EFFECT OF RISK MANAGEMENT ON THE PROFITABILITY OF UNIVERSAL BANKS IN GHANA

The banking industry plays a crucial role in the economic eco-system and its development means fostered growth for the country. For a financial system to be sound, a vibrant banking system needs to be present. Any shake in the banking system can send a ripple effect to the financial system and it can topple down, causing a recession. The collapse of two Ghanaian banks in 2017 and the consolidation of five other banks a year later raised concerns about the crucial role of risk management in the banking institutions. Therefore, the study sought to examine the effects of risk management on the profitability of universal banks in Ghana. Ten banks were sampled over the period 2006 to 2016. Using a random effect model, and performing all pre-estimation tests, the study revealed that credit risk had a negative effect on bank profitability (return on assets). Liquidity did not have a statistically significant effect on bank profitability. On the other hand, capital adequacy ratio, bank size and operational risk all had a positive effect on bank profitability whilst inflation was statically insignificant. Based on the findings, credit risk and capital adequacy are crucial indicators that impacted financial performance and easily resulted in banking failure. Operational risk is a dynamic factor that management can capitalize on to improve profitability, in our situation it is possible that whilst inadequate systems and processes contributed to poor performance some banks capitalized on it to make profits. Bank size improves performance; howbeit in this case profitability was small. The study recommends banks to make adjustments to reduce their credit risk for example through the use of credit rating bureaus when giving out loans. Also, good corporate governance is very important. Bank of Ghana must ensure compliance to the Basel Accords to maintain sound financial practice in the banking system. On the part of the central government, there should be effective regulations of the financial market.