LIQUIDITY RISK, CREDIT RISK AND PERFORMANCE OF LISTED BANKS IN GHANA

ABSTRACT

Credit risk and liquidity risk management practices have become very critical for efficient operations and survival of banks. This is because they have the tendency to affect the core existence of banks (profitability). However, the impact of credit risk and liquidity risk on the performance of banks is yet to be fully explored in Ghana. The recent takeover of UT bank Ltd and Capital bank Ltd by GCB bank Ltd; where issues of insolvency were cited by BoG as reason for the takeover is a prove  of  credit  risk  and  liquidity  risk  management  challenges in Ghana.  This study investigated the effect of credit risk and liquidity risk on the performance of listed  banks  in  Ghana.  The  study  used  a  quantitative  research  approach  in  the analysis of the data. Annual secondary data from the financial statements of listed banks were analysed for the period 2011 to 2014. A fixed effect model was used in the analysis. The results showed that the capital adequacy ratio, cost per loan assets ratio and loan advance total deposit ratio had significant negative effect on listed  banks’  liquidity  risk.  The  results  also  showed  that  liquidity  risk  had significant  negative  effect  on  the  performance  of  listed  banks  but  credit  risk generally  had  insignificant  effect  on  listed  banks’  performance.  The  study recommends; management to be cautious in setting up a credit policy that will not negatively  affects  liquidity  risk  and  liquidity  of  listed  banks.  BoG  for  policy purposes should regularly assess the lending attitudes of listed banks; one direct way is to assess the degree of credit crunch by isolating the impact of supply side of loan from the demand side taking into account the opinion of firms about listed banks’ lending attitude.