Determinants of credit risk: a comparative study of foreign and local banks in Ghana

Abstract

Banks play a critical role in financial intermediation. These institutions are channels for monetary circulation in the national economy. However, in its financial intermediation process, banks assume credit, market and operational risks. The dominant of these risks is credit and is associated with the loan book of banks. Banks risk eroding their capital if the quality of their risk assets (loans) deteriorates. Due to the detrimental effect of toxic assets on the profitability, liquidity and solvency of banks in particular and public confidence in the broader financial sector of a country, it is important to have a good understanding of the factors that affect or influence credit risk geographically (economy). This empirical study examines credit risk in Ghana, a Sub-Saharan African country positioned on the west coast of the continent. The study shows that only the bank specific variable of management efficiency and macroeconomic variable of previous year inflation affect credit risk in both locally and foreign owned banks. The study concludes that comparatively the determinants of credit risk do not differ between the ownership structure of the commercial banks. The result also suggests that bank management teams should carefully consider their decision making processes because it has a significant influence on value creation especially because it is a variable that is within their control unlike the macroeconomic indicator of inflation.