Credit risk and the financial performance of banks: evidence from commercial banks in Ghana

Author(s):

 Richard Eshun

richardeshun2004@yahoo.co.uk
2025-12-03 14:31:47

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Abstract

This study examines the relationship between credit risk indicators capital adequacy ratio (CAR), non performing loans ratio (NPL), and loans-to-assets ratio (LAR) and the financial performance of commercial banks in Ghana, measured through return on assets (ROA) and return on equity (ROE). Utilizing balanced panel data from audited financial reports of fourteen commercial banks spanning 2010 to 2022, the research employs multiple least squares regression analysis to investigate these relationships. The empirical findings reveal that CAR and LAR demonstrate statistically significant positive associations with both ROA and ROE, suggesting that higher capital adequacy and loan portfolio expansion contribute favourably to bank profitability. Conversely, the NPL ratio exhibits a significant negative relationship with financial performance, indicating that deteriorating asset quality substantially undermines bank profitability. These results underscore the critical importance of prudent credit risk management in sustaining financial performance. The study recommends that bank management prioritise effective monitoring of risk-weighted assets to maintain optimal capital adequacy levels while simultaneously strengthening credit appraisal mechanisms and loan monitoring frameworks to mitigate non-performing loans. Such measures are essential for preserving both operational performance and regulatory capital requirements in Ghana’s banking sector.

Keywords
Credit risk; financial performance; Commercial banks; Ghana

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