Credit Referencing Bureaus, Bank Credit Risk And Profitability: Evidence From Ghana.

ABSTRACT

Using a dataset from universal banks in Ghana, the study takes advantage of the introduction of a Credit Referencing Bureaus (CRBs) by the Ghanaian Banking Industry in 2010 as a natural experiment to evaluate the impact of Credit Referencing Bureaus on bank credit risk and profitability. Making use of the Prais-Winsten estimation, the study established that CRBs were negatively related to bank credit risk in Ghana. This implies that banks that use the services and products of CRBs in their operations are able to reduce their credit risk by reducing information asymmetry. On the contrary, the study found that CRBs were positively related to bank profitability implying that as banks use the products and services of CRBs, they are able to boost or increase their profitability also by reducing incomplete or false information (information asymmetry) on bank clients. The study further established that the impact of CRBs on bank credit risk was more than bank profitability. Finally, the study recommends that frequent usage or patronage of CRB services and products by banks in Ghana as it helps banks boost their profitability and at the same time help them to reduce their credit risk exposure. Also, though CRBs have significant impact on bank profitability and credit risk, there is more room for improvement since CRBs cover about only 10% of the Ghanaian adult population, hence expansion of the sources of data for CRBs could help capture more people for accurate, reliable and consistent evaluation of bank clients in order to boost and reduce bank profitability and credit risk respectively further. The study again recommends the publicity of CRBs activities in Ghana since the knowledge of CRBs existence puts pressure on bank client or borrowers to servicing their loans because they (borrowers) will be denied future credit or loan upon default.