This document summarizes a research study that examined the relationship between credit risk and profitability of selected banks in Ghana from 2005-2009. The study found that credit risk indicators like non-performing loan rates and net charge-off rates had a positive and significant relationship with bank profitability in Ghana, contrary to previous studies. This indicates that Ghanaian banks enjoy high profitability despite high credit risk. The results can be attributed to the high lending/interest rates and fees charged by Ghanaian banks. The study also found that bank size, growth, and capitalization positively influence bank profitability as supported by previous research.
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
Credit Risk and Profitability of Selected Banks in GhanaSamuel Agyei
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.
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.
This document discusses risk management practices in the Indian banking system and supervision by the Reserve Bank of India (RBI). It provides an overview of the types of risks banks face, including credit, market, and operational risks. The document also summarizes several academic studies that have examined relationships between macroeconomic variables, bank performance, and risk. Overall, the document analyzes current risk management practices of banks in India as directed by RBI guidelines and regulations.
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.
Business strategy and sustainability of microfinance institutions in ghanaAlexander Decker
This document summarizes a study on business strategies and sustainability of microfinance institutions in Ghana. It discusses six factors examined in the study: effective screening mechanisms, enforcing group collateral, regular client meetings, minimizing default rates, intensifying peer monitoring, and financial product innovation.
The study used both qualitative interviews and a quantitative survey of microfinance institutions. It found that most institutions employed screening mechanisms like background checks. Group collateral was the most common type of collateral used. Institutions also held regular weekly meetings with clients to monitor loans. The study revealed that all six factors examined were significant to the sustainability of microfinance institutions in Ghana.
This research analyzes the trend of non-performing loans (NPLs) in Pakistan's banking system and their impact on bank performance. NPLs have increased significantly in recent years, reaching Rs. 398 billion in 2009 and Rs. 459,840 million by June 2010. High NPLs threaten the banking sector through increased credit, liquidity, and other risks. The research finds that interest rates and discount rates are key drivers of NPL variation. It recommends that banks adopt more efficient loan appraisal techniques based on risk measurement and conventional investment analysis to better control lending. Overall, the high level of NPLs poses serious risks to Pakistan's banking sector and strategies are needed to reduce NPLs.
An assessment of factors affecting banks’ risk exposure in north central nigeriaAlexander Decker
The document summarizes a study that assessed factors affecting banks' risk exposure in North Central Nigeria. The study identified five main factors through factor analysis: liquidity and interest, domestic market, international market, business operation, and credit. It recommends that banks consider these factors in developing effective risk management strategies to reduce potential losses.
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
Credit Risk and Profitability of Selected Banks in GhanaSamuel Agyei
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.
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.
This document discusses risk management practices in the Indian banking system and supervision by the Reserve Bank of India (RBI). It provides an overview of the types of risks banks face, including credit, market, and operational risks. The document also summarizes several academic studies that have examined relationships between macroeconomic variables, bank performance, and risk. Overall, the document analyzes current risk management practices of banks in India as directed by RBI guidelines and regulations.
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.
Business strategy and sustainability of microfinance institutions in ghanaAlexander Decker
This document summarizes a study on business strategies and sustainability of microfinance institutions in Ghana. It discusses six factors examined in the study: effective screening mechanisms, enforcing group collateral, regular client meetings, minimizing default rates, intensifying peer monitoring, and financial product innovation.
The study used both qualitative interviews and a quantitative survey of microfinance institutions. It found that most institutions employed screening mechanisms like background checks. Group collateral was the most common type of collateral used. Institutions also held regular weekly meetings with clients to monitor loans. The study revealed that all six factors examined were significant to the sustainability of microfinance institutions in Ghana.
This research analyzes the trend of non-performing loans (NPLs) in Pakistan's banking system and their impact on bank performance. NPLs have increased significantly in recent years, reaching Rs. 398 billion in 2009 and Rs. 459,840 million by June 2010. High NPLs threaten the banking sector through increased credit, liquidity, and other risks. The research finds that interest rates and discount rates are key drivers of NPL variation. It recommends that banks adopt more efficient loan appraisal techniques based on risk measurement and conventional investment analysis to better control lending. Overall, the high level of NPLs poses serious risks to Pakistan's banking sector and strategies are needed to reduce NPLs.
