This document summarizes a study that examines the relationship between credit risk and profitability of selected banks in Ghana from 2005-2009. The study found that credit risk, as measured by non-performing loan rates, net charge-off rates, and pre-provision profit as a percentage of loans, had a positive and significant relationship with bank profitability in Ghana. This indicates that Ghanaian banks enjoyed high profitability despite high credit risk, contrary to previous studies. The results were attributed to the high lending/interest rates and fees charged by Ghanaian banks. The study also found support for bank size, growth, and capital influencing profitability positively and significantly.
Effect of Credit Risk Management Practices on Profitability of Listed Commerc...iosrjce
The study sought to analyze the effect of credit risk management practices on profitability of listed
commercial banks at Nairobi Security Exchange in Kenya. A descriptive research design was adopted. The
population comprised of listed commerical banks where a sample of 55 employees was purposively sampled. It
was established that credit appraisal practices had a significant positive effect on profitability and that it
explained 14.4% of the variations in profitability. The results also found that credit monitoring had a
significative positive effect on profitability and that 47.8% of the variance in profitability. The findings further,
indicated that debt collection practices had a positive and significant relationship and explained 17.4% of the
variations in profitability. Lastly, the results indicated that credit risk governance had a positive and significant
effect on profitability. Based on the study findings the study concluded that credit appraisal, debt collection and
credit risk governance have a significant positive effect on profitability. It is thus recommended that commercial
banks should have stringent credit appraisal and debt collection policies, credit personnel at all levels must
work in co-ordination in order to ensure that credit is collected in a timely manner and banks should also adopt
credit risk governance frameworks which can be attained by making the process of interaction between senior
management and the Board more effective
The study examined credit risk and management in Nigeria Commercial Banks. From the findings it
is concluded that banks profitability is inversely influenced by the levels of loans and advances, non-performing
loans and deposits thereby exposing them to great risk of illiquidity and distress. Therefore, management need
to be cautious in setting up a credit policy that will not negatively affects profitability and also they need to
know how credit policy affects the operation of their banks to ensure judicious utilization of deposits and
maximization of profit. Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to financial distress. CBN
for policy purposes should regularly assess the lending attitudes of commercial banks. One direct way is to
assess the degree of credit crunch by isolating the impact of supply side of loan from the demand side taking
into account the opinion of the firms about banks’ lending attitude.
Factors Factors Influencing Credit Risk For Small And Medium Enterprise Loans...paperpublications3
Abstract: There has been an increased concern over high credit risk for small and medium enterprise loan in financial institutions. High interest rates, credit rating, recovery mechanisms and business experience play an important role in influencing credit risk for small and medium enterprise loans. The main objective of this study was to investigate factors influencing credit risk for small and medium enterprise loans a survey of banks in Kitale Town, Kenya. The specific objectives of the study were: To establish the influence of interest rates on credit risk of small and medium enterprise loans in banks, bto find out the influence of credit rating in credit risk of small and medium enterprise loans in banks, to establish the influence of recovery mechanism in credit risk of small and medium enterprise loans in banks, and to assess the influence of business experience in credit risk of small and medium enterprise loans in banks. Credit management theory, trade-off theory, modern portfolio theory were used to underpin the study. Explanatory research design was used in this study. The study targeted 331 employees from 11 Commercial Banks in Kitale. The study used stratified sampling technique. Interest rates, credit rating, recovery mechanism and business experience were taken as the independent variables while credit risk was the dependent variable. Pilot study was used to test the validity and reliability of the research instrument. Interest rates showed a positive and significant effect on credit risk (β= 0.153, ρ<0.05).><0.05).><0.05).><0.05). In conclusion, the study has established that whenever there are high short-term interest rates, there is an increase in credit risk. In addition, interest rate shifts are heterogeneous across the firm and have different implications for leverage and default in the short run than in the longer run. Hence the study recommends for need for a comprehensive risk management process that ensures the timely identification, measurement, monitoring, and control of risk.
Effect of Credit Risk Management Practices on Profitability of Listed Commerc...iosrjce
The study sought to analyze the effect of credit risk management practices on profitability of listed
commercial banks at Nairobi Security Exchange in Kenya. A descriptive research design was adopted. The
population comprised of listed commerical banks where a sample of 55 employees was purposively sampled. It
was established that credit appraisal practices had a significant positive effect on profitability and that it
explained 14.4% of the variations in profitability. The results also found that credit monitoring had a
significative positive effect on profitability and that 47.8% of the variance in profitability. The findings further,
indicated that debt collection practices had a positive and significant relationship and explained 17.4% of the
variations in profitability. Lastly, the results indicated that credit risk governance had a positive and significant
effect on profitability. Based on the study findings the study concluded that credit appraisal, debt collection and
credit risk governance have a significant positive effect on profitability. It is thus recommended that commercial
banks should have stringent credit appraisal and debt collection policies, credit personnel at all levels must
work in co-ordination in order to ensure that credit is collected in a timely manner and banks should also adopt
credit risk governance frameworks which can be attained by making the process of interaction between senior
management and the Board more effective
The study examined credit risk and management in Nigeria Commercial Banks. From the findings it
is concluded that banks profitability is inversely influenced by the levels of loans and advances, non-performing
loans and deposits thereby exposing them to great risk of illiquidity and distress. Therefore, management need
to be cautious in setting up a credit policy that will not negatively affects profitability and also they need to
know how credit policy affects the operation of their banks to ensure judicious utilization of deposits and
maximization of profit. Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to financial distress. CBN
for policy purposes should regularly assess the lending attitudes of commercial banks. One direct way is to
assess the degree of credit crunch by isolating the impact of supply side of loan from the demand side taking
into account the opinion of the firms about banks’ lending attitude.
Factors Factors Influencing Credit Risk For Small And Medium Enterprise Loans...paperpublications3
Abstract: There has been an increased concern over high credit risk for small and medium enterprise loan in financial institutions. High interest rates, credit rating, recovery mechanisms and business experience play an important role in influencing credit risk for small and medium enterprise loans. The main objective of this study was to investigate factors influencing credit risk for small and medium enterprise loans a survey of banks in Kitale Town, Kenya. The specific objectives of the study were: To establish the influence of interest rates on credit risk of small and medium enterprise loans in banks, bto find out the influence of credit rating in credit risk of small and medium enterprise loans in banks, to establish the influence of recovery mechanism in credit risk of small and medium enterprise loans in banks, and to assess the influence of business experience in credit risk of small and medium enterprise loans in banks. Credit management theory, trade-off theory, modern portfolio theory were used to underpin the study. Explanatory research design was used in this study. The study targeted 331 employees from 11 Commercial Banks in Kitale. The study used stratified sampling technique. Interest rates, credit rating, recovery mechanism and business experience were taken as the independent variables while credit risk was the dependent variable. Pilot study was used to test the validity and reliability of the research instrument. Interest rates showed a positive and significant effect on credit risk (β= 0.153, ρ<0.05).><0.05).><0.05).><0.05). In conclusion, the study has established that whenever there are high short-term interest rates, there is an increase in credit risk. In addition, interest rate shifts are heterogeneous across the firm and have different implications for leverage and default in the short run than in the longer run. Hence the study recommends for need for a comprehensive risk management process that ensures the timely identification, measurement, monitoring, and control of risk.
