Credit Risk Management and Profitability: Challenges and Insight of Commercial Banks

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue VI, June 2019 | ISSN 2454–6186

Credit Risk Management and Profitability: Challenges and Insight of Commercial Banks

Dankwa, Ernest Akwasi Adom

Business School, Garden City University College, P.O. Box 12775 Kumasi-Ghana

Abstract:-The present article aimed to determine the impact of credit risk management on bank profitability performance using the Ecobank group covering the period 2013 to 2017. Based on research conducted abroad on bank and profitability indicators, in order to obtain research results the author evaluated return on assets (ROA) and return on equity (ROE) indicators of the Ecobank Group. This research interrogated the macro and micro implications of credit risk management on the profitability performance on the Ecobank Group by applying key credit risks tools and techniques. Based on the obtained results, the author have concluded that there is a statistical significance in profitability and default rate (i.e. a borrower’s default negatively affect banks profitability-ROA &ROE); a finding in line as posited in earlier studies by Opoku (2016); Gizaw et al (2015) & Mendoza et al (2017).Based on the study outcome, the author concluded that commercial banks must adhered to facility granting protocols to avoid giving bad loans as its impact on investor returns is detrimental and could affect their share prices in medium to long term.

Keywords: Profitability, ROA, ROE, commercial banks, Ecobank group.

I. INTRODUCTION

Credit management and its associated risk form the main drivers of the business of banking, and since about 70 percent of a banks revenue emanate from interest income, there is the need for efficient management of the risk associated to this credit as they affects the profitability performance of banks (Li & Zou 2014)
After the 2007 and 2008 financial and banking crises led to global recession, new risk management techniques emerged (for example the enactment of the Basel III accord which aims to strengthen among other things the credit risk management policy techniques) of commercial banks worldwide. See Basel III accord, released, 2010)
A bank’s ability to properly apply these credit risk management tools (including the Basel III accords and other internally developed credit risk management policies) will help reduce defaults and its associated impact thereby providing the bank with opportunity to improve profitability performance, growth and competitive advantage.

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