Management

CREDIT RISK MANAGEMENT AND PROFITABILITY OF SELECTED RURAL BANKS IN GHANA

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Credit risk management in rural and community banks has become more important not only
because of the financial crisis that the world is experiencing currently, but also as a crucial
concept which determines banks’ survival, growth and profitability. Because credit granting is
one of the key sources of income generating activity in rural banks, the management of the risk
related to credit affects the profitability of the banks.
This study examines the impact of credit risk management on the profitability of rural and
community banks in the Brong Ahafo Region of Ghana. We used the financial statements of ten
rural banks from the period of 2006 to 2010 (five years) for our analysis. The panel regression
model was employed for the estimation. In the model, definition of Return on Equity (ROE) and
Return on Asset (ROA) were used as profitability indicator while Non-Performing Loans Ratio
(NLPR) and Capital Adequacy Ratio (CAR) as credit risk management indicators.
The findings indicate a significant positive relationship between non-performing loans and rural
banks’ profitability revealing that, there are higher loan losses but banks still earn profit. This
indicates that, rural banks do not have sound and effective credit risk management practices.
Theoretically, non-performing loans reduce the profit levels of rural banks but in situation where
non-performing loans are increasing proportionately to profitability, then it means that rural
banks do not have effective institutional measures to deal with credit risk management. What the
banks do is that they shift the cost on loan default to other customers in the form of higher
interest rate on loans.
Higher interest margin charged on loan by rural banks due to weak credit risk management
practices prevent microenterprises from accessing loans. Such a situation prevents business
expansion and rural industrialization which are essential for poverty reduction.
Most studies in this area tend to focus on the big commercial banks, thus this study with it focus
on rural banks, contributes a lot to literature concerning credit risk management in small banks
such as rural and community banks.
In terms of policy directions, the Bank of Ghana will have to tighten its control mechanisms of
rural banks to stop this unfortunate trend in the rural banking industry.

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English

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CREDIT RISK MANAGEMENT AND PROFITABILITY OF SELECT

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