Writekraft Research and Publications LLP was initially formed, informally, in 2006 by a group of scholars to help fellow students. Gradually, with several dissertations, thesis and assignments receiving acclaim and a good grade, Writekraft was officially founded in 2011 . Since its establishment, Writekraft Research & Publications LLP is Guiding and Mentoring PhD Scholars.
Our Mission
“To provide breakthrough research works to our clients through Perseverant efforts towards creativity and innovation”.
Vision
Writekraft endeavours to be the leading global research and publications company that will fulfil all research needs of our clients. We will achieve this vision through:
Analyzing every customer’s aims, objectives and purpose of research
Using advanced and latest tools and technique of research and analysis
Coordinating and including their own ideas and knowledge
Providing the desired inferences and results of the research
In the past decade, we have successfully assisted students from various universities in India and globally. We at Writekraft Research & Publications LLP head office in Kanpur, India are most trusted and professional Research, Writing, Guidance and Publication Service Provider for PhD. Our services meet all your PhD Admissions, Thesis Preparation and Research Paper Publication needs with highest regards for the quality you prefer.
The Influence of Solvency Ratio Decision on Rural Bank Dinar Pusaka In The Di...inventionjournals
The solvency ratio is a ratio that can be used to influence lending decisions on the BPR. This research purpose to test and find empirical evidence whether the Debt to Assets Ratio, Times Interest Earned Ratio, and Long-term Debt to Equity Ratio influence on lending decisions. The population useful for customers apply for credit to the BPR Dinar Pusaka in the district Sidoarjo. The sample in this research were selected using purposive sampling method until elected only 30 customers during the three periods, namely the year 2013 to 2015. Data analysis technique used is the logistic regression analysis. The research results show that Times Interest Earned Ratio variable does not affect the lending decisions. Meanwhile, the variable Debt to Assets Ratio and Long-term Debt to Equity Ratio influence on lending decisions
Assessment of Credit Risk Management System in Ethiopian Bankinginventionjournals
The main objective of this study is to assess credit risk management system in Ethiopian banking industry of some private and government commercial banks. Selection of banks for the study was done based on two criteria; it involves only government and private commercial banks and two those banks that operate during the period 1999-2014. Seven commercial banks out of eighteen banks operating at 2000 G.C are selected. These banks are Commercial Bank of Ethiopia, Awash International Bank S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB International Bank S.C. From these seven commercial banks with so many branches nationwide, it can be difficult to be managed by the researcher due to time and resource constraints. Therefore, the researcher purposely limits in selecting banks at the head office. In this study, the researcher will utilize purposive sampling technique in order to select participants of the study. For the purpose of this study, both primary and secondary data is used. Primary data is collected through questionnaires distributed to respondents that involve professional working in the banks such as Department Managers and Senior Officers working on loan processing. Finding of this study will assist in forwarding recommendations to improve the problems the present credit management situation prevailing in the banking sector in Ethiopia by assessing commercial banks credit management activity. In addition to this, based on the implication of the research findings, the research also recommended areas for future research.
“Credit Risk Management” A comparative analysis on three selected Banks- (Na...Ashis Barman
“Credit Risk Management”
A comparative analysis on three selected Banks- (National Bank, Sonali Bank & Islamic bank Bangladesh Limited)
By
Ashis Kumar Barman
ID# 2013110001094
Has been approved
January 2015
__________________
Sadia Noor Khan
Lecturer
School of Business
Southeast University
Overall banking system on agrani bank ltdAsad Saimon
Agrani Bank being one of the largest nationalized commercial bank must shoulder the responsibility of expanding its network in rural area. Presently bank has its 561 branches out of total 891 branches located in rural areas implementing as many as 29 programs targeting rural people.
Writekraft Research and Publications LLP was initially formed, informally, in 2006 by a group of scholars to help fellow students. Gradually, with several dissertations, thesis and assignments receiving acclaim and a good grade, Writekraft was officially founded in 2011 . Since its establishment, Writekraft Research & Publications LLP is Guiding and Mentoring PhD Scholars.
Our Mission
“To provide breakthrough research works to our clients through Perseverant efforts towards creativity and innovation”.
Vision
Writekraft endeavours to be the leading global research and publications company that will fulfil all research needs of our clients. We will achieve this vision through:
Analyzing every customer’s aims, objectives and purpose of research
Using advanced and latest tools and technique of research and analysis
Coordinating and including their own ideas and knowledge
Providing the desired inferences and results of the research
In the past decade, we have successfully assisted students from various universities in India and globally. We at Writekraft Research & Publications LLP head office in Kanpur, India are most trusted and professional Research, Writing, Guidance and Publication Service Provider for PhD. Our services meet all your PhD Admissions, Thesis Preparation and Research Paper Publication needs with highest regards for the quality you prefer.
The Influence of Solvency Ratio Decision on Rural Bank Dinar Pusaka In The Di...inventionjournals
The solvency ratio is a ratio that can be used to influence lending decisions on the BPR. This research purpose to test and find empirical evidence whether the Debt to Assets Ratio, Times Interest Earned Ratio, and Long-term Debt to Equity Ratio influence on lending decisions. The population useful for customers apply for credit to the BPR Dinar Pusaka in the district Sidoarjo. The sample in this research were selected using purposive sampling method until elected only 30 customers during the three periods, namely the year 2013 to 2015. Data analysis technique used is the logistic regression analysis. The research results show that Times Interest Earned Ratio variable does not affect the lending decisions. Meanwhile, the variable Debt to Assets Ratio and Long-term Debt to Equity Ratio influence on lending decisions
Assessment of Credit Risk Management System in Ethiopian Bankinginventionjournals
The main objective of this study is to assess credit risk management system in Ethiopian banking industry of some private and government commercial banks. Selection of banks for the study was done based on two criteria; it involves only government and private commercial banks and two those banks that operate during the period 1999-2014. Seven commercial banks out of eighteen banks operating at 2000 G.C are selected. These banks are Commercial Bank of Ethiopia, Awash International Bank S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB International Bank S.C. From these seven commercial banks with so many branches nationwide, it can be difficult to be managed by the researcher due to time and resource constraints. Therefore, the researcher purposely limits in selecting banks at the head office. In this study, the researcher will utilize purposive sampling technique in order to select participants of the study. For the purpose of this study, both primary and secondary data is used. Primary data is collected through questionnaires distributed to respondents that involve professional working in the banks such as Department Managers and Senior Officers working on loan processing. Finding of this study will assist in forwarding recommendations to improve the problems the present credit management situation prevailing in the banking sector in Ethiopia by assessing commercial banks credit management activity. In addition to this, based on the implication of the research findings, the research also recommended areas for future research.
“Credit Risk Management” A comparative analysis on three selected Banks- (Na...Ashis Barman
“Credit Risk Management”
A comparative analysis on three selected Banks- (National Bank, Sonali Bank & Islamic bank Bangladesh Limited)
By
Ashis Kumar Barman
ID# 2013110001094
Has been approved
January 2015
__________________
Sadia Noor Khan
Lecturer
School of Business
Southeast University
Overall banking system on agrani bank ltdAsad Saimon
Agrani Bank being one of the largest nationalized commercial bank must shoulder the responsibility of expanding its network in rural area. Presently bank has its 561 branches out of total 891 branches located in rural areas implementing as many as 29 programs targeting rural people.
