An Investigation of the Predictors of Credit Risk Among Ghanaian Rural and Community Banks

Abstract

Non-performing loans (NPLs) have attracted a lot of academic attention in recent times due to the devastating effects of credit risk on banks. This study investigated the predictors of credit risk in rural and community banks (RCBs), and the effects of rural banking in the Ashanti Region of Ghana. The study examined the correlation between credit risk as the dependent factor and a set of 8 systemic and nonsystemic factors of credit risk as independent variables. The systemic variables were GDP growth rate, interest rate, inflation rate and unemployment rate. The nonsystemic factors analyzed were branch network, total assets, return on assets and capital adequacy ratio. Secondary data was collected from 15 RCBs which were selected through purposive sampling, stratified random sampling and simple random sampling. The dataset ranged from the year 2008 to 2017. The study found that return on assets, branch network and size (total assets) were the significant unsystemic predictors of credit risk whilst interest rate, inflation and unemployment were the significant systemic predictors of credit risk in RCBs in Ghana. Furthermore, the study revealed that RCBs have had a considerable positive impact on the communities where they operated. Managers of RCBs must consider pursuing a strategy of branch expansion and improving the efficiency of staff because of the moderating effects of these factors on credit risk.

Keywords

• Credit Risk
• Rural and Community Banks
• Branch Network

Gana Kırsal ve Topluluk Bankaları Arasındaki Kredi Riskinin Belirleyicilerinin İncelenmesi

Öz

Son dönemde, kredi riskinin bankalar üzerindeki yıkıcı etkileri nedeniyle, geri ödenmeyen krediler (NPL'ler) akademik ilginin odağı haline gelmiştir. Bu çalışma, Gana’nın Ashanti Bölgesi'ndeki kırsal ve topluluk bankalarında kredi riskinin belirleyicilerini ve kırsal bankacılığın etkilerini incelemiştir. Çalışmada, bağımlı değişken olarak kredi riski ile birlikte 8 sistemik ve sistemik olmayan kredi riski faktörü arasındaki ilişki incelenmiştir. Sistemik değişkenler olarak GSYİH büyüme oranı, faiz oranı, enflasyon oranı ve işsizlik oranı ele alınmıştır. Sistemik olmayan faktörler ise şube ağı, toplam varlıklar, varlık getirisi ve sermaye yeterliliği oranı olarak analiz edilmiştir. 2008-2017 yılları arasında, amaçlı örnekleme, tabakalı rastgele örnekleme ve basit rastgele örnekleme yöntemleriyle seçilen 15 RCB'den ikincil veriler toplanmıştır. Çalışmada, varlık getirisi, şube ağı ve büyüklüğün (toplam varlıklar) kredi riskinin önemli sistemik olmayan belirleyicileri olduğu, faiz oranı, enflasyon ve işsizlik oranının ise Gana'daki RCB'lerde kredi riskinin önemli sistemik belirleyicileri olduğu tespit edilmiştir. Ayrıca, RCB'lerin faaliyet gösterdiği topluluklar üzerinde kayda değer olumlu bir etki yarattığı ortaya konmuştur. RCB yöneticileri, bu faktörlerin kredi riski üzerindeki düzenleyici etkileri nedeniyle şube genişletme stratejisini takip etmeyi ve personelin verimliliğini artırmayı düşünmelidir.

Anahtar Kelimeler

• Kredi Riski
• Kırsal ve Topluluk Bankaları
• Şube Ağı

Kaynakça

1. Adusei, M., Akomea S.Y., & Nyadu-Addo, R. (2014). Predicting bank credit risk: Does board structure matter? The International Journal of Business and Finance Research, 8(5), 59-70.
2. Afriyie, O., & Akotey, J. O. (2013). Credit risk management and profitability in rural banks in the brong ahafo region of Ghana: European Journal of Business and Management, 5(24), 25-32.
3. Agyei, C. (2016). Shareholder value creation and financial performance indicators: An empirical evidence from Ghanaian listed banks. A dissertation submitted to the Swiss Management Center University in partial fulfilment of the requirement for the award of Doctor of Finance degree.
4. Ajayi, V. O. (2017). Primary sources of data and secondary sources of data. Benue State University, 1(1), 1-6.
5. Akorsu, P. K., Adu-Asare, A., & Addo, J. (2015). From rural banks to urban banks: Why do rural banks move to urban areas in emerging economies? International Journal of Economics, Commerce and Management, III (3), 1-30.
6. Amoako, A. K. (2015). The effect of bad loans on the profitability and lending potential of rural banks: A case study of some selected rural banks in the Ashanti Region. A thesis submitted to the Department of Accounting and Finance Kwame Nkrumah University of Science and Technology, Kumasi in partial fulfilment of the requirement for the award of the Master of Business Administration (Finance) degree.
7. Amuakwa-Mensah, F., & Boakye-Adjei, A. (2015). Determinants of non-performing loans in the Ghanaian banking industry. International Journal of Computational Economics and Econometrics, 5(1), 35-51.
8. Appiah, M. A. F. (2015). Credit risk of banks in Africa: Determinants and impact of credit risk on banks’ lending rate and bank stability. A thesis submitted to the University of Ghana, Legon in partial fulfilment of the requirement for the award of the MPHIL degree.

