CHAPTER ONE INTRODUCTION
Background to the Study
Banks perform critical functions in the economic development of all nations through their financial intermediation functions. This intermediation role serves a catalyst for economic growth. Also, banks provide capita to investors who by this are able to exploit desired profitable ventures (Kargi, 2011). But, at the same time, the provision of credit poses concern to banks due to the risk associated. This risks comes about due to the failure of borrowers to repay loans and advances granted. In this case, the banks needs to make provisions for loan losses which potentially constrain its profitability level.
Risk of nonpayment has largely been attributed to poor credit management. In an empirical study in Ghana, Addae-Korankye (2014) for example, found the major causes of non- performing loan to comprise poor appraisal, lack of monitoring, and improper client selection. This underscores the existence of a fundamental problem in the credit management practices of banks. Gill (1998) likewise contends that the incidence of nonperforming loans has been as a result of weak institutional standards of lending to clients and counterparties, and management of risk exposures. Extant literature indicates that non-performing loan levels are quite high among Ghanaian banks. The Ghana Business and Finance (2011) for example report that by close of year 2010, 17.6% of the loan portfolio of Ghanaian Banks were thought to be non-performing. By year 2017, this had risen to 21.6% (The World Bank, 2019). Given the growing levels of non-performing loans it has become imperative for banks to embrace efficiency in their operations. Non-performing loans generate additional costs for banks (Nitoi & Spulbar, 2015). Thus efficiency and cost optimization must characterise the operations of indigenous banks. Cost per loan asset ratio for instance is an indication of management efficiency in the administration of loans. Proceeding from this background, this study seeks to
evaluate the effect of credit risk management on bank performance, with a focus on the indigenous banks.
Statement of the Problem
Banks generally obtain their earnings from interest income accruing from their loan advances. However, this source of income is also the source of their vulnerability as some borrowers tend to default in making repayments (Li and Zou, 2014). This has clearly been witnessed in the banking sector in Ghana in recent times. In a more recent report on the banking sector, The Bank of Ghana (2018) revealed that credit risk among banks continues to be high with more than one-fifth of loans in the sector being non-performing and thus further highlighting the enormity of credit risk that banks face. Credit risk has also been cited as a cause of the collapse of some banks in recent times. That of Sovereign Bank, that is, non-performing loans was found to be 78.9 percent of its loan portfolio. The reports indicated further that some of the affected banks had transactions with individuals and bodies that per the central bank’s regulations must be within stipulated limits. The transactions of these banks with the earlier mentioned parties amounted to GH¢161.92 million. Per the banking regulations, the transactions with parties such as shareholders, and parties related to the bank should not exceed stipulated limits. The actions of the banks were therefore undertaken to conceal information as well as mislead the banking supervisors, thereby presenting wrong information on the adequacy of their capital (Joy Business News, 2018).