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Bank risk, profit efficiency and profitability in a frontier market

Author

Listed:
  • King Carl Tornam Duho
  • Joseph Mensah Onumah
  • Raymond Agbesi Owodo
  • Emmanuel Tetteh Asare
  • Regina Mensah Onumah

Abstract

Purpose - The study examines the impact of risk on the profit efficiency and profitability of banks in Ghana. Design/methodology/approach - Data envelopment analysis was used to estimate profit efficiency scores and accounting ratios were used to measure profitability. The panel corrected standard error regression was used to assess the nexus using a dataset of 32 banks from 2000 to 2015. Findings - The paper found that the Ghanaian banking industry exhibits a variable return to scale property, suggesting that average costs change with output size. Profit efficiency score for banks closer to the efficiency frontier is 61%. Credit risk is significant in enhancing profit efficiency and return on equity. Market risk is relevant in improving profit efficiency, return on asset and asset turnover. To drive profitability, bank managers have to be committed to effective liquidity risk, insolvency risk and capital risk management. Operational risk reduces shareholders' returns. The impact of size, age, stock exchange listing, cost efficiency and competition have are all been discussed extensively. Practical implications - The findings contribute to the knowledge on the risk-performance nexus and provide information that is valuable to academics, bankers and regulators for policy formulation. The findings are relevant to the newly established Financial Stability Council. Originality/value - This paper appears to be among the premier attempts to examine the effect of various risk types identified in the Basel III framework on bank performance in Africa.

Suggested Citation

  • King Carl Tornam Duho & Joseph Mensah Onumah & Raymond Agbesi Owodo & Emmanuel Tetteh Asare & Regina Mensah Onumah, 2020. "Bank risk, profit efficiency and profitability in a frontier market," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 36(4), pages 381-402, June.
    • Handle: RePEc:eme:jeaspp:jeas-01-2019-0009
    DOI: 10.1108/JEAS-01-2019-0009
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    Citations

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    Cited by:

    1. Krumina Dace & Lejniece Ilona & Skvarciany Viktorija, 2020. "Determinants of Bank Profitability: Case of Latvia," Economics and Culture, Sciendo, vol. 17(2), pages 30-37, December.
    2. Hussien Mohsen Ahmed & Sherif Ismail El-Halaby & Hebatallah Ahmed Soliman, 2022. "The consequence of the credit risk on the financial performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region," Future Business Journal, Springer, vol. 8(1), pages 1-22, December.

    More about this item

    Keywords

    Risk; Profit efficiency; Basel accord; Data envelopment analysis; Returns to scale; Africa; C1; E5; G21; G32;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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