9. Arora, A. (2014). The impact of branch network on credit risk management practices in Indian banking sector: The IUP Journal of Financial Risk Management, XI (4), 31-44.
10. Attah, R. (2017). Ghanaian bank performance and ownership, size, risk and efficiency. A thesis submitted to the Walden University in partial fulfilment of the requirement for the award of the Doctor of Business Administration degree.
11. Badar, M., Javid, Y. A., & Zulfiquar, S. (2013). Impact of macroeconomic forces on non-performing loans: An empirical study of commercial banks in Pakistan. Elixir Marketing Management, 56A (2013), 13807-13814.
12. Bank of Ghana (2013). Minimum capital requirements for banks and non-bank financial institutions. http://www.bog.gov.gh, 01.03.2024.
13. Bank of Ghana, (2017). Annual Report for 2017. Source: http://www.bog.gov.gh, 01.03.2024.
14. Bank of Ghana, (2018). Banking Sector Report for January 2018. Source: http://www.bog.gov.gh, 01.03.2024.
15. Bannerman, S., & Fu, G. (2018). Empirical study of rural banking and its impact of farmers in China: A case study of Jintang, Sichuan Province. European Journal of Social Science, 56(1), 77-89.
16. Bekhet, H. A., & Eletter, S. F. (2014). Credit risk assessment model for Jordanian commercial banks: Neural scoring approach. Review of Development Finance, 4(2014), 20-28.
17. Berrios, M. R. (2013). The relationship between bank credit risk and profitability and liquidity: International Journal of Business and Finance Research 7(3), 105-118.
18. Bhamra, H. S., Dorion, C., Jeanneret, A., & Weber, M. (2023). High inflation: Low default risk and low equity valuations. The Review of Financial Studies, 36(3), 1192-1252.
19. Boadi, K. E., Li, Y., & Lartey, V. C., (2016). Determinants of liquidity of rural and community banks in Ghana. International Journal of Economic Issues, 6(2), 813-823.
20. Boakye, D. (2015). Credit risk management practices among rural and community banks in Ghana: A case study of Sekyere rural bank. A thesis submitted to the Department of Accounting and Finance, School of Business, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirements for the degree of Master of Business Administration (Finance Option).
21. Burova, A., Penikas, H., & Popova, S. (2021). Probability of default (pd) model to estimate ex ante credit risk. Russian Journal of Money and Finance, 80 (3), 49-72.
22. Castro, V. (2013). Macroeconomic determinants of credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31, 672- 683.
23. Chen, H., Xu, Y., & Yang, J. (2021). Systematic risk, debt maturity, and the term structure of credit spreads. Journal of Financial Economics, 139(3), 770-799.
24. Curtis, A., McVay, S., & Toynbee, S. (2020). The changing implications of research and development expenditures for future profitability. Review of Accounting Studies, 25, 405-437.
25. Doung, N. T., & Houng, T. T. T. (2017). The analysis of major credit risk factors: The Case of the Vietnamese commercial banks. International Journal of Financial Research, 8(1), 33-42.
26. Garr, D. K. (2013). Determinants of credit risk in the banking industry in Ghana. Developing Country Studies, 3(11), 64-79.
27. Gila-Gourgoura, E., & Nikolaidou, E. (2017). Credit risk determinants in the vulnerable economies of Europe: Evidence from the Spanish banking system. International Journal of Business and Economics Sciences Applied Research, 10(1), 60-70.
28. Golitsis, P., Fassas, A., & Lyutakova, A. (2019). Credit risk determinants: Evidence from the Bulgarian banking system. Bulletin of Applied Economics, 6(1), 41-64.
29. Han, J., & Bin, J. (2018). Credit risk management of commercial banks in China. Advances in Economics, Business and Management Research, 54, 99-103.
30. Han, P. (2015). Credit risk management of commercial banks. Journal of Business Administration Research, 4(1), 8-11.
31. Iqbal, M. S., & Fikri, S. M. (2023). Comparison of credit risk management practices among Islamic and public commercial bank’s in Pakistan. International Journal of Management Research and Emerging Sciences, 13(3).
32. Jovic, Z. (2017). Determinants of credit risk- The Case of Serbia. Economic Annals, LXII (212), 155-189.
33. Kagoyire, A., & Shukla, J. (2016). Effect of credit risk management on performance of commercial banks in Rwanda: A Case study of equity bank Rwanda ltd. International Journal of Business and Management Review, 4(4), 1-12.
34. Kanhukamwe, A. (2015). An analysis for factors leading to rising credit risk in the Zimbabwean banking sector. A thesis submitted to the University of Zimbabwe, in partial fulfilment of the requirements for the degree of Master of Business Administration.
35. Kanthimathinathan, S. (2016). A study on the role of regional rural banks in the growth of the Indian economy. International Journal of World Research, 1(XXXII), 61-64.
