Credit risk management of Ghanaian listed banks

Abstract

Purpose – The study aims to assess credit risk management practices within financial institutions in Ghana. Specifically, the study compares credit risk management practices of listed banks in Ghana with Basel II (1999). Design/methodology/approach – The analysis is based on data gathered from varied sources, namely, use of questionnaires, analysis of internal credit policies and procedure manuals and semi-structured interviews and discussions with credit risk managers of the selected banks in May 2007 and October 2014. Findings – Overall, the credit risk management practices within listed banks in Ghana are in line with sound practices. The only dissimilarity, however, is the role of the board of directors in defining acceptable types of loans and maximum maturities for the various types of loans. The listed banks in Ghana are also exposed to credit risks associated with granting both corporate and small business commercial loans and the use of collaterals to mitigate their credit risk exposures. Practical implications – Banks in Ghana should consider developing the skills of all their personnel and appropriately motivating those involved in the credit risk management processes to ensure that they carry out this process efficiently. Originality/value – Research into credit risk management in the banking industry from the Ghanaian perspective remains scant. This study is, therefore, timely, and its findings are invaluable for the efficient management of credit risk in the banking industry. This study provides policy recommendations which will enhance shareholder value and, in this way, contribute to greater stability in the banking sector in developing countries, in particular.

Credit risk and operational risk on financial performance of universal banks in Ghana: A partial least squared structural equation model (PLS SEM) approach

“…In addition, whenever the CAR of the banks falls below the regulatory threshold of 10% as stipulated by the Bank of Ghana, the universal banks are left with less funds to lend to customers to attract the necessary interest income which will boost their financial performance. Comparing the results to empirical literature, this study is not consistent with the findings of Boahene et al (2012), Kolapo et al (2012), andApanga et al (2016) whose outcome found a positive relationship between financial performance and credit risk. This is because each of these studies used one proxy for credit risk and another proxy for profitability and also did not perform a path analysis with the bank specific variable which were used in the current study.…”

“…This sample period even though improves on Amidu and Hinson (2006), is related to the situation before the credit crunch in 2008 and the euro-zone crisis which subsequently had it's real effect on the Ghanaian economy from 2012 to date. The study by Apanga et al (2016) was done post the global financial crises but the thrust of the study was the identification of the credit risk management practices and juxtaposing them with the recommendations in the Basel II accord. Nevertheless, these findings were not analysed in the context of the lemon theory through the SEM.…”

“…There is no doubt that the retrenchment of credit and increases in bad loans hamper the financial performance of banks as depicted in literature (Noman, Pervin, Chowdhury, & Banna, 2015;Ruziqa, 2013;Salah & Fedhila, 2012;Corcoran, 2010;Hsieh & Lee, 2010;Hosna, Bakaeva & Juanjuan, 2009;Li & Zou, 2014;Apanga, Appiah, & Arthur, 2016). The study conducted by Muriithi (2017) also indicated that operational risk affect performance but neither of these studies used latent variables to represent credit and operational risk in a structural equation model (SEM) nor combined both credit and operational risk to access the magnitude of their effect on the financial performance of financial institutions.…”

Banking Sector Competition and Financial Development in Sub-Saharan Africa

“…It is believed that bank stability is an essential factor in explaining financial development (Apanga, Appiah, & Arthur, 2016;Maredza, 2015;Sarkar & Sensarma, 2016). It is plausible to argue that, when banks are stable, they will contribute positively to the development of the financial sector (Beck, De Jonghe, & Schepens, 2013;Carvallo & Pagliacci, 2016).…”

An Assessment of Credit Risk Management Practices of Adansi Rural Bank Limited

“…According to Apanga et al (2016), "credit risk practices within listed banks in Ghana are in line with sound practices. The only dissimilarity, however, is the role of the board of directors in defining acceptable types of loans and maximum maturities for the various types of loans.…”