Kiva Zip, Technology & The Future of Financial Inclusion 2013Sulin Lau
Kiva Zip presentation given at a joint panel with Kiva, Accion Venture Labs, Lenddo. Moderated by Shannjit Singh (technologist, innovation and investment banking consultant for micro/social finance sector). Can learning and applying the same technologies we use to share Space (airbnb), Stuff, and Skills (Skillshare) to unlock wealth from Spare Change into small business growth? Kiva Zip is an experiment to do exactly that. Crowdfunding financially-excluded businesses begins with just $25 of spare change.
Mexico's first mobile exclusive Micro-Lending service. With fast approval, less than 15 minutes and 24/7 availability we are offering money when needed.
No contract, paperwork or forms to sign.
Downloading mobiLender App (Available for Android and iOS), is everything you need to do.
Follow our 5 steps verification and you are good to go.
Edit
Go-to-market Strategy and Customer Acquisition - Mind your Business 2014 Marie Laenen
Every entrepreneur should have a killer go-to-market strategy, as their success almost entirely depends on it. Find out how good customer acquisition is vital to your business.
Tracxn FinTech SEA Startup Landscape, July 2016Tracxn
Our FinTech SouthEast Asia Report covers FinTech trends and investments in Singapore, Indonesia, Malaysia, Thailand, Philippines, and Vietnam, with exhaustive Q&A’s with the leadership team at East Ventures and Lenddo.
Assessment of Credit Risk Management System in Ethiopian Bankinginventionjournals
The main objective of this study is to assess credit risk management system in Ethiopian banking industry of some private and government commercial banks. Selection of banks for the study was done based on two criteria; it involves only government and private commercial banks and two those banks that operate during the period 1999-2014. Seven commercial banks out of eighteen banks operating at 2000 G.C are selected. These banks are Commercial Bank of Ethiopia, Awash International Bank S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB International Bank S.C. From these seven commercial banks with so many branches nationwide, it can be difficult to be managed by the researcher due to time and resource constraints. Therefore, the researcher purposely limits in selecting banks at the head office. In this study, the researcher will utilize purposive sampling technique in order to select participants of the study. For the purpose of this study, both primary and secondary data is used. Primary data is collected through questionnaires distributed to respondents that involve professional working in the banks such as Department Managers and Senior Officers working on loan processing. Finding of this study will assist in forwarding recommendations to improve the problems the present credit management situation prevailing in the banking sector in Ethiopia by assessing commercial banks credit management activity. In addition to this, based on the implication of the research findings, the research also recommended areas for future research.
Running head: BANKING RISKS 1
BANKING RISKS 4
Bank Risk
Notes from the teacher:
The project is a good start, but for full credit you will need to identify an organization and provide deeper details on that organization. Also, I have a few thoughts as you progress deeper into the weeks:
-Recommend you combined module 1 and 2 together - keep adding each week to the prior. Once you have it threaded together, concentrate on transitions and good visual aspects such as headers and various fonts and mediums.
-Consider using bullets to list several ideas
People risks
There are huge risks that are experienced when a company is dealing with money. People risks associated with a bank are numerous. Banks deal with people including employees, creditors, debtors and others. Employees can be a source of great risks especially when they expose confidential information to the public. The information can be accessed by criminals who can cause a great loss in regards to the company’s information and money. Debtors are people who can result in great risks when they fail to repay their debts together with interests, and this affects the existence of the bank. Creditors affect the bank when they withdraw their money at once to go to other banks or use their money. This situation causes a company to have less amount of money to lend, and this can affect the bank's existence. The managers of a bank can also put a bank in risks by making wrong decisions by doing things that put the bank's existence in jeopardy
Financial risks
There are different types of financial risks that faced by banks. One risk involves the bank paying its creditors. Banks usually use the money of clients who deposit their money in bank accounts to lend to borrowers. Banks create money by charging interest on loans and therefore return their clients’ money and also pays a small percentage of interest. When creditors withdraw their money at one time, the bank lacks money to lend, and this increases the risk to a bank as it can become bankrupt (Fight, 2014).
The other risk is recovering money from debtors. Banks get funds from the interest that they charge for loans and when debtors fail to pay the bank can be in trouble since it needs the money to pay creditors as well as get its operating cash. Errors that are caused by people and machines can be a source of great risks as the bank can lose money.
Operational risks
Operational risks are termed as risks of losses that may result from the processes that are inadequate or that have failed. Additionally, these risks may be attributed to people, external events, and systems. The operational risks that might be associated with the Bank of America may emanate from the installation of new systems of banking that have not ye ...
This presentation provides complete study ofcredit risk management,how it was performed in yester years ,how it is taken care nowadays and what is the road ahead in future
An Analysis of Factors Influencing Customer Creditworthiness in the Banking S...Dr. Amarjeet Singh
This research is based on Bahraini bankers’ perception on the factors influencing customer creditworthiness in the banking sector of Kingdom of Bahrain. We consider that the research was done in the Kingdom of Bahrain which has a growing banking industry. To enhance the whole procedure of the creditworthiness, it is vital for an employer to understand the most important factors influencing customer creditworthiness. The purpose of the study was to investigate the factors influencing customers creditworthiness in the banking industry. The creditworthiness can be assessed through qualitative factors, quantitative factors and risk factors. The research was conducted through a survey, using the questionnaire as the research instrument. The respondents of the study are employees of banks across the Kingdom dealing with creditworthiness. The statistical tools used in the study are Multiple Regression Analyses and weighted mean. The researcher has found that there is significant relationship between all three factors and creditworthiness, and they don’t equally influence the creditworthiness. The research provides recommendations to banks in assessing the creditworthiness. The researcher recommended that employees must use the most effective methods such as credit scoring to conduct the analysis of creditworthiness in order to make effective decisions. Moreover, the researcher recommended that analysts should take into considerations the most effective factors in the analysis process and they must not neglect other.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
This study investigated loans default (problems loans) and returns on assets in Nigeria banks, employing the data of five banks for a period of five years (2010-2014), using the ordinary least squares (OLS) regression techniques to check the relationship between problem loans and returns on assets (ROA). The findings shows that a positive and significant relationship at 5% level of significance exist between problem loans and returns on assets, and a negative and significant relationship at 10% level of significance exists between loans and advances and returns on assets in Nigerian banks. A major suggestion is that banks in Nigeria should enhance their capacity in credit analysis and loan administration, while the regulatory authority should pay more attention to banks’ compliance to relevant provisions of Bank and other Financial Institutions Act (1991) and prudential guidelines.
Running head BANK OF AMERICA1BANK OF AMERICA12.docxsusanschei
Running head: BANK OF AMERICA 1
BANK OF AMERICA 12
Bank of America
NOTES FROM TEACHER:
This section of your risk management plan addresses credit risk in relation to retail banking. It should have investigated retail banking services and the risks associated with providing consumer credit individuals and institutions. Also, are the risk mitigation plans in place and are they effective?
The project on B of A is becoming a robust document with good data, but for this week's submission would have liked deeper insights into the risks and mitigation plans and processes.
Now, I would encourage you to begin the final revisions, consider incorporatation new headers (not just the question from the module) but thought provoking headers,visuals and look ahead to the final submission requirements.