An assessment of factors affecting banks’ risk exposure in north central nigeriaAlexander Decker
The document summarizes a study that assessed factors affecting banks' risk exposure in North Central Nigeria. The study identified five main factors through factor analysis: liquidity and interest, domestic market, international market, business operation, and credit. It recommends that banks consider these factors in developing effective risk management strategies to reduce potential losses.
This document provides a final project report on credit risk management in banks. The report contains 12 chapters that discuss topics such as the importance of credit risk assessment, credit risk modeling, data collection, and model validation. The report finds that banks need sophisticated systems to quantify and manage credit risk across business lines. It evaluates traditional credit risk measurement approaches like expert systems and discusses the need for banks to have strong management information systems and analytical techniques to measure credit risk. The report aims to provide an accurate and comprehensive framework for estimating credit risk to help banks quantify capital needs to support risk-taking activities.
This document discusses various types of risks faced by banks, including credit risk, market risk, operational risk, liquidity risk, and reputation risk. It provides definitions of different risk types such as credit risk, concentration risk, and interest rate risk. The document also covers topics like the importance of credit risk management, factors to consider in credit risk analysis, and modern approaches to assessing and managing credit risk in the banking industry.
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.
This document is a questionnaire for a survey on credit risk management and the financial crisis in accordance with Basel II. It requests personal and professional information from respondents and asks questions about their bank's approach to credit risk management, internal factors and models used, external risk responses, and opinions on credit risk tolerance, capital reserves, and the introduction of credit bureaus in the UAE. The final questions inquire about preparations for implementing Basel III and suggestions for improving current credit risk management systems.
This document discusses risk management in banks. It begins by defining risk and explaining the importance of risk management. It then discusses what risk management is and how it helps organizations like banks mitigate and reduce risks. The document emphasizes how important risk management is for banks given the various financial and non-financial risks they face. It outlines some of the major risks banks encounter like credit risk and discusses tools that banks use to manage credit risk, such as exposure ceilings, risk ratings, pricing based on risk, and portfolio management.
This document provides a summary and comparison of risk management theories from Hennie van Greuning, Joël Bessis, and Dennis Uyemura. It discusses the major categories of risk that banks face, including credit risk, country risk, performance risk, liquidity risk, interest rate risk, market risk, foreign exchange risk, solvency risk, and operational risk. While the theorists generally agree on the types of risks, there are some differences in how some risks are defined or categorized. The document will examine these risk management theories in the context of the current US mortgage crisis.
This document discusses credit risk management in commercial banks in India. It begins by defining credit and risk, and then credit risk specifically. It describes how credit risk can arise from borrower failure to repay loans. It then provides recent examples of large loan defaults in various Indian banks. The document discusses various models that banks use to assess and mitigate credit risk, such as credit scoring, Altman's Z-score model, and value at risk. It concludes that commercial lending inherently carries some risk, so banks must carefully analyze borrowers' trustworthiness, financial health, and collateral to minimize credit risk in their lending.
A report on Credit Risk Management in BanksAnurag Ghosh
This document discusses credit risk management in banks. It begins with an introduction and methodology section describing the sources of data analyzed. It then includes an index and sections on the banking scenario in India, credit policies, data analysis of NPA levels in major Indian banks showing a correlation between loans and NPAs, definitions of business and credit risk, causes of credit risk, credit risk assessment techniques, and other risk management strategies like credit ratings and ALM. The document analyzes challenges for banks and provides recommendations to better manage credit risk.
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.