36. Koju, L., Koju, R., & Wang, S. (2018). Macroeconomic and bank-specific determinants of non-performing loans: Evidence from Nepalese banking system. Journal of Central Theory and Practice, (3), 111-138.
37. Konovalova, N., Kristovska, I., & Kudinska, M. (2016). Credit risk management in commercial banks. Polish Journal of Management Studies, 13(2), 90-100.
38. Maier-Paape, S., & Zhu, O. J. (2018). A general framework for portfolio theory Part 1.
39. Manu, H. (2015). Examining the contributions of rural and community banks to the development of small and medium scale enterprises in Ghana: A case study of Amenfiman rural bank. A thesis submitted to the School of Business, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirements for the degree of Master of Business Administration.
40. Marouf, F. Z., & Guellil, Z., (2017). The macroeconomic determinants of credit risk: The Algerian banking system. Management International Conference, Monastier, di Treviso, Venice, Italy, 2017, 595-608.
41. Mensah, A.M.D. (2019). Determinants of nonperforming loans of banks in Ghana: A case of listed banks. A thesis submitted to the School of Business, University of Ghana, Legon, in partial fulfilment of the requirements for the award of the degree of Master of Business Administration (Finance Option).
42. Moges, H. T., Dejaeger, K., Lemahieu, W., & Baesens, B. (2013). A multidimensional analysis of data quality for credit risk management: new insights and challenges. Information & Management, 50(1), 43-58.
43. Mpofu, T. R., & Nikolaidou, E. (2018). Determinants of credit risk in the banking system in Sub Saharan Africa. Review of Development Finance, 8(2), 141-153.
44. Mukhtarov, S., Yuksel, S., & Mammadov, E. (2018). Factors that increase credit risk in Azerbaijani banks. Journal of International Studies, 11(2), 63-75.
45. Mwawurah, I. G. (2013). The determinants of credit risk in commercial banks in Kenya. A Dissertation Submitted to the University of Nairobi, Kenya in partial fulfilment of the requirements for the Degree of Master of Science in Finance.
46. Mwinlaaru, P. Y., Ofori, I. K., Adiyiah, K. A., & Adu-Asare, I. (2016). Non-performing loans and universal banks’ profitability. MPRA Paper no. 82902.
47. Nguyen, H. L. Q. (2014). Do bank branches still matter? The effect of closings on local economic outcomes. Massachusetts Institute of Technology, Working Paper.
48. Nguyen, L. (2016). Credit risk control for loan products in commercial banks. Case: Bank for investment and development of Vietnam. A thesis submitted to the Haagra-Helia University of Applied Sciences in partial fulfilment of the requirements for the Degree of Master of International Business.
49. Nikolaidou, E. K., & Vogiazas, S. (2017). Credit risk determinants in Sub-Saharan banking systems: Evidence from five countries and lessons learnt from Central East and South East European Countries. Review of Development Finance, 7(2017), 52-63.
50. Oheneaku, V. K. (2017). Credit risk management in rural banks: A case of some selected rural banking institutions within the Ashanti region of Ghana. A dissertation submitted to the Department of Accounting Education, University of Education, Winneba, in partial fulfilment of the requirements for the award of Master of Business Administration (Accounting) degree.
51. Omwenga, N., & Omar, N. (2017). Effects of non-performing loans on the financial performance of commercial banks in Kenya. Imperial Journal of Interdisciplinary Research, 3(5), 204-230.
52. Owusu-Antwi, G., Aikens, F., Bannoh, F. A., & Dwobeng, O. N. (2016). Efficiency of rural and community banks in Ghana: An application of data envelope analysis. Journal of Research, Economics and Management, 7(3), 1091-1106.
53. Owusu-Boateng, G. (2015). Credit risk management practices of Amantin and Kasei Community bank ltd. A thesis submitted to the Department of Accounting and Finance, School of Business, University of Cape Coast, Cape Coast, in partial fulfilment of the requirements for the award of Master of Business Administration (General Management) degree.
54. Panda, B., & Leepsa, N. M. (2017). Agency Theory: Review of theory and evidence on problems and perspectives. Indian Journal of corporate Governance, 10(1), 74-95.
55. Sirucek, M., & Kren, L. (2015). Application of markowitz portfolio theory by building optimal portfolio on the stock market. Acta Universitatis Agriculturae Et Silviculturae Mendeliance Brunensis, 63(4), 1375-1380. Spuchl’akova, E., Valaskova, K., & Adamko, P. (2015). The credit risk and its measurement, hedging and monitoring. Procedia Economics and Finance, 24, 675.
56. Tangsupvattana, A. (2022). Driving the juggernaut: From economic crisis to global governance in Pacific Asia. Pacific Asia, 144-177.
57. Wang, Y. (2013). Credit risk management in rural commercial banks in China. A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy, School of Accounting, Financial Services and Law, Edinburgh NAPIER University.