The Effect of Credit Risk on Bank Performance; A Case Study of Stanbic Bank, Ghana
Chapter One
Objective of the study
- To evaluate the nature and extent of credit risk exposure faced by Stanbic Bank Ghana
- To investigate Impact on Bank Performance: Analyze how credit risk influences key performance indicators of Stanbic Bank Ghana.
- To assess the effectiveness of risk management practices employed by Stanbic Bank Ghana in mitigating credit risk
CHAPTER TWO
REVIEWED OF RELATED LITERATURE
INTRODUCTION
Deposit money banks are wide-open to risk probably due to the nature of their business. Yesuf (2003) posits that deposit money banks are opened to various forms of risk such as default risk, credit risk or counterparty risk, interest rate risk, operational risk, foreign exchange risk, liquidity risk, political risk and market risk. Rehman, Muhammad, and Sarwar (2019) assert that previous studies established the causes of the credit crisis as well as proffer possible solution to assist financial institutions worldwide to evade disaster in the future. Credit risks are losses occasioned by the failure of a bank customer to effect the payment of interest and principal amount owed on time and in full. Conford (2000) asserts that credit risk is the probability that loan contracted to a customer could deviate from that which was expected in terms of fulfilling payment obligations. Basel committee on banking supervision-BCBS (1999) sees credit risk as a future threat to the financial strength of the financial sector. The deposit money banks are mandated to maintain certain minimum capital requirement as well as maintain proper leverage ratios to avoid or mitigate potential credit crisis. BCBS (1999) sees credit risk as the likelihood that counterparty (a bank borrower) will fail to meet its obligations in accordance with agreed terms. And that bank is gradually exposed to counterparty risk in several financial instruments such as loans, settlement of transaction, financial futures, options, swaps, interbank transactions and foreign exchange transactions. Credit risk is essentially caused by many factors which are within and outside the control of the bank such as poor supervision from the Nigeria deposit insurance system and central banks, unnecessary government intervention, poor credit assessment and lending practices, faulty credit policies, unstable interest rates, non-adherence to basic lending principle and so on. All these can be moderated through efficient credit risk management. Kou, Ergu, Lin, and Chen, (2016) posit that the banking sector is highly competitive and the main survival strategy is for banks to effectively manage credit risk as well as engage in the diversification of financial services and product to attract and keep potential customers and improve performance. Credit risk management becomes imperative due to the volatile nature of the banking industry. Coyle (2000) asserts that credit risk management focuses on identifying, measuring, monitoring and effective control of risk prompted by the probability of loan repayment failure. Bikker and Metzmakers (2005) assert that credit risk management involves the basic processes of identifying, assessing and analyzing, audit monitoring as well as the control or treatment of risk in the deposit money banks. Liquidation, bankruptcy and macroeconomic problems could lead to credit risk in the financial system. The accumulation of these events could lead to bank failure or bank crisis. Sanusi (2002) posits that bank distresses in the Nigerian banking system are due to poor bank management, insider abuses, political considerations, adverse ownership influence as well as protracted court process especially as concerning the recovery of debts. Past records have shown that the main cause of bank failure in the banking system is the concentration and accumulation of credit risk in banks asset portfolios (BCBS, 2006).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine the effect of credit risk on bank performance. STANBIC BANK GHANA form the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the effect of credit risk on bank performance. A Case Study of Stanbic Bank Ghana. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the effect of credit risk on bank performance. A Case Study of Stanbic Bank Ghana
Summary
This study was on the effect of credit risk on bank performance. A Case Study of Stanbic Bank Ghana. Three objectives were raised which included: To evaluate the nature and extent of credit risk exposure faced by Stanbic Bank Ghana, to investigate Impact on Bank Performance: Analyze how credit risk influences key performance indicators of Stanbic Bank Ghana and to assess the effectiveness of risk management practices employed by Stanbic Bank Ghana in mitigating credit risk. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from Stanbic Bank Ghana. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
The study on the effect of credit risk on the performance of Stanbic Bank Ghana provides valuable insights into the intricate relationship between credit risk management and financial performance in the banking sector. Through a comprehensive analysis of historical data and contemporary trends, several key conclusions can be drawn:
Firstly, credit risk significantly impacts the performance of Stanbic Bank Ghana, manifesting in various dimensions such as profitability, asset quality, and operational efficiency. The study reveals that fluctuations in credit risk levels have a direct bearing on the bank’s bottom line, underscoring the importance of robust risk management practices in safeguarding financial stability.
Secondly, the findings highlight the dynamic nature of credit risk, influenced by macroeconomic conditions, industry-specific factors, and internal policies. Effective mitigation of credit risk requires a nuanced understanding of these drivers and proactive measures to adapt risk management strategies accordingly.
Furthermore, the study underscores the critical role of regulatory frameworks and internal controls in mitigating credit risk exposure. Compliance with prudential regulations, adoption of best practices in credit assessment, and continuous monitoring of loan portfolios are essential for enhancing the resilience of Stanbic Bank Ghana against credit-related vulnerabilities.
Recommendations:
Based on the findings of the study, the following recommendations are proposed to enhance the credit risk management practices and overall performance of Stanbic Bank Ghana:
- Invest in advanced credit scoring models and analytics to improve the accuracy of loan origination decisions. Incorporate qualitative factors alongside quantitative metrics to gain a holistic view of borrower creditworthiness.
- Promote diversification across industry sectors, geographical regions, and borrower segments to mitigate concentration risk. Emphasize prudent lending practices and avoid overexposure to high-risk assets.
- Implement robust systems for ongoing monitoring of loan performance and early detection of deteriorating credit quality. Proactively identify problem loans and initiate timely remedial actions to minimize potential losses.
- Provide regular training programs for bank staff to enhance their understanding of credit risk dynamics and best practices in risk management. Foster a culture of risk awareness and accountability across all levels of the organization.
- Maintain open communication channels with regulatory authorities to stay abreast of evolving regulatory requirements and industry standards. Proactively engage in dialogue to address emerging risks and ensure compliance with regulatory guidelines.
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