The moderating role of bank performance indicators on credit risk of indian p...Alexander Decker
The document analyzes the moderating role of bank performance indicators on the relationship between lending (advances) and credit risk (non-performing assets or NPA) for Indian public sector banks from 2000-2001 to 2011-2012. It finds that bank performance variables like borrowing, investments, reserves, deposits, capital, and total assets moderate the relationship between advances and NPA. Specifically, the study shows that over 90% of the variability in gross NPA for State Bank of India and its associates can be explained when including these bank performance variables and their interaction with advances in the regression model.
Microfinancing aims to provide financial services to the poor by making loans accessible. However, microfinancing involves significant risks due to the unpredictable incomes of borrowers and weak property rights. Successful microfinancing requires an in-depth understanding of borrowers' social environments and financial needs. It also relies on social pressures rather than traditional collateral. Microfinancing institutions face various financial, operational, and strategic risks that must be carefully managed, such as credit, liquidity, interest rate, and fraud risks. Both the characteristics of the institutions and macroeconomic factors can impact the sustainability of microfinancing.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
Credit default, also known as non-performing loan (NPL), refers to a loan where payments of interest and principal are past due by 90 days or more. There are several causes of credit default in banks, including macroeconomic factors, issues related to lending, business-related problems, and factors related to entrepreneurs. Credit default can lead banks to have efficiency problems, a negative relationship between NPLs and performance, and credit crunch situations. Some remedies for banks include proper risk assessment, motivating loan performers, forming recovery agencies, monitoring collaterals, training staff, and balancing risk and return through investment portfolios.
Profitability Determinants of Go-Public Bank in Indonesia: Empirical Evidenc...inventionjournals
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
Given the continued poor performance experienced in the banking sector as indicated by high levels of credit risk, poor quality loans and high incidence of non-performing loans, in spite of the frequent reforms that various governments in Nigeria have embarked upon, there is the need to constantly examine and analyse the factors that could affect bank performance with the aim of providing empirical evidence based on which solutions can be proffered. The paper examined the impact of asset quality management on the performance of deposit money banks in Nigeria. The paper adopted the ECM and co-integration techniques using annual aggregate data sourced from the CBN and the NDIC publications for the period 1990-2013. The findings of the study indicate that the selected measures of asset quality have significant impact on all the three indicators of bank performance namely- return on equity, return on total assets and return on shareholders’ fund respectively. In addition, the results of the impulse response and variance decomposition show that own shocks from the performance indicators ROE, ROTA and ROSF account for a greater proportion of the forecast errors of the variables within the ten-year forecast period. In the light of the above, it is recommended that deposit money banks in Nigeria should intensify their efforts in designing and implementing good asset quality management policies in order to further improve on their performance. This can be through human capacity building for personnel in the form of frequent professional training as well as strict adherence to the prudential guidelines.
Do rating agencies cater evidence from rating based contractsMr HP
This summary provides the key points from the document in 3 sentences:
Rating agencies may provide inflated credit ratings to borrowers with rating-based loan contracts in order to cater to their business interests, as downgrades could negatively impact the borrowers' cash flows. The study finds evidence that rating agencies' adjustments for off-balance sheet debt and soft factors are more favorable for borrowers with rating-based contracts compared to accounting-ratio based contracts. However, the degree of rating inflation is reduced when rating agencies face higher reputational costs, such as when ratings are close to thresholds or another rating agency also provides a rating.
This document provides an overview of key concepts in credit risk management, including:
1) Credit risk arises from factors like a borrower's ability to repay, economic conditions, specific events, and regional factors. It is the risk of financial loss if a counterparty fails to meet contractual obligations.
2) Banks assess probability of default, exposure at default, and loss given default to measure and manage credit risk. Transition matrices track how probabilities of default change over time.
3) Credit risk arises in both a bank's trading book (exchange traded and OTC derivatives) and banking book (loans and off-balance sheet commitments). Credit ratings and market prices help estimate probability of default.
