Impact of Credit Risk Management on the Profitability of Selected Commercial Banks Listed on the Ghana Stock Exchange

Abstract

Effective credit risk management is very important to the health of banks because it has the possibility of either ruining or ensuring the sustenance and growth of the bank. This study assessed the impact of credit risk management on the profitability of 6 selected commercial banks listed on the Ghana stock exchange. Secondary data was gathered from the annual reports of the six selected banks and Ghana banking survey for the years under consideration. The study adopted the Random Effect Model within the panel estimation technique framework. The study used return on equity (ROE) to measure profitability of bank, non-performing loans, loan loss provisions ratio, loan to asset ratio and capital adequacy ratio as credit risk. The findings showed that indeed credit risk management have significant relationship with the profitability of banks. While capital adequacy ratio had positive relationship with a bank’s profitability; non-performing loans, loan loss provisions ratio and loan to asset ratio shows statistically significant negative relationship with the profitability of a bank. The study recommends that banks should assess and manage credit risk indicators vigorously in order reduce their exposure to these risks.