Impact of credit risk on corporate financial performance: Evidence from listed banks on the Ghana stock exchange

Abstract

A bank's financial performance and survival can be threatened when there is an increased exposure to credit risk. On this basis, this study seeks to identify the factors that determine the level of bank credit risk and further estimates the effects of bank credit risk on corporate financial performance using financial data from banks on the Ghana Stock Exchange over a 15-year period from 2003 to 2017. Using the method of 2SLS, it was observed variables such as capital adequacy, operating efficiency, profitability, and net interest margin are inversely related to credit risk. Conversely, bank size and financing gap tend to relate positively with credit risk. Also, anualised changes in inflation tend to positively affect credit risk. Again, it was observed that, increase in bank credit risk negatively affects corporate financial performance which is consistent with Basel accord. Thus, for banks to survive in their industry, critical attention needs to be paid to management of its credit risk exposure.