1 efficacy-of-credit-risk-management and profitabilityMisker Bizuayehu
This document is a research paper that examines the efficacy of credit risk management on bank performance in Nigeria using Union Bank PLC from 2006-2010 as a case study. The author aims to determine if credit risk affects bank profitability and examine the relationship between interest income and bad debt. Secondary data is used and analyzed using time series, trend, correlation and regression analyses. The study concludes that credit risk negatively impacts Union Bank's performance and high interest income requires effective credit risk management and prudent lending practices. It recommends regularly reviewing loans to assess risk levels and ensuring collateral for loans.
Risk management in banking a study with reference to state bank of india sbi aIAEME Publication
This document discusses risk management in banking with a focus on credit risk management practices at State Bank of India (SBI) and its associates. It provides an overview of SBI and its subsidiaries, and discusses how SBI has implemented the Basel accords on capital adequacy requirements and approaches credit risk measurement. The document analyzes trends in non-performing assets and capital adequacy ratios at SBI from 2007-2008 to 2012-2013 to assess its risk management practices.
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 document provides a final project report on credit risk management in banks. The report contains 12 chapters that discuss topics such as the importance of credit risk assessment, credit risk modeling, data collection, and model validation. The report finds that banks need sophisticated systems to quantify and manage credit risk across business lines. It evaluates traditional credit risk measurement approaches like expert systems and discusses the need for banks to have strong management information systems and analytical techniques to measure credit risk. The report aims to provide an accurate and comprehensive framework for estimating credit risk to help banks quantify capital needs to support risk-taking activities.
This document discusses various types of risks faced by banks, including credit risk, market risk, operational risk, liquidity risk, and reputation risk. It provides definitions of different risk types such as credit risk, concentration risk, and interest rate risk. The document also covers topics like the importance of credit risk management, factors to consider in credit risk analysis, and modern approaches to assessing and managing credit risk in the banking industry.
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.
This document is a questionnaire for a survey on credit risk management and the financial crisis in accordance with Basel II. It requests personal and professional information from respondents and asks questions about their bank's approach to credit risk management, internal factors and models used, external risk responses, and opinions on credit risk tolerance, capital reserves, and the introduction of credit bureaus in the UAE. The final questions inquire about preparations for implementing Basel III and suggestions for improving current credit risk management systems.
This document discusses risk management in banks. It begins by defining risk and explaining the importance of risk management. It then discusses what risk management is and how it helps organizations like banks mitigate and reduce risks. The document emphasizes how important risk management is for banks given the various financial and non-financial risks they face. It outlines some of the major risks banks encounter like credit risk and discusses tools that banks use to manage credit risk, such as exposure ceilings, risk ratings, pricing based on risk, and portfolio management.
This document provides a summary and comparison of risk management theories from Hennie van Greuning, Joël Bessis, and Dennis Uyemura. It discusses the major categories of risk that banks face, including credit risk, country risk, performance risk, liquidity risk, interest rate risk, market risk, foreign exchange risk, solvency risk, and operational risk. While the theorists generally agree on the types of risks, there are some differences in how some risks are defined or categorized. The document will examine these risk management theories in the context of the current US mortgage crisis.
This document discusses credit risk management in commercial banks in India. It begins by defining credit and risk, and then credit risk specifically. It describes how credit risk can arise from borrower failure to repay loans. It then provides recent examples of large loan defaults in various Indian banks. The document discusses various models that banks use to assess and mitigate credit risk, such as credit scoring, Altman's Z-score model, and value at risk. It concludes that commercial lending inherently carries some risk, so banks must carefully analyze borrowers' trustworthiness, financial health, and collateral to minimize credit risk in their lending.
A report on Credit Risk Management in BanksAnurag Ghosh
This document discusses credit risk management in banks. It begins with an introduction and methodology section describing the sources of data analyzed. It then includes an index and sections on the banking scenario in India, credit policies, data analysis of NPA levels in major Indian banks showing a correlation between loans and NPAs, definitions of business and credit risk, causes of credit risk, credit risk assessment techniques, and other risk management strategies like credit ratings and ALM. The document analyzes challenges for banks and provides recommendations to better manage credit risk.
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.
