Bank risk, profit efficiency and profitability in a frontier market
Journal of Economic and Administrative Sciences
ISSN: 1026-4116
Article publication date: 19 June 2020
Issue publication date: 29 October 2020
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.
Keywords
Acknowledgements
The authors appreciate without implications, the support of Co-Editors, Associate Professor Ghulam A Arain and Professor Rebecca Abraham. In addition, we are grateful to the reviewers for their constructive comments that have improved the manuscript. We also thank Joseph Tettey for proofreading the manuscript.
Citation
Duho, K.C.T., Onumah, J.M., Owodo, R.A., Asare, E.T. and Onumah, R.M. (2020), "Bank risk, profit efficiency and profitability in a frontier market", Journal of Economic and Administrative Sciences, Vol. 36 No. 4, pp. 381-402. https://doi.org/10.1108/JEAS-01-2019-0009
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited