Credit Risk,its Impact On Profitability Of Banks

Credit risk has been the core of banking.The delicate of the banking activities mainly being the cause.Thus,Banks collect deposits and lends to customers but when customers fail to fulfill their obligations problems arise and eventually,catastrophe hit the banks and its capability to operation.This study therefore aim to analyse the impact of credit risk on profitability of Banks in Ghana.Panel data covering the period of 2010-2015 were collected from 20 banks for the analysis using the fixed effect regression model.Three determinants of credit risk were chosen in accordance to relevant literature.These are asset quality,non-performing loan,and liquidity.Return on Asset(ROA)was employed as a measure of profitability.Growth and operating cost were additional measures used in controlling the study.The findings of the study shown that Asset Quality,Non-performing loan,and Liquidity are inversely related to profitability.Whiles the relationship of asset quality and non-performing loan with profitability were statistically significant,the relationship of liquidity with banks' profitability was found to be insignificant.Operating cost had a negative relationship with profitability and the relationship of growth with profitability was found to be positive.These were statistically significant.The study implied that credit risk is a significant factor that influences the profitability of banks in Ghana.The analysis shows that banks with huge non-performing loans given rise to poor asset quality are less profitable and this in turn reflects in the liquidity position of the banks making them being faced with liquidity risk which will translate to high credit risk resulting in the solvency of the banks and hence its bankruptcy.This study has several managerial and policy implications.Based on the result of the study,it is argued that banks should adopt and implement effective credit risk management strategies as it will enhance their profitability.