The moderating role of bank performance indicators on credit risk of indian p...Alexander Decker
The document analyzes the moderating role of bank performance indicators on the relationship between lending (advances) and credit risk (non-performing assets or NPA) for Indian public sector banks from 2000-2001 to 2011-2012. It finds that bank performance variables like borrowing, investments, reserves, deposits, capital, and total assets moderate the relationship between advances and NPA. Specifically, the study shows that over 90% of the variability in gross NPA for State Bank of India and its associates can be explained when including these bank performance variables and their interaction with advances in the regression model.
Microfinancing aims to provide financial services to the poor by making loans accessible. However, microfinancing involves significant risks due to the unpredictable incomes of borrowers and weak property rights. Successful microfinancing requires an in-depth understanding of borrowers' social environments and financial needs. It also relies on social pressures rather than traditional collateral. Microfinancing institutions face various financial, operational, and strategic risks that must be carefully managed, such as credit, liquidity, interest rate, and fraud risks. Both the characteristics of the institutions and macroeconomic factors can impact the sustainability of microfinancing.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
Credit default, also known as non-performing loan (NPL), refers to a loan where payments of interest and principal are past due by 90 days or more. There are several causes of credit default in banks, including macroeconomic factors, issues related to lending, business-related problems, and factors related to entrepreneurs. Credit default can lead banks to have efficiency problems, a negative relationship between NPLs and performance, and credit crunch situations. Some remedies for banks include proper risk assessment, motivating loan performers, forming recovery agencies, monitoring collaterals, training staff, and balancing risk and return through investment portfolios.
Profitability Determinants of Go-Public Bank in Indonesia: Empirical Evidenc...inventionjournals
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
Given the continued poor performance experienced in the banking sector as indicated by high levels of credit risk, poor quality loans and high incidence of non-performing loans, in spite of the frequent reforms that various governments in Nigeria have embarked upon, there is the need to constantly examine and analyse the factors that could affect bank performance with the aim of providing empirical evidence based on which solutions can be proffered. The paper examined the impact of asset quality management on the performance of deposit money banks in Nigeria. The paper adopted the ECM and co-integration techniques using annual aggregate data sourced from the CBN and the NDIC publications for the period 1990-2013. The findings of the study indicate that the selected measures of asset quality have significant impact on all the three indicators of bank performance namely- return on equity, return on total assets and return on shareholders’ fund respectively. In addition, the results of the impulse response and variance decomposition show that own shocks from the performance indicators ROE, ROTA and ROSF account for a greater proportion of the forecast errors of the variables within the ten-year forecast period. In the light of the above, it is recommended that deposit money banks in Nigeria should intensify their efforts in designing and implementing good asset quality management policies in order to further improve on their performance. This can be through human capacity building for personnel in the form of frequent professional training as well as strict adherence to the prudential guidelines.
Do rating agencies cater evidence from rating based contractsMr HP
This summary provides the key points from the document in 3 sentences:
Rating agencies may provide inflated credit ratings to borrowers with rating-based loan contracts in order to cater to their business interests, as downgrades could negatively impact the borrowers' cash flows. The study finds evidence that rating agencies' adjustments for off-balance sheet debt and soft factors are more favorable for borrowers with rating-based contracts compared to accounting-ratio based contracts. However, the degree of rating inflation is reduced when rating agencies face higher reputational costs, such as when ratings are close to thresholds or another rating agency also provides a rating.
This document provides an overview of key concepts in credit risk management, including:
1) Credit risk arises from factors like a borrower's ability to repay, economic conditions, specific events, and regional factors. It is the risk of financial loss if a counterparty fails to meet contractual obligations.
2) Banks assess probability of default, exposure at default, and loss given default to measure and manage credit risk. Transition matrices track how probabilities of default change over time.
3) Credit risk arises in both a bank's trading book (exchange traded and OTC derivatives) and banking book (loans and off-balance sheet commitments). Credit ratings and market prices help estimate probability of default.