Table of Contents
Executive Summary 3
Introduction 3
Banking Risks 4
People risks 5
Financial risks 5
Operational risks 6
Risk mitigation 6
Bank of Americas board of directors 7
Bank of America’s executive committee 7
Sarbanes-Oxley Act and other legislation 8
Asset-liability management 8
Credit risks faced by retail banking 9
Credit risks associated with individuals and institutions 9
Retail banking services for individuals 9
Retail banking services for institutions 10
Bank Assessment of Credit Risk 10
References 11
Executive Summary
The banking sector is a very risky venture that is full of challenges. There are various risks that emerge in the course of the business, and the firm has to look for ways to mitigate these risks. Different types of risks are common in the banking sector ranging from credit risk, operational risks, sovereign risk, trade risk, interest rate risk, and foreign exchange risk among others. These risks are brought about by different factors, and there is a need for them to be addressed as soon as possible. The Bank of America has been one of the core financial institutions in the world having over five thousand bank centers globally. The bank is faced with different forms of risks, and it has come up with various ways to address the challenges that they face. The bank observes the Sox Act strictly to cater for accountability and transparency in the financial sector.
Introduction
The banking risk is exposure that might result to uncertainty of the outcome. There are various risk types that are categorized based on different aspects such as the causes and the area affected. These types are operational risk, credit risk, sovereign risk, trade risk, foreign exchange risk, and interest rate risk. Risk trends are various changes that occur in these types of risks and they are most influenced by the changes in the economy among other factors. Risk mitigation. Credit risk is the exposure that the creditors bear when lend money to individuals. Lending practices vary among lending institutions change and are influenced by various factors. Capitalization ref ...
Credit Risk and Bank Performance in Nigeriaiosrjce
This study investigates the impact of credit risk on banks’ performance in Nigeria. A panel
estimation of six banks from 2000 to 2013 was done using the random effect model framework. Our findings
show that credit risk is negatively and significantly related to bank performance, measured by return on assets
(ROA). This suggests that an increased exposure to credit risk reduces bank profitability. We also found that
total loan has a positive and significant impact on bank performance. Therefore, to stem the cyclical nature of
non-performing loans and increase their profits, the banks should adopt an aggressive deposit mobilization to
increase credit availability and develop a reliable credit risk management strategy with adequate punishment
for loan payment defaults
Running Head BANK LENDING PRACTICES AT THE BANK OF AMERICABANK .docxsusanschei
Running Head: BANK LENDING PRACTICES AT THE BANK OF AMERICA
BANK LENDING PRACTICES AT THE BANK OF AMERICA 4
Bank Lending Practices at the Bank of America
Rasmussen College
March 19, 2017
Individual and Commercial Lending Practices
As one of the largest financial organizations, the Bank of America (BOA) serves both personal and commercial businesses and corporations. Businesses owners are offered loans to enable them to purchase inventory and materials. Furthermore, loans are provided by the BOA to refinance debt or finance account receivables. In the individual aspects, loans on mortgages are given to enable people to fund their new homes. Car loans are also get provided to the client as the banks depending on the eligibility of an individual (Hanken, Young, Smilowitz, Chiampas & Waskowski, 2016).
Under the Small Business Administration Federal Agency, the Bank of America offers loans to small established businesses and to firms that are getting started. A minimum of $350,000 gets provided to businesses to buy equipment or purchasing real estate. The loan can get paid for a seven-year term. Competitive variable rates based on prime rates gets offered. Considerations get made in a type of relationship an individual or business has with the bank. An online banking system is also provided to give clients more access to their finances.
Risk Measurement Techniques
Risk analysis and management are indispensable at the Bank of America in particular with the high rates or credits offered to individuals and commercial corporations. The Bank of America utilizes different strategies for competency credit risk policies to monitor and manage credit risks in the company. A team of credit risk analyst exists that extensive conduct analysis of the bank’s exposure to credit risks. Studies are carried out on financial statements of industrial corporations to determine their credibility for credit. For individual loans, credit-card loss forecasting is done to assess and calculate the risks of personal lending. On the other hand, an SAS Enterprise Risk Management system and an IBM grid are used in to evaluate the risks exposed to the bank. The high technologies can ensure that useful calculations on statistics are conducted to determine the credit risks in the bank. Consequently, almost accurate forecasts can be made therefore evading considerable risks on the part of the company. Short term deposits get required from all borrowers to according to the time frame indicated in the issuance of credit. The Bank of America has a Corporate Investments Group that models and calculates the risks and probability of default to securities offered. Furthermore, a compliance team also exists and provides guidance and advice to the Bank on issues related to financial lending.
Benefits of Transfer of Credit Risk
There are various benefits associated with the transfer of credit risks. One of the most apparent ...
Proposed topic of the res an emperical analysis on interest rate risk managem...tesfatsion tefera
Risk is defined as anything that can create hindrances in the way of achievement of certain objectives. It can be because of either internal factors or external factors, depending upon the type of risk that exists within a particular situation. Exposure to that risk can make a situation more critical. A better way to deal with such a situation; is to take certain proactive measures to identify any kind of risk that can result in undesirable outcomes. In simple terms, it can be said that managing a risk in advance is far better than waiting for its occurrence. Risk Management is a measure that is used for identifying, analyzing and then responding to a particular risk. It is a process that is continuous in nature and a helpful tool in decision making process. According to the Higher Education Funding Council for England (HEFCE), Risk Management is not just used for ensuring the reduction of the probability of bad happenings but it also covers the increase in likeliness of occurring good things. A model called “Prospect Theory” states that a person is more likely to take on the risk than to suffer a sure loss.
Consumer Credit Scoring Using Logistic Regression and Random ForestHirak Sen Roy
Project Details: In this study, the concept and application of credit scoring in a German banking environment is
explained. A credit scoring model has been developed using logistic regression and random forest. Limitations of
the model are explained and possible solutions are given with an overview of LASSO.
Guide: Dr. Sibnarayan Guria, Associate Professor and Head of the Department, Department of
Statistics, West Bengal State University
Language Used: R
Credit Risk Management and Loan Recovery in Nigerian Deposit Money Banksijtsrd
The quality of loan recovery in Nigerian deposit money banks is presently impaired with the incidence of a large portfolio of non performing loans. The position of the banks to also act as prime movers of economic development and to effectively manage their credit risk, has not been effective the study therefore examined the potency of credit risk management in addressing loan delinquency or high non performing loan of deposit money banks in Nigeria. In view of this, investigation was conducted on the effect of credit risk architecture on loan recovery. Primary data was used for the study and the ordinary least square was used for data analysis and it was concluded that effective credit risk architecture could enhance loan recovery of deposit money banks in Nigeria. Sunny B. Beredugo | Clifford I. Akhuamheokhun | Bassey Ekpo "Credit Risk Management and Loan Recovery in Nigerian Deposit Money Banks" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-2 , February 2021, URL: https://www.ijtsrd.com/papers/ijtsrd38430.pdf Paper Url: https://www.ijtsrd.com/management/accounting-and-finance/38430/credit-risk-management-and-loan-recovery-in-nigerian-deposit-money-banks/sunny-b-beredugo
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The European Unemployment Puzzle: implications from population agingGRAPE
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How Does CRISIL Evaluate Lenders in India for Credit RatingsShaheen Kumar
CRISIL evaluates lenders in India by analyzing financial performance, loan portfolio quality, risk management practices, capital adequacy, market position, and adherence to regulatory requirements. This comprehensive assessment ensures a thorough evaluation of creditworthiness and financial strength. Each criterion is meticulously examined to provide credible and reliable ratings.
