How 6 Bank Risks Affect Performance in Developing Countries

What is it about?

Banks face several risks which threaten their existence and performance. The current study explores how six different types of risks affect the profit efficiency and profitability of banks. The result shows that increasing inputs does not result in a proportionate increase in outputs for Ghanaian banks. The profit efficiency of an average bank is about 60% of the best-performing banks. The effect of risk types on bank performance metrics differ. To enhance profit efficiency, banks should focus on managing credit risk and market risk. To improve return on asset, they should focus on liquidity risk, market risk, insolvency risk and capital risk. To improve return on equity, banks should focus on credit risk, liquidity risk, insolvency risk, capital risk and operational risk. To improve asset turnover, banks should focus on liquidity risk, market risk, insolvency risk and capital risk. This suggests that there is a need for an enterprise-wide risk management approach for banks to enhance performance. These results are relevant for the newly established Financial Stability Council.

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Photo by Markus Winkler on Unsplash

Photo by Markus Winkler on Unsplash

Why is it important?

This study uses data covering year 2000 when a financial sector crisis ended and 2015, when another financial crisis looms. The eventual financial sector clean-up from 2017 to 2019 and the setting up of the financial stability council are indications of the essence of this research. The study explains how the Basel framework of risks affect performance.

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