An Investigation of the Predictors of Credit Risk Among Ghanaian Rural and Community Banks

Non-performing loans (NPLs) have attracted a lot of academic attention in recent times due to the devastating effects of credit risk on banks. This study investigated the predictors of credit risk in rural and community banks (RCBs), and the effects of rural banking in the Ashanti Region of Ghana. The study examined the correlation between credit risk as the dependent factor and a set of 8 systemic and nonsystemic factors of credit risk as independent variables. The systemic variables were GDP growth rate, interest rate, inflation rate and unemployment rate. The nonsystemic factors analyzed were branch network, total assets, return on assets and capital adequacy ratio. Secondary data was collected from 15 RCBs which were selected through purposive sampling, stratified random sampling and simple random sampling. The dataset ranged from the year 2008 to 2017. The study found that return on assets, branch network and size (total assets) were the significant unsystemic predictors of credit risk whilst interest rate, inflation and unemployment were the significant systemic predictors of credit risk in RCBs in Ghana. Furthermore, the study revealed that RCBs have had a considerable positive impact on the communities where they operated. Managers of RCBs must consider pursuing a strategy of branch expansion and improving the efficiency of staff because of the moderating effects of these factors on credit risk.