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Credit Risk and Profitability of Selected Banks in Ghana
1. Credit Risk and Profitability of Selected Banks in Ghana
Samuel Hymore Boahene
Internal Audit Officer, International Commercial Bank (Ghana) Limited,
Accra-Ghana.
Email: hymoresb@yahoo.com
+233 (0) 261 690 125
Dr. Julius Dasah
Bank of Ghana
Accra - Ghana
Samuel Kwaku Agyei
Department of Accounting and Finance, School of Business
University of Cape Coast, Cape Coast-Ghana
Email: twoices2003@yahoo.co.uk
+233 (0) 277 655 161
Abstract
This study attempts to reveal the relationship between credit risk and profitability of some selected banks in Ghana.
A panel data from six selected commercial banks covering the five-year period (2005-2009) was analyzed within the
fixed effects framework. In Ghana, the average lending/interest rate is about 30% - 35% per annum. From the
results credit risk (non-performing loan rate, net charge-off rate, and the pre-provision profit as a percentage of net
total loans and advances) has a positive and significant relationship with bank profitability. This indicates that banks
in Ghana enjoy high profitability in spite of high credit risk, contrary to the normal view held in previous studies that
credit risk indicators are negatively related to profitability. Our results can be attributed to the prohibitive
lending/interest rates, fees and commission (non- interest income) charged. Also, we found support for previous
empirical works which depicted that bank size, bank growth and bank debt capital influence bank profitability
positively and significantly.
Keywords: Credit Risk, Profitability, Banks, Ghana.
1.0 Introduction
Even though one of the major causes of serious banking problems continues to be ineffective credit risk
management, the provision of credit remains the primary business of every bank in the World. For this reason,
credit quality is considered a primary indicator of financial soundness and health of banks. Interests that are charged
on loans and advances form sizeable part of banks’ assets. Default of loans and advances poses serious setbacks not
only for borrowers and lenders but also to the entire economy of a country. Studies of banking crises all over the
world have shown that poor loans (asset quality) are the key factor of bank failures. Stuart (2005) stressed that the
spate of bad loans (non-performing loans) was as high as 35% in Nigerian Commercial Banks between 1999 and
2009.Umoh (1994) also pointed out that increasing level of non-performing loan rates in banks’ books, poor loan
processing, undue interference in the loan granting process, inadequate or absences of loan collaterals among other
things, are linked with poor and ineffective credit risk management that negatively impact on banks profitability.
As a result of the likely huge and widespread of economic impact in connection with banks failure, the management
of credit risk is a topic of great importance since the core activity of every bank is credit financing. According to the
bank theory, there are six (6) main types of risk which are linked with credit policies of banks and these are; credit
risk (risk of repayment), interest risk, portfolio risk, operating risk, credit deficiency risk and trade union risk.
However, the most vital of these risks, is the credit risk and therefore, it demands special attention and treatment.
This paper attempts to make a modest contribution to literature on credit risk by assessing its impact on a developing
economy, Ghana. The rest of the paper is organized into four sections: review of relevant literature; methodology;
discussion of empirical results; and summary and conclusions.
1
2. 2.0 Review of Research Literature
The significant role played by banks in a developing economy like Ghana (where access to capital market is limited)
cannot be overemphasized. In fact, well functioning banks are known as catalyst for economic growth whereas
poorly functioning ones do not only impede economic progress but also exacerbate poverty (Barth et al, 2004).
However banks are exposed to various risks such as credit, market and operational risk. Although all these risk
militate against the performance of banks in several ways, Chijoriga (1997) argues that the size and the level of loss
caused by credit risk as compared to others were severe to collapse a bank.
2.1 Credit Risk Management System of Banks
Numerous researchers had studied reasons behind bank problems and identified several factors (Chijoriga, 1997,
Santomera 1997, Brown, Bridge and Harvey, 1998). Problems in respect of credit especially, weakness in credit
risk management have been identified to be the main part of the major reasons behind banking difficulties. Loans
forms huge proportion of credit as they normally accounted for 10 – 15 times the equity of a bank (Kitwa, 1996).
In this way, the business of banking is potentially faced with difficulties where there is small deterioration in the
quality of loans. Poor loan quality starts from the information processing mechanism (Liuksila, 1996) and then
increase further at the loan approval, monitoring and controlling stages. This problem is magnified especially, when
credit risk management guidelines in terms of policy and strategies and procedure regarding credit processing do not
exist or are weak or incomplete. BrownBridge (1998) observed that these problems are at their acute stage in
developing countries.
In order to minimize loan losses as well as credit risk, it is crucial for banks to have an effective credit risk
management systems in place (Santomera 1997, Basel 1999). As a result of asymmetric information that exists
between banks and borrowers, banks must have a system in place to ensure that they can do analysis and evaluate
default risk that is hidden from them. Information asymmetry may make it impossible to differentiate good
borrowers from bad ones which may culminate in adverse selection and moral hazards have led to huge
accumulation of non-performing accounts in banks (Baster, 1994, Gobbi, 2003).
Credit risk management is very vital to measuring and optimizing the profitability of banks. The long term success
of any banking institution depended on effective system that ensures repayments of loans by borrowers which was
critical in dealing with asymmetric information problems, thus, reduced the level of loan losses, Basel (1999).
Effective credit risk management system involved establishing a suitable credit risk environment; operating under a
sound credit granting process, maintaining an appropriate credit administration that involves monitoring, processing
as well as enough controls over credit risk (Greuning and Bratanovic 2003). Top management must ensure, in
managing credit risk, that all guidelines are properly communicated throughout the organization and that everybody
involved in credit risk management understands what is required of him/her.
The management of credit risk in banking industry follows the process of risk identification, measurement,
assessment, monitoring and control. It involves identification of potential risk factors’, extrapolate their
consequences, monitor activities exposed to the identified risk factors and put in place control measures to prevent
or reduce undesirable effects. This process is applied within the strategic and operational framework of banking
business.
Sound credit risk management system are policies and strategies (guidelines) which clearly outline the purview and
allocation of a bank credit facilities and the way in which credit portfolio is managed; that is, how loans were
originated, appraised, supervised and collected (Basel, 1999; Greuning and Bratanovic 2003, Pricewaterhouse,
1994). The activity of screening borrowers had widely been recommended by, among other, Derban et al, (2005).
The theory of asymmetric information from prospective borrowers becomes critical in achieving effective screening.
In screening loan applicants, both qualitative and quantitative techniques should be used with due consideration for
their relative strength and weaknesses. It must be stressed that borrowers attributes, assessed through qualitative
models can be assigned numbers with the sum of values compared to a threshold. This technique is termed as
“credit scoring” (Heffernan, 1996). The rating systems, if meaningful, should signal changes in expected level of
loan loss (Santomero, 1997). Chijoriga (1997) posited that quantitative models make it possible to among others,
numerically establish which factors are important in explaining default risk, evaluate the relative degree of
importance of the factors, improving the pricing of default risk, be more able to screen out bad loans application and
be in a better position of calculate any reserve needed to meet anticipated future loan losses.