1 efficacy-of-credit-risk-management and profitabilityMisker Bizuayehu
This document is a research paper that examines the efficacy of credit risk management on bank performance in Nigeria using Union Bank PLC from 2006-2010 as a case study. The author aims to determine if credit risk affects bank profitability and examine the relationship between interest income and bad debt. Secondary data is used and analyzed using time series, trend, correlation and regression analyses. The study concludes that credit risk negatively impacts Union Bank's performance and high interest income requires effective credit risk management and prudent lending practices. It recommends regularly reviewing loans to assess risk levels and ensuring collateral for loans.
Risk management in banking a study with reference to state bank of india sbi aIAEME Publication
This document discusses risk management in banking with a focus on credit risk management practices at State Bank of India (SBI) and its associates. It provides an overview of SBI and its subsidiaries, and discusses how SBI has implemented the Basel accords on capital adequacy requirements and approaches credit risk measurement. The document analyzes trends in non-performing assets and capital adequacy ratios at SBI from 2007-2008 to 2012-2013 to assess its risk management practices.
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 ...
A Systematic Literature Review On The Effects Of Risk Management Practices On...Claire Webber
This document summarizes a systematic literature review on the effects of risk management practices (RMPs) on the performance of Islamic banking institutions (IBIs). The review identified 16 themes and 17 sub-themes related to RMPs and IBI performance from analyzing 39 primary studies. Key findings included that IBIs with good risk mitigation practices, strong risk management environments, clear policies and procedures, and effective risk monitoring tended to have better financial performance. The review concluded RMPs are important for IBIs' financial stability and performance, so IBIs must make RMPs a priority.
Risk management practices among commercial banks in ghanaAlexander Decker
This document discusses risk management practices among commercial banks in Ghana. It begins with an abstract that summarizes the study, which compares risk management practices across commercial banks using a regression model. The study found that banks are somewhat efficient in managing risk, and risk monitoring and control is the most influential factor. The document then provides background on the banking system in Ghana and the importance of risk management. It discusses theoretical models and approaches to risk management, highlighting understanding risk, risk identification, risk assessment, analysis, and monitoring. The empirical literature review found that few studies have examined risk management practices in financial institutions specifically.
Asset liability management in indian private sector banks-a canonical correlatiIAEME Publication
This document summarizes an article from the International Journal of Management about asset-liability management in Indian private sector banks. It discusses the risks banks face from mismatches between short-term liabilities and long-term assets, and how canonical correlation analysis was used on 3 private banks to analyze the relationship between predictor variables like deposits and predictive variables like loans. The analysis found that except for ICICI Bank, the other banks were in a safer position with long-term predictors and predictives.
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.
The aim of this paper is to analyze the liquidity levels of various banks in the UAE for the period 2005-2009. To understand the behavior of liquidity indicators especially during the financial crisis, the researcher will analyze the four liquidity indicators over the years 2005 to 2009. The findings highlight how the banks in question have been impacted by the 2007-2008 crisis. This can most obviously be seen in the notable decline of each of the banks liquidity level in 2009. The effect of loans to total assets, loans to customers’ deposit, and investment to total assets ratios for the five banks was most notable in 2009. Two liquidity ratios were analyzed in order to determine the banks’ ability to honor its debt obligations, these being loans to total assets and loans to customers respectively. The third ratio was the total equity to total assets to assess the liquidity level in the capital structure, while the fourth ratio was the investment to total assets to measure the managing of liquidity. While Bank liquidity was affected by the crisis, bank performance remained relatively stable, as measured by coefficient of variation, since these banks were able to yield more control over cash flows in comparison to revenues and costs.
IMPACT OF CREDIT RISK ON PROFITABILITY A STUDY OF INDIAN PUBLIC SECTOR BANKSJessica Tanner
This document summarizes a research study that examined the impact of credit risk on the profitability of public sector banks in India from 2011 to 2016. The study found:
1) There was a significant positive relationship between return on assets (ROA) and capital adequacy ratio (CAR) and loan provisions to non-performing loans (LPNPL), but a significant negative relationship between ROA and non-performing loans ratio (NPLR).
2) The credit risk variables (CAR, NPLR, LPNPL) predicted 55.7% of the variation in ROA, indicating a significant impact of credit risk on profitability.
3) Among the credit risk indicators, N
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 ...
This document examines the determinants of commercial bank profitability in Nigeria from 2000-2013 using panel data regression. It finds that asset quality, management efficiency, and economic growth are statistically significant determinants of profitability. Asset quality, in particular, is highly significant, concluding that credit risk is a major determinant of bank profitability. The study aims to assist bank regulators and managers in Nigeria to better understand factors influencing profitability and improve policies. It reviews theories and prior empirical research on determinants of bank profitability, such as capital adequacy, asset composition, regulation, and ownership structure.
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
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.
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
Reply to DiscussionsD1 navyaA bank failure is the ending of.docxchris293
Reply to Discussions
D1: navya
A bank failure is the ending of an insolvent bank by a state or federal regulator. So the only power that closes the national banks is the comptroller who has a higher power in maintaining the currency. It mainly happens when a bank fails where it is assumed by the federal deposit insurance corporation in the insures of deposits. They find a different bank to take it over because various customers will specifically like the continuation using their debit cards, online banking tools, and accounts. So bank failures are mainly often to predict because the federal deposit insurance commission will not announce a particular bank to set go under the profits. Then bank diversification is the procedure that allocates the capital in a specific way because it reduces the exposure to a particular asset or risk. Therefore, the main reason for this bank diversification is to decrease the volatility or risk by investing in various assets (Goetz, 2012).
So considering both of those banking systems can easily relate to the country's economic health by determining the better quality of the loan book of different individual books. Then for maintaining the better quality of advance bank portfolio, there is only one crucial tool where it is credit monitoring. Credit monitoring plays a vital role in protecting the bank's exposures, but it also ensures the various funds that are channeled by maintaining the right purpose. It mainly acts as the guardrail for ensuring the health of banks and countries economically to stay in the right trajectory. Then various technology solutions will be readily available in the market for helping the automated process of credit monitoring to a large extent. They can ensure the functions of credit monitoring to keep the process and objective in the method oriented (Brownbridge, 2002).
References
Brownbridge, M. (2002). Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures. Development Policy Review, 20(3), 279-291. doi: 10.1111/1467-7679.00171
Goetz, M. (2012). Bank Diversification, Market Structure and Bank Risk Taking: Theory and Evidence from U.S. Commercial Banks. SSRN Electronic Journal. doi: 10.2139/ssrn.2651161
Reply:
D2: pavani
Diversification helps individual institutions and makes them be benefited. But Wagner says that the systematic risk increases by the degree of diversification. Raffestin also said something about the diversification that diversification can cause risks and any number of failures also. By the above words, we can know the negative aspects or negative effects of diversification. Systematic risks are very broad and complex term. This diversification process has some of the diversification measures. The indicator of diversification is calculated from the bank’s profitability. There are various methods of diversification. Commonly Alas et al proposed method is used (Mirzaei & Kutan, 2016).
And also the weight average diversification of banks ( AWDI.
This document appears to be an introduction and outline for an MSc dissertation on the role of financial regulations in the risk and profit efficiency of commercial banks in the U.S. It provides background on bank regulations and non-performing loans. The methodology will use data envelopment analysis and regression models to analyze how regulations impact efficiency and risk for large and small banks from 2002-2015. Preliminary results found that higher provision coverage reduced risk for large banks, while higher capital and leverage ratios increased efficiency and reduced risk for small banks. Overall, the dissertation aims to examine the tradeoff between bank efficiency and risk under different financial regulations.
Study on credit risk management of SBI CochiSreelakshmi_S
1. The document discusses credit risk management practices at SBI Kochi from 2013-2014. It provides background on credit risk and outlines key aspects of effective credit risk management like establishing appropriate risk environment, credit risk assessment, and portfolio management.
