Credit Risk on the Return on Equity & Return of Assets – Accounting & Finance Assignment Help

Assignment Task

Task 

Introduction
The important findings and relevant information gained or achieved by this study have been carefully presented in this chapter. The research summary, conclusion, and recommendations derived from this research study are all included in this chapter. The examination of the available data in this study also provided considerable direction for future research.

Summary of Key Findings
The goal of the study was to find out how credit risk management affects the financial performance of commercial banks listed on the Ghana Stock Exchange. The following specific objectives were analyzed:

1. Effects of Credit Risk on the Return on Equity of selected banks in the Tamale metropolis.

2. Effects of Credit Risk on the Return of Assets of selected banks in the Tamale Metropolis.

For the period 2017–2021, the study used a quantitative research approach and an explanatory design that targeted all commercial banks listed on the Ghana Stock Exchange (GSE). However, only 10 commercial banks with proper financial accounts for the years 2017 to 2021 were included in this analysis. To investigate the association between credit risk management and bank performance, the researchers used the multiple regression method. This was done with the aid of multiple regression technique of the Statistical Package for the Social Sciences (SPSS) version 26. The findings of the research objectives are summarized below:

To begin with, the first research objective sought to examine the relationship between credit risk and return of equity of selected commercial banks in the Tamale Metropolis. A multiple regression was used to identify the impact of the independent variables (Leverage, Capital Adequacy, and non-performing loans) on the dependent variable (Return on Equity). The study identified that, there was a strong relationship between the independent variables (non-performing loans, Capital Adequacy, and Leverage) and the dependent variables (Return on Equity). Given the substantial association between the variables, it is evident that a causal relationship can be deduced between capital adequacy, non-performing loans, leverage and financial performance (Return on Equity). 

The result show that leverage has a negative effect on the return of equity of the selected commercial banks. This suggests that L had a negative impact on the financial performance (ROE) of Tamale’s publicly traded commercial banks. As a result, a one-unit increase in Leverage Ratio resulted in a decrease in financial performance. In terms of ROE, however, this association was statistically insignificant. Also, the result shows that Capital Adequacy has a statistically insignificant negative impact on financial performance of the selected banks (B= -0.104, t=-0.426, P=0.685). This means that a unit change in capital adequacy will result in a 0.104 unit change in financial performance if all other parameters remain constant. Looking at the relationship’s direction, it appears that a unit change in capital adequacy will result in a 0.104 decrease or improvement in financial performance (ROE) of selected banks. 

This might cause the commercial banks to be distressed as explain by the theory of distress. Last, the non-performing loan ratio has a statistically insignificant negative effect on the selected banks’ return on equity (B=-0.550, p=0.162). It has a negative correlation with the performance of commercial banks (ROE). This suggests that the NPLR has a negative influence on the financial performance of Ghana’s publicly traded commercial banks. This means that a unit change in non-performing loans will reduce the selected banks’ return on equity by 0.55 percent.

The second objective was to examine the relationship between credit risk and the return on assets of selected commercial banks in the Tamale Metropolis. The study identified that, there was a strong relationship between the independent variables (non-performing loans, Capital Adequacy, and Leverage) and the dependent variables (Return on Assets) with a regression coefficient of 0.905. Given the substantial association between the variables, it is evident that a causal relationship can be deduced between capital adequacy, non-performing loans, leverage and financial performance (Return on Assets). The result show that leverage has a has a statistically insignificant negative effect on Return on Asset of the selected banks. This is evidenced with a regression

the leverage will cause a 0.430 reduction in the return on Asset of the selected banks and vice versa. In terms of ROA, however, this association was statistically insignificant. Also, the result shows that Capital Adequacy has a statistically insignificant positive impact on financial performance of the selected banks (B= 0.033, t=-0.180, P=0.863). This means that a unit change in capital adequacy will result in a 0.0.033 unit change in financial performance if all other parameters remain constant. Looking at the relationship’s direction, it appears that a unit change in capital adequacy will result in a 0.033 increase or improvement in financial performance (ROA) of selected banks. Last, the non-performing loan ratio has a a statistically insignificant negative impact of the return on assets of the selected banks (B=-0.533, p=0.082). This indicates that a unit change in the non-performing loans will negative affect the return on asset of the selected banks by 0.533.

Recommendations
The following recommendations are made based on the study’s established findings:

The Bank of Ghana should urge commercial banks to cut loan rates and other fees and commission charges sensibly, or perhaps try to eliminate some banking fees.
Commercial banks should maintain appropriate liquidity, capital levels, and high-quality assets on their books to inspire their consumers to deposit more.
Since the Non-Performing Loans Ratio (NPL R) has a negative association with performance, commercial banks should be cautious about making loans and ensuring that they are repaid on time.

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