2
3. Establishing a clear process for approving new credit and extending the existing credit (Heffernan, 1996) and
monitoring credits granted to borrowers (Mwisho, 2001) are considered important when managing credit risk
(Heffernan, 1996). Instruments or tools such as covenants, collateral, credit rationing, loan securitization and
syndication have been used by banks in developing countries in controlling credit losses. (Benveniste and Bergar
1987). It has also been identified that high-quality credit risk management staff are critical to ensure that the depth
of knowledge and judgment needed is always available, thus ensuring the successfully management of credit risk in
banks (Koford and Tschoegl, 1997 and Wyman, 1999).
2.2 Credit Portfolio Management
Supervisors of banks more often than not, place considerable importance on formal policies which are laid down by
their boards and aggressively implemented by management. This is most critical with regard to banks’ lending
function, which stated that banks adopted sound systems for managing credit risk (Greuning and Bratanovic, 1999)
In order to appropriately analyse credit risk factors, banks’ chief credit risk officers are required to have detail
understanding of the principal economic factors that drive loan portfolio performance and the relationship between
those factors. Most credit risk officers in the banking industry analyse factors such as; inflation, the level of interest
rates, the GDP rate, market value of collaterals among others, for banks in mortgage financing. Also, traditional
financial management texts posit that credit manager would take note of the five Cs of credit – character, capacity,
capital, collateral and conditions to evaluate the probability of default (Casu et al,2006; Zech,2003). These factors
are in line with the arbitrage pricing theory of Stephen Ross which is the most applicable to loan portfolio
management.
According to Uyemura and Deventer, (1993), many techniques in equity portfolio management were applicable in
individual loans or loan category which can be measured by the dependence of the loan’s return on the factors
mentioned. It should be noted that lending policy should contain an outline of the scope and allocation of banks’
credit facilities and the manner in which credit portfolio is managed. That is to say that, how loans are originated,
serviced, supervised and collected. Banks must bear in mind that a good lending policy is not overly restrictive, but
allow for the presentation of loans to the board that officers believe are worthy of consideration but which do not fall
within the parameters of written guideline. A sound lending policy should consider; limit on total outstanding loans,
geographic limit, credit concentration, distribution by category, type of loans, maturity, loan pricing, lending
authority, appraisal process, maximum ratio of loan amount of the market value of pledged, recognition,
impairment, collection and financial information.
2.2.1 Value at – Risk (VaR) As a Tool For Portfolio Optimization
Banks are able to move near to the efficient frontier by diversifying their portfolio and also by adequately pricing
loans and insuring appropriate risk return relationship for each loan in the portfolio. The optimal level or point on
the risk return relationship depends on the risk preferences of banks. Which are influenced by the regulators who
would like to minimize the risk and also by shareholders (investors) who prefer high returns. Banks can vary their
portfolio risk-return trade-offs by making new loans, selling existing loans and using derivatives especially in the
developed countries like U.S. and UK.
However there are shortcomings in this modern portfolio theory when applied to loan portfolios. First of all
managers perceive risk in term of cedi or dollar loss while standard deviation which is in the efficient portfolio
frontier defines risk in terms of deviation from expected return, hence it is not intuitive. Secondly, the use of
standard deviation assumes normal distribution whereas the distributions of returns in loan portfolio are skewed.
Due to these shortcomings in the modern portfolio theory, Value-at-Risk (VaR) becomes alternatives which
overcome the shortcomings mentioned. VaR measures portfolio risk by estimating the loss in line with a given
small probability of occurrence. A higher risk means a higher loss at the given probability. VaR is a forecast of a
given percentile usually in the lower tail (such as 99th percentile) of the distribution of returns (or losses) on a
portfolio over some period. Again it is an estimate to be equaled or exceeded with a given, small probability such as
1%. However, when returns are normally distributed, VaR conveys exactly the same as the information as standard
deviations. Hence, the VaR appeal can be consistent with modern portfolio theory. In this way, VaR method is seen
to be consistent with modern portfolio theory. VaR measures portfolio risk as alternative to the standard deviation of
returns realizing bank’s risk preferences posits that, there is an optimal level of VaR for a given portfolio. The
choice of confidence level of VaR shows risk aversion of a bank. The optimal level of VaR for a portfolio
represents the optimal level of capital to back the portfolio. VaR approach is having ongoing studies by researchers
3
4. because of the promise hold for improving risk management, by knowing the risk of the overall portfolio and each
loan, necessary for banks to get nearer to the efficient frontier. The optimal amount of capital or equity to cushen
against the desired level of risk can be identified, given the risk presence of a bank. The VaR approach is the most
preferred to be used when the market risk is measured (Schacter, 1998: Zech, 2003: Markowitz, 1959: Hull, 2007).
2.3 The Basel Capital Accord and Banking in Ghana
Banks maintain adequate capital to safeguard them from the risk inherent in their portfolios. Banks have three types
of capital. That is book capital, regulatory capital and economic capital. Economic capital serves as a cushion to
unexpected losses. The introduction of the Basel Capital Accord in 1988 has offered for the implementation of a
credit risk measurement framework with a minimum permanent capital ratio of 8% by the end of 1992. Because
banks are competing globally, it was thought vital to create equal wave length by taking regulation uniform
throughout the world. In 1995 the capital requirements for credit risk were modified to incorporate netting. In 1996
the Accord was modified to factor in a capital charge for market risk. Sophisticated banks could base their capital
charge on a value-a-t risk (VaR) calculation, Hull, (2007). In 1999 the Basel committee suggested some changes
which were intended to be operationalised in 2007. The new capital accord (Basel II) framework under Pillar 1
offers three (3) main approaches for the calculation of capital requirements. These are standardized approach, the
foundation and internal Rating Basel (IRB) Approach and the Advanced IRB Approach.
The Bank of Ghana (BoG) has done a number of consultations in the Ghanaian banking industry and has concluded
to adopt the standardized Approach for computing the capital requirement for credit risk. This approach has two (2)
main methods. These are internal credit ratings approach which is subject to the prior explicit approval of the
supervisor and the other alternative is the use of the external credit assessment approach. The Capital Adequacy
Framework for capital requirement directive issued by Bank of Ghana (BoG, 2008), stipulated that locally
incorporated licensed banks were to adopt the standardized approach with the credit ratings specified in calculating
their capital requirements. BoG recognized both the simple and comprehensive approaches for credit mitigation. It
also specified eligible final collateral, allowed as credit risk mitigants for the purpose of calculating capital
requirements for credit risk. Consequently, the Basel II has been in operation since the beginning of 2012,
representing the most significant change to the supervision of banks. The focus is on establishing the capital banks
require, given their risk profiles and improve risk management. The new capital requirements may lead to an
improved buffer for risk absorption in the industry.
2.4 Credit Risk and Bank Performance
Banks that have higher loan portfolio with lower credit risk improve on their profitability. Angbazo (1997) stressed
that banks with larger loan portfolio appear to require higher net interest margin to compensate for higher risk of
default. Cooper et al (2003) add that variations in credit risks would lead to variations in the health of banks’ loan
portfolio which in turn affect bank performance. Meanwhile, Ducas and McLaughlin (1990) had earlier argued that
volatility of bank profitability is largely due to credit risk. Specifically, they claim that the change in bank
performance or profitability are mainly due to changes in credit risk because increased exposure to credit risk leads
to fall in bank performance and profitability.
