Home⇛International Social Science Review⇛vol. 7 no. 1 (2023)

Credit Risk Management Practices And Its Impact On Rural Bank’s Financial Performance

Christine Cayanan

Discipline: management studies

 

Abstract:

Credit risk management in banks has become a critical concept that determines banks' survival, growth, and profitability, not only as a result of the industry's current financial crisis. The goal of this research is to find out how credit risk management affects rural bank profitability in Central Luzon. The bank’s financial performance was measured by the Return on Asset (ROA) and Return on Equity (ROE). The study revealed that Credit Risk Management Practices have no significant impact on the rural bank’s financial performance. Credit Risk Management Practices have insignificant impact on CAR, ROE and ROA. Previous research findings show that the relationship between CAR, ROA, and ROE is not significant. The following recommendations are hereby offered out of the result of the aforesaid findings and conclusions: Banks should consider the indicators of non-performing loans/Gross loans portfolio. It is also recommended that NonPerforming Loans (NPLs) will be used as one of the credit risk indicators. The study sought to find the impact of credit risk management practices on the financial performance of rural banks in Central Luzon and recommend that similar research should be done but with a specific focus on Non-Performing Loan/Total Loan Portfolio as one of the variables of Credit Risk Management. Further, this study will help Rural banks improved its operation by minimizing the credit risk aspect. This will minimize the number of banks placed under the Prompt Corrective Action (PCA) through proper credit risk management that will reduce the Past Due ratio or its Non-Performing Loan.



References:

  1. Abbas, A., Haider, A., and Rana, U. A., 2014. Credit risk exposure and performance of banking sector of Pakistan. Journal of Basic and Applied Sciences, 4(3), 24245.
  2. Abdelrahim K.E. (2013). Effectiveness of Credit Risk Management of Saudi Banks in the Light of Global Financial Crisis: A Qualitative Study, Asian Transactions on Basic and Applied Sciences, Vol. 3 (2), pp. 73-91
  3. Abdelrahim, K.E. (2013). effectiveness of Credit Risk Management of Saudi Banks in the Light of Global Financial Crisis: A Qualitative Study, Asian Transactions on Basic and Applied Sciences, 3 (2), pp. 73-91. Available at: http://asian-transactions.org
  4. Abiola, I. and Olausi, A.S. (2014). Theimpactof Credit Risk Management on the Commercial Banks Performance in Nigeria, International Journal of Management and Sustainability, 3 (5), pp. 295-306. Available at: http://pakinsight.com.
  5. Adequacy on the Profitability of Rural Banks in the Philippines. Scientific Annals of Economics and Moody's Analytics. "Credit Risk Solutions." Accessed Aug. 22, 2020.
  6. Adequacy on the Profitability of Rural Banks in the Philippines. Scientific Annals of Economics and Business, 64(1), 83–96.
  7. https://doi.org/10.1515/saeb-2017-0006
  8. Adeusi, S.O., Akeke, N.I., Adebisi, O.S. and Oladunjoye, O. (2013). RiskManagement and Financial Performance of Banks in Nigeria, Journal of Business and Management, 14 (6), pp. 52-56. Available at: http://iosrjournals.org.
  9. Adjirackor, T., Oppong, D., Agarwal, S., Paintsil, R., Akuma, J., & Gagakuma, W. (2016). Evaluation of Credit Risk Management Practices in Societe Generale             Ghana. Research Journal of Finance and Accounting, 7, 102-113.
  10. Aduda, J. and Gitonga, J. (2011). The Relationship between Credit RiskManagement and Profitability Among the Commercial Banks in Kenya, Journal           of Modern Accounting and Auditing, 7 (9), pp. 934-946. Available at: file:///C:/Users/alial_000.
  11. Adusei, Charles. (2018). Credit Risk Management Practices at the Branch Level of a RuralBank. https://www.researchgate.net/publication/344300738_Credit_Risk_Management_Practices_at_the_Branch_Level_of_a_Rural_Bank
  12. Afriyie, H. O. and Akotey, J. O. (2012). Credit risk management and profitability of selected rural banks in Ghana. Ghana: Catholic University College of Ghana, 7(4), 176-181.
