The Impact Of Credit Risk Management On Financial Performance

There is high competition in the banking industry as a result of demand for diverse financial products and services.The banking industry today is globally characterized by stiff and intense competition,which threatens the very survival of the banking institutions.The industry now is very competitive and therefore players in it need to apply the right methods to differentiate from each other to gain a competitive advantage by designing more modern and most needed financial products or services.As the stronger banks try to consolidate their hold on the industry the smaller ones develop strategies to compete.This leads to the creation of different banking products,varying from different types of accounts with varying attached benefits to different offers for loans,thus increasing the pressure on the banks to extend credit and maximize profit.These activities come with risks,which must be considered appropriately in the credit granting making credit risk management in financial institutions and banks becoming more crucial.Also,because of the financial crisis that the world is experiencing currently but also the introduction of Basel II credit risk management has been an integral part of financial institutions and commercial banks.Since granting of credit is a major source of earnings in financial institution and commercial banks,the management of the associated risk with these credit has an impact on the financial performance or profitability of the banks.This research study attempts to reveal the impact of credit risk management on financial performance or profitability of some selected commercial banks in Ghana for a period of seven years(2011 – 2017).Two model specifications have been designed to measure this relationship,and the research revealed there is a significant relationship between credit risk management and financial performance of the fifteen(15)selected commercial banks in Ghana as measured by two major measures of profitability(ROE and ROA)as dependent variables.The credit risk measures adopted in the study included capital adequacy ratio,non-performing loans to total loans,loan loss provisions ratio and loans to deposit ratio.A descriptive statistics and pooled panel regression analysis techniques were employed to analyze the data gathered from the annual report of the selected commercial banks.The results showed that,capital adequacy ratio is positively related to financial performance(both return on equity and return on asset)but statistically insignificant to return on equity while non-performing loan ratio is negative related to the selected banks' financial performance but statistically insignificant to return on asset.Also,it was discovered that both loan to deposit ratio and loan loss provision ratio are negatively related and statistically significant to the financial performance of the banks.Based on the findings,the researcher suggests that the management of banks needs to improve credit risk management by putting in place effective credit risk measures to improve risk management strategies in order to enhance financial performance.Thus,a robust credit risk management structure is required to strengthen the process of loan assessment in order to minimize the possibility of granting bad loans.Also,it is suggested that management should institute adequate credit risk management policies by imposing stern credit estimation before issuing credit to customers,and in establishing an effective credit risk management system,need to institute a suitable credit risk environment;operating under a sound credit granting process,maintaining an appropriate credit administration that includes monitoring,processing as well as enough controls over credit risk,and banks require to adopt strategies that will not only limit the banks exposition to credit risk but will improve and develop financial performance and competitiveness of the banks.It was also suggested based on the findings that,management must keep an eye on capital adequacy ratio to ensure that the banks have high CAR in order to avoid breach of regulatory requirement as well as enjoying the positive impact it has on financial performance.