Heffernan (1996) stressed that credit risk is the risk that an asset or loan becomes irrecoverable, in the case of
outright default or the risk of delay in servicing of loans and advances. Thus, when this occurs or becomes
persistent, the performance, profitability, or net interest income of banks is affected. Consequently, this study seeks
to find out the relationship between credit risk and bank performance of some selected banks in Ghana.
3.0 Methodology
The core objective of this study is to ascertain the relationship between credit risk and bank profitability. The
primary data used for the study were from secondary sources especially from financial statements of the banks. Data
was obtained from six banks in Ghana. They included Ghana Commercial Bank Limited (the largest bank in Ghana),
International Commercial Bank Limited, Calbank Limited, UT Bank Ghana Limited, First Atlantic Merchant Bank
Limited and Unibank Ghana Limited. Purposive sampling technique was used in selecting these six banks. The basic
data was obtained from the Annual Report of the banks from 2005 – 2009.
3.1 The Model
The basic model used for the study is written as follows:
4
5. ROEi,t= α0 + βNCOTLi,t + δNPLRi,t + θPPPNTLAi,t+ ØSIZEi,t+ ΦGROi,t+ γTDAi,t+ εi,t
Where the variables have been explained in Table 1
The dependent variable in the model is Return on Equity while the explanatory variable is Credit Risk which is
measured by three main variables- Net Charge Off to Total Loans and Advances, Non-Performing Loans to Total
Loans and Advances and Pre-provision Profit to Total Loans and Advances. The researcher also controlled for the
effects of other factors on firm profitability. These include bank size, bank growth rate and the choice of capital
structure.
3.2 Measurement of Credit Risk
Jorion (2007) pointed out that “credit risk is the risk of losses owing to the fact that counterparties may be unwilling
or unable to fulfill their contractual obligations”. Generic factors that affect credit risk are default, downgrade,
market and recovery risk. Default risk is the uncertainty regarding counterparty’s ability to service debts and
obligations and it is measured by the probability of default. The downgrade “was the probability and value impact of
changes in default probability” (Crosbie and Kocagil 2003). Thus, it considers the effects in relation to the
deterioration of the borrower’s credit quality. The extreme form of downgrade is default.
TRNC(2006) and USAID (2006) observed the basic credit risk ratios or indicators are the following: Ratio of Non-
performing Loan to Total Loan; Annual provision for loan loss to Non performing loan; Non performing loan to
Total Equity Capital; Annual provisioning for loan loss to Total Equity Capital; Pre-provisioning profit to Total
Loan and Advances; Total Equity Capital to Total Loan and Advances; Net Charge Off (Impairment) to Total loan
and Advances and; Total Loan and Advances to Total Deposit. All the ratios mentioned above, if they are increasing
over a period, indicate deterioration of a bank’s capacity absorb loan losses. If the ratios increase continuously they
show the capacity of a bank continuously deteriorating hence, indicate poor credit risk management. However, if the
ratios decrease continuously over a period, then it implies that a bank has adequate capacity to absorb loan losses,
and hence indicate good credit risk management. In this study, the researchers used Net Charge Off (Impairment) to
Total loan and Advances, Non-performing Loans to Total Loans and Advances and Pre-provisioning profit to
Total Loan and Advances as proxies for credit due to availability of data.
3.3 Measurement of Profitability in Banks (Dependent Variables)
Some of the profitability indicators in banks are Return on Equity (ROE), Return in Assets (ROA), Net interest
Margin (NIM). Loan profitability (LPP) and the recurring earning power (REP). ROE and ROA were the indicators
of measuring managerial efficiency (Ross 1994, Sabi 1996, Hassan 1999 and Samad 1998). The study used ROE as
indicator for bank profitability.
5.0 Discussion of Empirical Results
5.1 Descriptive Statistics
Table 2 gives information about the descriptive statistics of the dependent variable, the independent variables and
the control variables. The average (standard deviation) performance of banks in the sample was 0.3674 (0.65687).
This depicts that equity shareholders were able to generate a return of 36.74% which can be considered to be good.
It also shows that the payback period of equity holders is about 3 years. Even though the average performance can
be considered as good, some banks recorded abysmal performance. The minimum recorded profitability was as low
as -46.84% while the maximum was about 211.1%. Apparently some banks performed poorly as compared to that of
the industry. Also, Net Charge Off (impairments) to Total Loans and Advances averaged (standard deviation) at
41.27% (1.026). This can be considered as high since on the average the proportion of loans impaired is about one-
third of total loans and advances. This casts a slur on the quality of loans given out by banks in this sample. The
ratio of non-performing loans to total loans and advances was astonishing. As high as 78.65% (1.738) of total loans
and advances was considered to be non-performing. This confirms the numerous assertions that there is high level of
default among borrowers in Ghana, a reason which is mostly given by banks as the cause of high interest rate even
though the prime rate has fallen significantly. This could be due to macroeconomic factors. High credit risk
indicators in particular, non-performing loans, were due to macroeconomic instability that is, triggered by
prohibitively interest/lending rates, fees, commission and depreciation of the cedis since the late 1990s whiles at the
same period bank were making higher profitability in Ghana, Aboagye-Debrah,(2007). This notwithstanding, it is
also clear that the high level of credit risks as shown by the above two indicators cannot be said to be widespread
among the firms in the sample because of the high levels of standard deviations. Furthermore, pre-provision profits
5
6. to total loans and advances had a mean (standard deviation) of 14.03% (0.09). Firm size (log of total asset) was
18.79 while the average (standard deviation) growth rate among the banks was 48.13% (0.3033). This shows a
significant growth in the industry. Debt capital represents a greater proportion of bank total capital. It represents
about 86.63% confirming earlier empirical evidence that banks are highly leveraged (Agyei, 2010). The low
standard deviation 0f 0.0677 also confirms that it is represented of all banks in the sample.
5.2 Variance Inflation Factor Analysis
Multicollinearity is a statistical phenomenon in which two or more predictor variables in a multiple regression
model are highly correlated. In this situation the coefficient estimates may change erratically in response to small
changes in the model or the data. A number of tests can be used to test the presence of multicollinearity including
constructing the regression matrix and checking the correlation among the variables or using the variance inflation
factor analysis. In this study, the researchers used the variance inflation factor (VIF) analysis. The variance inflation
factor quantifies the severity of multicollinearity in an ordinary least squares regression analysis. It provides an
index that measures how much the variance (the square of the estimate's standard deviation) of an estimated
regression coefficient is increased because of collinearity. A common rule of thumb is that if VIF is greater than 5,
then multicollinearity is high (Wikipedia, 2011). Also Kutner (2004) has proposed 10 as a cut off value. The results
of the VIF test as shown in table three (3) shows that the presence of multicollinearity is minimal. The mean VIF is
1.83 which is far below the rule of thumb.
5.3 Discussion of Regression Results
Table 4 presents the regression results of the analysis. The results of both the fixed and random effects model are
consistent for all the variables, with the exception of the growth variable. The results of the Hausman Specification
Test shows that the fixed effects model is much more preferred to the random effects model. Consequently the fixed
effects model was used for the analysis. The study shows that credit risk, size of a bank, bank growth rate and
capital structure are the key factors which influence the profitability of the sampled banks. Quite interestingly, all
the variables in the study have a positive impact on firm performance.
Credit risk has a positive and significant relationship with bank profitability or performance. This result indicates
that as a bank’s risk of customer loan default increases, the bank is able to increase its profitability. According to
Buchs and Mathisen (2005), despite high overhead costs and sizable provisioning, due to huge NPLs, Ghanaian
banks’ pretax returns on assets and equity are among the highest in the sub-saharan Africa. This result is quite
surprising because normally one would expect that as more customers fail to pay for facilities they have taken from
a bank, the profitability of the bank should be harmed. This notwithstanding, it is possible for a bank (knowing very
well the inherent risk in a facility being given out) to increase the proportion of the default risk component in the
interest rate charged out on loans far more than the actual default risk. Eventually, banks which put up this
behaviour are more likely to increase their profitability, even though credit risk may be high. This seems to be the
case among the banks in our study. In other words, the presence of credit risk allows banks to charge extremely high
interest rates which invariably lead to their high profitability. Bank of Ghana (BOG) report (2004) on Cost of
Banking in Ghana, makes it clear that, banks in Ghana still enjoy high profitability ratio in spite of the high
overhead cost which includes huge NPLs as a result of high interest rates or lending rates. Ghana Banking Survey
Report (2010), authored by PricewaterhouseCoopers, add that as non performing loan increased from GHS60million
in 2007 to GHS266million in 2009, total income of the banking industry became more than double from
GHS798million in 2007 to GHS.1.5 billion in 2009. It is therefore apparent that profitability of banks in Ghana, is
highly dependent on high interest rates which dampens financial intermediation, widens interest spreads at the
expenses of the private sector, possibly exacerbates the loan quality problem and ultimately restrict competition
(Buchs and Mathisen,2005).The NPLs deteriorated from 13.2% in September 2009 to 18.1% in September 2010, net
charge-offs to gross loan ratio worsened from 8.5% to 10.1% in September 2010 and the industry’s return on
equity(ROE) increased to 20.2% by the end of September 2010 from 19.8% by the end of September 2009.(BOG ,
2010)
This condition appears to partially explain the state of the Ghanaian banking industry. Even though the economy has
witnessed a fall in policy rate for quite some time, banks are reluctant to reduce their interest rates accordingly. The
most cited reason, which is difficult to refute, is that they have high bad loans in their books. In effect, the banks
have succeeded in widening their interest margins thus cashing in on the high credit risk. This, in a larger sense, also
goes to support age long principle in finance that the higher the risk in an investment, the higher the expected return.
Because banks in the Ghanaian economy have accepted to operate in a region with high default risk, they should be
6
7. compensated for the additional risk they are undertaking. Banks in Ghana justify charging extremely high interest/
lending rates because credit risk is high as a results of inadequate collateral, inadequate borrower identification and
generally high level of default, which notwithstanding, enjoy high levels of profitability (Kwaakye, 2011)
The relationship between the size of a bank and its profitability is not only positive but also significant. Apparently,
bigger banks perform better than smaller banks. Benefits associated with firm size, if managed properly, include
economies of scale, high bargaining power, ability to invest in research and development and improved efficiency of
operation because of ability to afford better technologies. These benefits eventually lead to lower cost of operation
and increased profitability. For instance, larger banks are more likely to attract bigger and cheaper loan facilities,
because of their high collateral capacity. In the same way, they are more likely to win bigger deals with high
profitability prospects than smaller banks. This is what the results seem to reflect in the Ghanaian banking industry.
High growth banks are better able to increase their profitability than low growth banks. Larger market growth or
shares are as a result of efficiency that in turn lead to higher profitability (Aboagye-Debrah, 2007). As a bank
embarks on growth strategies, the results show that the profitability of that bank is enhanced. This result is also
significant in explaining the profitability of banks in the sample. In other words, when banks managed their growth
well (in terms embarking on strategies to increase their interest margins), investors benefit tremendously from the
improved sales.
Debt Capital has a positive and significant relationship with bank profitability. Banks that use more debt are better
able to increase their profitability than banks that do not. This is because of the added discipline and interest tax
shield that high debt brings to the banking business. This result supports previous empirical work in Ghana (Agyei,
2010) and also sits well with the agency cost hypothesis. Consequently, it lends support to Modigliani and Miller’s
proposition 2, which summarizes that a firm’s value is not independent of its capital structure.
6.0 Conclusions
Banks, just like all other forms of businesses are faced with numerous risks such as interest rate risk, exchange rate
risk, liquidity risk, operating risk, political risk, technological risk and default risk(credit risk). Among these risks,
the major cause of serious banking problems continues to be poor credit risk management. This study therefore
looked at the relationship between credit risk and profitability of some selected banks in Ghana. Interesting but quite
surprising results from the study showed that credit risk indicators have a positive and significant relationship with
bank profitability signifying that, in Ghana, banks benefit from high default risk due (probably) to prohibitively
lending/interest rates, fees and commission. The results also depict that bank size, bank growth and bank debt
capital influence bank profitability positively and significantly. In fact, support was found for the agency cost
hypothesis theory of capital structure. It also confirmed that banks in the sample, performed well, used more debt
capital than equity and faced a high risk of default, over the study period.
Consequently, the above results do not offer support for the numerous empirical works which conclude that credit
risk has a negative relationship with bank performance but rather sits well with the few ones which hold the view
that credit risk improves bank profit. Thus while banks should be encouraged to reduce their lending rates
judiciously and reduce fees and commission charge or even try to waive some, like ATM withdrawal charges, it is
also imperative that borrowers repay their loans on time and fully.
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List of Tables
TABLE 1: Definition of variables (proxies) and Expected signs
VARIABLE DEFINITION EXPECTED SIGN
ROE Profitability = Return on Equity (Net Income to
Total Equity Fund) of Bank i in time t
NCOTL Credit Risk = Net Charge Off (impairments) / Negative/ Positive
Total Loans and Advances of Bank i in time t
NPLR Credit Risk = Non Performing Loans / Total Negative/Positive
Loans and Advances
of Bank i in time t
PPPNTLA Credit Risk = Pre-Provision Profit / Net Total Negative/Positive
Loans and Advances
of Bank i in time t
SIZE Bank Size = the log of Total Assets of Bank i in Positive
time t
GRO Growth = Growth in Bank Interest income, year Positive
on year.
TDA Leverage = the ratio of Total Debt to Total Net Positive
Assets for Bank i in time t. A measure for bank
capital structure.
Ε The error term
TABLE 2: DESCRIPTIVE STATISTICS
VAR. OBS. MEAN STD. DEV. MIN MAX
ROE 30 0.36735 0.65697 -0.4684 2.111
NCOTL 30 0.41267 1.02592 0 4.89
NPLR 30 0.78649 1.73819 0.02 6.7352
PPPNTLA 30 0.14033 0.09084 0 0.33
SIZE 20 18.7966 1.25739 16.695 21.374
GRO 24 0.48125 0.30330 0 1.14
TDA 30 0.86625 0.06776 0.641 0.9733
TABLE 3: VARIANCE INFLATION FACTOR TEST
VAR. VIF 1/VIF
PPPNTLA 3.24 0.309024
NPLR 1.93 0.518910
TDA 1.71 0.583547
NCOTL 1.61 0.622986
10