  13. Afriyie, H. O. and Akotey, J. O. (2013). Credit risk management and profitability of rural banks in the Brong Ahafo region of Ghana. management, 5(24).
  14. Akanyonge, J. (2019). Credit Risk Management Assessment as an Operational Strategy in the Ghanaian Banking Sector: Empirical Evidence. Texila  International Journal Of Management, 5(2), 8–18. https://doi.org/10.21522/tijmg.2015.05.02.art002
  15. Al Zaidanin, J. S. and Al Zaidanin, O. J. (2021). Theimpactof credit risk    
  16. Al Zaidanin, J. S., & Al Zaidanin, O. J. (2021). The impact of credit risk      management on the financial performance of United Arab Emirates   commercial banks. International Journal of Research in Business and Social Science (2147- 4478), 10(3), 303–319. https://doi.org/10.20525/ijrbs.v10i3.1102
  17. Ali Sulieman Alshatti (2015). The impact of credit risk management on financial performance of the Jordanian commercial banks. Investment Management and  Financial Innovations, 12(1-2), 338-345
  18. Alzeaideen, Cogent Business & Management (2019), 6: 1675455             
  19. Alzeaideen, K. (2019). Credit risk management and business intelligence approach of the banking sector in jordan. Cogent Business & Management, 0(0). https://doi.org/10.1080/23311975.2019.1675455and Bank Lending - PDF Download. Retrieved from  https://eduprojecttopics.com/product/credit-management-and-bank-lending/
  20. Apanga M.A.N., Appiah K.O., Arthur J. (2016). “Credit risk management of Ghanaian listed banks”. International Journalof Law and management, vol.58     (2), Iss. 2, pp. 162 – 178. Archive. 7(5), 562-573.
  21. Aremu, M. A., Ekpo, I. C., and Mustapha, A. M. (2013). Determinants of banks' profitability in a developing economy: Evidence from Nigerian banking industry. InterdisciplinaryJournal of Contemporary Research in Business, 4(9), 155-181.
  22. Aruwa, S.A. and Musa, O.A. (2014). Risk components and the financial performance of deposit money in Nigeria, International Journal of Social Sciences, and Entrepreneurship, 1 (11), pp. 1-8. Available at: http://www.ijsse.org.
  23. Awosanya, Yusuff & Elena, Platonova. (2019). Credit Risk and The Financial Performance of Islamic Banks in Africa: A Critical Literature Review.
  24. Ayertey Odonkor, A. (2018). An Assessment of Credit Risk Management        
  25. Practices of Adansi Rural Bank Limited. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3252463
  26. Ayertey Odonkor, Alexander, An Assessment of Credit Risk Management Practices of Adansi Rural Bank Limited (September 20, 2018). Available at SSRN: https://ssrn.com/abstract=3252463http://dx.doi.org/10.2139/ssrn.3252463
  27. Bangko Sentral ng Pilipinas, (2013). Philippine Banking System. Status Report on the Philippine Financial System. http://www.bsp.gov.ph/downloads/publications/2013/statrep_2sem2013b.pdf.
  28. Bangko Sentral ng Pilipinas, (2014). Circular No. 855. Guidelines on Sound Credit Risk ManagementPractices http://www.bsp.gov.ph/downloads/regulations/attachments/2014/c855.pdf.
  29. Bangko Sentral ng Pilipinas, 2014. Circular No. 855. Guidelines on Sound Credit Risk Management Practices. http://www.bsp.gov.ph/downloads/regulations/attachments/2014/c855.pdf
  30. Bangko Sentral ng Pilipinas, 2016. Philippine Banking System. Status Report on the Philippine Financial System. http://www.bsp.gov.ph/downloads/publications/2013/statrep_2sem2013b.pdf.  
  31. Bank for International Settlements (2000). Principles for the Management of Credit Risk final document, Available at: http://www.bis.org.
  32. Bank of America. "5 Cs of Credit: What Are Banks Looking For?" Accessed Aug. 22, 2020.
  33. Barth, J. R., Caprio Jr., G., and Levine, R. (2013). Bank Regulation and Supervision in 180 Countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111-219.
  34. Barth, J. R., Caprio Jr., G., and Levine, R., 2013. Bank Regulation and Supervision in 180 Countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111-219. doi: http://dx.doi.org/10.1108/17576381311329661
  35. Barth, J. R., Caprio, G., & Levine, R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111–219. https://doi.org/10.1108/17576381311329661
  36. Basel Committee on Banking Supervision, 1999, Principles for the Management of Credit Risk, http://www.bis.org/publ/bcbs54.htm.pdf , Access on:12.12.2015.
  37. Basel Committee on Banking Supervision, 2000. Principles for the management of credit risk. 1-26. http://www.bis.org/publ/bcbs75.pdf.
  38. Basel Committee on Banking Supervision, 2000. Principles for the management of credit risk. 1-26. http://www.bis.org/publ/bcbs75.pdf
  39. Basel Committee on Banking Supervision, 2010, Basel III: A global regulatory   Basel Committee on Banking Supervision, 2010, Results of the comprehensive quantitative impact study, Switzerland: Basel Committee on Banking Supervision,
  40. Basel Committee on Banking Supervision, 2015. History of the Basel committee. Retrieved June 23, 2016, from http://www.bis.org/bcbs/history.pdf
  41. Basel Committee on Banking Supervision, 2015. History of the Basel committee.Retrieved June 23, 2016, from http://www.bis.org/bcbs/history.pdf
  42. Benjamin E Diokno: Opportunities for banks in pursuing a green, sustainable economy in the current pandemic. Retrieved from https://www.bis.org/review/r201807m.html
  43. Berrios, M.R. (2013). The Relationship between Bank Credit Risk and Profitability and Liquidity, the International Journal of Business and Finance Research, 7 (3), pp.105-118. Available at: SSRN: http://ssrn.com/abstract=2149816.
  44. Bhattarai, B. (2019). Effect Of Credit Risk Management On Financial Performance Of Commercial Banks In Nepal. European Journal of Accounting, Auditing and Finance Research, 7(5), 87–103. https://www.eajournals.org/wp-content/uploads/Effect-of-Credit-Risk-Management-on-Financial-Performance-of-Commercial-Banks-in-Nepal.pdf
  45. Bhattarai, B. (2019). Effect Of Credit Risk Management On Financial Performance Of Commercial Banks In Nepal. European Journal of Accounting, Auditing and Finance Research, 7(5), 87–103. https://www.eajournals.org/wp-content/uploads/Effect-of-Credit-Risk-Management-on-Financial-Performance-of-Commercial-Banks-in-Nepal.pdf
  46. Bhattarai, Y.R. (2016). The effect of credit risk on the performance of Nepalese commercial banks. NRB Economic Review, 28(1),41-62
  47. Boahene, S.H., Dasah, J. and Agyei, S.K. (2012). Credit Risk and Profitability of Selected Banks in Ghana, Research Journal of Finance and Accounting, 3 (7), pp.           6-15. Available at: file:///C:/Users/alial_000/Downloads/2628- 4635-1-PB.pdf.
  48. Boateng, K. (2020). Credit Risk Management And Profitability In Select Savings         And Loans Companies In Ghana Dr. Y. Nagaraju. In International Journal of Advanced Research. http://www.journalijar.com/uploads/489_THESIS-0917.pdf
  49. Bouvatier, V. & Lepetit, L. (2012). impacts of loan loss provisions on growth in bank lending: Some international comparisons. Économie internationale, 4(4), 91-116. https://doi.org/10.3917/ecoi.132.0091
  50. Bülbül, D., Hakenes, H., & Lambert, C. (2019). What influences banks’ choice of credit risk management practices? Theory and evidence. Journal of Financial Stability, 40, 1–14.       https://doi.org/10.1016/j.jfs.2018.11.002
  51. Business, 64(1), 83–96. https://doi.org/10.1515/saeb-2017-0006  Credit Managementcapital, Oxford University Press.commercial bank limited, Master Theses, Kwame Nkrumah University of Science and Technology. Available at: http://ir.knust.edu.gh.comparative study for Egypt and Lebanon, Working Paper í Published by The Economic Research Forum (ERF), No. 0137. Available at: http://www.erf.org.
  52. Credit Risk Management In Commercial Banks 2016 Natalia Konovalova, , Ineta Kristovska, Deposit Banks In Turkey,Procedia Computer Science,Volume 158,2019,Pages 979-987,
  53. Dilek Bülbül, Hendrik Hakenes, Claudia Lambert, Edustore.ng. (2019, March 16).
  54. Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks In Turkey. Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
  55. Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks In Turkey. Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
  56. Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks In Turkey. Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
  57. Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performancof Deposit Banks In Turkey. Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
  58. Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks In Turkey. Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
  59. Fan, L. and Yijun, Z. (2014). Theimpactof credit risk management on profitability of commercial banks: A study of Europe, Umea School of Business, and Economics: Available at: http://www.diva-portal. org.
  60. Fatemi, A., and Fooladi, I. (2016). Credit risk management: a survey of practices. Managerial Finance,32(3),227 233. https://doi.org/10.1108/03074350610646735 financial risk components, rating analysis, models, economic and regulatory Fitch Solutions. "Fitch Credit Ratings." Accessed Aug. 22, 2020.frameworkfor more resilient banks and banking systems, Switzerland: Basel Committee on Banking Supervision, https://www/bis/org/publ/bcbs189dec2010.pdf , Access on: 20.01.2016.  
  61. Gakure, R.W., Ngugi, J.K., Ndwiga, P.M. and Waithaka, S.M. (2012). impact of CreditRisk Management Techniques on the Performance of Unsecured Bank Loans Employed Commercial Banks in Kenya, International Journal of Business and Social Research, 2 (4), pp. 221-236. Available at: http://thejournalofbusiness.org.
  62. Garr, D. K. (2013. Determinants of credit risk in the Banking industry of Ghana: Developing country studies.
  63. Gestel, T.V. and Baesens, B. (2018). Credit Risk Management Basic Concepts:   
  64. Guna, R., & Chhetri. (2021). Effect of Credit Risk Management on Financial Performance Of Nepalese Commercial Banks. Journal of Balkumari College,10(1) https://www.nepjol.info/index.php/jbkc/article/download/42088/321
  65. Hailu, A., & Veni2, P. (n.d.). Determinants Of Credit Risk In Ethiopian Private Commercial Banks. Retrieved May 29, 2022,From Http://Www.Tjprc.Org/Publishpapers/--1433931683-1.%20Accounting%20%20Ijafmr%2020Determinants%20of%20Credit%20risk%20in%20Ethiopian%20private%20%20Commercial%20banks.Pdf
  66. Intellectual capital and financial performance: A study of the Turkish Banking Sector.              (2017, September1). ScienceDirect. Retrieved from  https://linkinghub.elsevier.com/retrieve/pii/S2214845016300011ISSN18770509,
  67. International Journal of Business and Public Management, 2 (2), pp. 72-80. Available at: http://mku.ac.ke/journals.
  68. Journal of Financial Stability, Volume 40,2019, Pages 1-14,ISSN 1572-3089, https://doi.org/10.1016/j.jfs.2018.11.002.
  69. Kaaya, I. and Pastory, D. (2013). Credit Risk and Commercial Banks Performance in Tanzania: a Panel Data Analysis, Research Journal of Finance and Accounting, 4 (16), pp. 55-63. Available at: www.iiste.org.
