Thus, it is recommended that banks should endeavour to meet the statutory CAR requirement of the BOG to remain resilient to any economic slowdowns. Banks should also ensure a reasonably low rate of NPL is maintained while increasing TLAR with the aim of increasing bank performance.
A thesis submitted to the department of accounting and finance, kwame nkrumah university of science and technology, in partial fulfilment of the requirements for the award of master of science (accounting & finance)