Research On The Impact Of Credit Risk On Commercial Banks Performance

Banks play integral part in the economy.Just like the heart in a human body,the banking sector is the heart of a functioning economy hence it is important to ensure a sound banking system.It has been argued that lax credit risk management practices and an increase in credit risk instigated the 2007-2009 global financial crisis.As a result,banks have increasingly prioritized credit risk management to ensure an increase in bank performance while minimizing risk.However,research on the relationship between credit risk management and profitability in banks in South Africa remains limited.Thus,the study pursues three objectives;the first objective is to examine the impact of credit risk on bank performance,the second objective is the impact of macro-economic factors on bank performance,and the third objective is the correlation between bank size and bank performance.The study employed panel data as such the research used the following panel econometric approaches to deal with cross-sectional dependence and heterogeneity;P-Y homogeneity test,Pedroni and Durbin-Hausman panel cointegration,,Pesaran CD_LMM test,the AMG estimator,CIPS panel unit root test and the DH panel granger causality test.The results from these tests reveal that the panel time series data employed in the study is indeed heterogeneous and has evidence of cross-sectional dependence.In addition,there exists evidence of a long-run structural relationship among the variables reviewed.We also discover that non-performing loans does have an adverse impact on bank performance at a significance of 1%,whereas net income and bank size have positive effect on bank performance all at 1%level of significance.The results also demonstrate that real GDP and inflation have a negative impact on bank performance but insignificant while,on the other side of the coin,the ratio of total assets to loans also has a statically insignificant but positive impact on profitability.The consequences of inadequate credit risk management have been dire;forcing some financial institutions to close entirely as the sector‘s overall profitability have been reduced.This eventually leaves a poorer economy,as banks as financial intermediaries cannot effectively perform their role in the economy.Credit officers and staff in commercial banks’credit departments do need to undergo regular training and improvement programs so that they remain well versed in developments about sound policies and strategies for credit risk management.That will put them in good hands when it comes to lending money to customers to make smart decisions.