  70. Kenya Kithinji, A.M. (2010). Credit risk management and profitability of commercial banks in Kenya, Working paper, School of Business í University of Nairobi, Kenya. Available at: http://erepository.uonbi.ac .ke. Kibui, N. & Moronge, M. (2014). impacts of credit risk management on financial performance of SACCOS: A case study of Harambee SACCO. International Academic Journal of Information Sciences and Project Management, 1 (3), pp. 157-172.
  71. Kolapo, T.F., Ayeni, R.K. and Oke, M.O. (2012). Credit risk and commercial banks’ performance in Nigeria: A panel model approach, Australian Journal of Business and Management Research, 2 (2), pp. 31-38. Available at:           http://ajbmr.com/article.
  72. Konovalova, N., Kristovska, I., & Kudinska, M. (2016). CREDIT RISK MANAGEMENT IN COMMERCIAL BANKS. Polish Journal of Management Studies, 13(2), 90–100. https://doi.org/10.17512/pjms.2016.13.2.09
  73. Kurawa, J.M. and Garba, S. (2014). An Evaluation of the impact of Credit Risk Management (CRM) on the Profitability of Nigerian Banks, Journal of Modern Accounting and Auditing, 10 (1), pp. 104-115. Available at:          http://www.academia.edu.
  74. Lagat, F. K., Mugo, R., and Otuya, R. (2013). impact of credit risk management practices on lending portfolio among savings and credit cooperatives in Kenya.
  75. Lapteva, M.N. (2010). Credit Risk Management in the Bank, Letter from the Bank of Russia On typical banking risks. Available at: https://www.google.jo.
  76. Laryea, E., Ntow-Gyamfi, M. and Alu, A.A. (2016), "Nonperforming loans and bank profitability: evidence from an emerging market", African Journal of Economic and Management Studies, Vol. 7 No. 4, pp. 462-481. https://doi.org/10.1108/AJEMS-07-2015-0088
  77. Li, F., Zou, Y., & Lions Student, C. (n.d.). The Impact of Credit Risk Management on Profitability of Commercial Banks: A Study of Europe. http://www.diva-portal.org/smash/get/diva2:743402/FULLTEXT01.pdf
  78. Luqman, Olawale, The Effect of Credit Risk on the Performance of Commercial Banks           in Nigeria (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2536531  or http://dx.doi.org/10.2139/ssrn.2536531
  79. Luqman, Olawale, The impact of Credit Risk on the Performance of Commercial Banks in Nigeria (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2536531  or http://dx.doi.org/10.2139/ssrn.2536531
  80. management on the financial performance of United Arab Emirates
  81. commercial banks. International Journal of Research in Business and Social Science (2147- 4478), 10(3), 303–319. https://doi.org/10.20525/ijrbs.v10i3.1102
  82. Mendoza, R., & Rivera, J. P. R. (2017). The Effect of Credit Risk and Capital Adequacy on the Profitability of Rural Banks in the Philippines. Annals of the Alexandru Ioan Cuza University - Economics, 64(1), 83–96. https://doi.org/10.1515/aicue-2017-0006  
  83. Musyoki, D. and Kadubo, A.S. (2012). Theimpactof credit risk management on the financial performance of Banks in Kenya for the period (2000-2016),  
  84. Naresh Choppari, Associate Professor, Rao Borala Rajeshwar, Associate Professor  Krishna Murthy Institute of Management, Osmania University, Hyderabad, Telangana State Online published on 15 March 2016.
  85. Naresh Choppari, Associate Professor, Rao Borala Rajeshwar, Associate Professor Krishna Murthy Institute of Management, Osmania University, Hyderabad, Telangana State  Online published on 15 March, 2016.
  86. Nawaz, M. and Munir, S. (2012). Credit risk and the performance of Nigerian,  Interdisciplinary Journal of Contemporary Research in, 4 (7), pp. 49-63. Available at: http://journal-archieves25.webs.com.
  87. Ndwiga, J. M. (2010). Relationship between credit risk management practices and financial performance of microfinance institutions in Kenya (Doctoral dissertation, University of Nairobi, Kenya).