2. The theoretical background section defines terms like credit, risk, market risk, operational risk, and credit risk. It also discusses contributors to credit risk and key elements of credit risk management.
3. The document discusses credit rating and its use in credit decision making. It provides details on the rating tool used by SBI for assessing creditworthiness of borrowers, especially Small and Medium Enterprises.
This summary provides the key points from the document in 3 sentences:
The document discusses a study that investigates the determinants of bank lending behavior in Ghana. Using an econometric model, the study finds that bank size, capital structure, and competition have a positive relationship with bank lending, while macroeconomic indicators like interest rates and exchange rates negatively impact lending. The study contributes to understanding how bank-specific, macroeconomic, and industry factors influence bank lending decisions in an emerging market context like Ghana.
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.
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Credit risk and profitability of selected banks in ghana
1. Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol 3, No 7, 2012
Credit Risk and Profitability of Selected Banks in Ghana
Samuel Hymore Boahene1* Dr. Julius Dasah2 Samuel Kwaku Agyei3
1. Internal Audit Officer, International Commercial Bank (Ghana) Limited, Accra-Ghana. Email:
hymoresb@yahoo.com Tel: +233 (0) 261 690 125
2. Bank of Ghana, Accra - Ghana
3. Department of Accounting and Finance, School of Business, University of Cape Coast, Cape
Coast-Ghana. Email: twoices2003@yahoo.co.uk Tel: +233 (0) 277 655 161
*
Corresponding Author
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.
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,
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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.
Sound credit risk management system (which include risk identification, measurement, assessment,
monitoring and control) 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.
Establishing a clear process for approving new credit and extending existing credit (Heffernan, 1996) and
monitoring credits granted to borrowers (Mwisho, 2001) are considered important when managing credit risk
(Heffernan, 1996). Instruments 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 ensuring
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 and; 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.
2.2.1 Value at – Risk (VaR) As a Tool for Portfolio Optimization.
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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. It is intended to overcome the shortcomings of modern
portfolio theory when standard deviation is used as a measure of risk in risk-return relationships 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. 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
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 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). 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:
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
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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) / Total Negative/ Positive
Loans and Advances of Bank i in time t
NPLR Credit Risk = Non Performing Loans / Total Loans and Negative/Positive
Advances
of Bank i in time t
PPPNTLA Credit Risk = Pre-Provision Profit / Net Total Loans Negative/Positive
and Advances
of Bank i in time t
SIZE Bank Size = the log of Total Assets of Bank i in time t Positive
GRO Growth = Growth in Bank Interest income, year on year. Positive
TDA Leverage = the ratio of Total Debt to Total Net Assets Positive
for Bank i in time t. A measure for bank capital
structure.
Ε The error term
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.
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 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.
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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
5.2 Variance Inflation Factor Analysis
In this study, the researchers used the variance inflation factor (VIF) analysis. 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.
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
SIZE 1.35 0.742634
GRO 1.17 0.856027
Mean VIF 1.83
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 result 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.
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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 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.
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Vol 3, No 7, 2012
Table 4, Regression Results (Dependent Variable: Roe)
Fixed Effects Model Random Effects Model
Var. Coef. t-test Prob. Coef. z-test Prob.
NCOTL 0.2826 7.57 0.000 0.2366 5.76 0.000
NPLR 0.2593 11.86 0.000 0.2657 10.33 0.000
PPPNTLA 1.4190 2.09 0.056 0.6338 0.84 0.400
SIZE 0.1165 3.45 0.004 0.0636 1.84 0.066
GRO 0.2861 1.87 0.083 -0.0429 -0.34 0.736
TDA 1.0862 1.97 0.069 0.7100 1.11 0.268
CONS -3.4687 -3.79 0.002 -1.8621 -2.10 0.036
R-sq 0.9221 R-sq. 0.9527
Wald chi2 81.64 Wald chi2 342.17
Prob. 0.0000 Prob. 0.0000
Haus. Test: 12.64
Chi2: 12.64
Prob. 0.0491
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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