  88. Njanike, K. (2010). Theimpactof impactive Credit Risk Management on Bank Survival, Journal of Financial Regulation and Compliance, Working paper, Bindura University, Zimbabwe. Available at: https://ideas.repec.org.
  89. Ogboi, Ch. and Unuafe, O.K. (2013). impact of Credit Risk Management and Capital Adequacy on the Financial Performance of Commercial Banks in Nigeria, Journal of Emerging Issues in Economics, Finance and Banking, 2 (3), pp. 703-717. Available: http://www.globalbizresearch.com.
  90. Olobo, M. , Karyeija, G. , Sande, P. and Khoch, S. (2021) Credit Risk
  91. Management Practices and Performance of Commercial Banks in
  92. South Sudan. Journal of Financial Risk Management, 10, 306-316. doi: 10.4236/jfrm.2021.103018.
  93. Oudat, M. S., & Ali, B. J. (2021). The Underlying Effect of Risk Management On Banks' Financial Performance: An Analytical Study On Commercial and Investment Banking in Bahrain. Ilkogretim Online, 20(5).
  94. Poudel, R.P. (2012). Theimpactof credit risk management on financial performance of commercial banks in Nepal, International Journal of Arts and Commerce, 1 (5), pp. 9-15. Available at: http://www.ijac.org.uk/images. profitability in commercial banks in Sweden, Master Theses.
  95. Rehman, Z. U., Muhammad, N., Sarwar, B., & Raz, M. A. (2019). Impact of risk management strategies on the credit risk faced by commercial banks of Balochistan. Financial Innovation, 5(1). https://doi.org/10.1186/s40854-019-0159-8
  96. Richard, E., Chijoriga, M., Kaijage, E., Peterson, C. and Bohman, H. (2018), "Credit risk management system of a commercial bank in Tanzania", International Journal of Emergingb Markets, Vol. 3 No. 3, pp. 323-                       332. https://doi.org/10.1108/17468800810883729
  97. Sathyamoorthi, C., Mapharing, M., Mphoeng, M., & Dzimiri, M. (2020). Impact of financial risk management practices on financial performance: Evidence from commercial banks in Botswana. Applied Finance and Accounting, 6(1), 25-39.
  98. Singh, A. (2013). Credit risk management in Indian commercial banks, International Journal of Marketing, Financial Services & Management Research, 2 (7), pp. 47-51. Available at: http://indianresearchjournals.com.
  99. Sleimi, M. (2020). Effects of risk management practices on banks' performance: An empirical study of the Jordanian banks. Management Science Letters, 10(2), 489-496.
  100. Tangngisalu, J., Hasanuddin, R., Hala, Y., Nurlina, N., & Syahrul, S. (2020). impact of CAR and NPL on ROA: Empirical Study in Indonesia Banks. The Journal of Asian Finance, Economics and Business, 7(6), 9–18.            https://doi.org/10.13106/JAFEB.2020.VOL7.NO6.009
  101. Tangngisalu, J., Hasanuddin, R., Hala, Y., Nurlina, N., & Syahrul, S. (2020). Effect of CAR and NPL on ROA: Empirical Study in Indonesia Banks. The Journal of Asian Finance, Economics and Business, 7(6), 9–18.   https://doi.org/10.13106/JAFEB.2020.VOL7.NO6.009
  102. Tetteh, F.L. (2012). Evaluation of credit risk management practices in Ghana. 
  103. Yeasin, H. (2022). Impact of credit risk management on financial performance: A study of commercial banks in Bangladesh. Interdisciplinary Journal of Applied Basic Subjects, 2(1), 14–22. https://visnav.in/ijabs/wp-content/uploads/sites/11/2022/01/Impact-of-credit-risk-management-on-financial-performance-A-study-of-commercial-banks-in-Bangladesh.pdf

Tools


Copyright © 2024  KITE Digital Educational Solutions |  Exclusively distributed by CE-Logic