The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

PREDICTING BANK CREDIT RISK: DOES BOARD

STRUCTURE MATTER?
Michael Adusei, Kwame Nkrumah University of Science and Technology
Samuel Yaw Akomea, Kwame Nkrumah University of Science and Technology
Ralph Nyadu-Addo, Kwame Nkrumah University of Science and Technology

ABSTRACT

The study investigates the predictors of credit risk in the universal banking industry with panel data from
universal banks in Ghana and finds that leverage, assets (size), loan loss provision, board size, board
independence, and the number of executive directors on the board of a bank are the predictors of its credit
risk. Based on these results, the study concludes that board structure matters in credit risk management of
universal banks in Ghana. The recommendation is that banks could improve their credit risk management
by formulating policies around these factors.

JEL: E5, G21, G34, N27

KEYWORDS: Bank Credit Risk, Board Structure, Ghana

INTRODUCTION

A
s depositary institutions taking deposits from the savings surplus units and making them available
to savings deficits units at a profit, universal banks, among other things, promote entrepreneurship
which ultimately culminates in the socio-economic development of an economy. However, in
discharging this financial intermediation role, universal banks are confronted with the herculean task of
managing risks. One of these risks is credit risk. Credit risk simply means the probability that the borrower
will fail to honor the terms of the loan agreement. This risk is usually exacerbated by the phenomenon of
information asymmetry which creates adverse selection and moral hazard. Banks usually manage this
phenomenon by instituting effective and efficient loan appraisal systems supported by aggressive loan
recovery systems.

That the development of the financial system including the banking sector promotes economic growth is
well documented in the literature (Ono, 2012; Jalil and Feridun, 2011; Esso , 2010; and Levine, Loayza and
Beck, 2000; King and Levine, 1993). However, the development of the financial sector especially the
banking sector has also been documented to undermine economic growth (Adusei, 2013a, b; Adusei, 2012;
Chow and Fung, 2013; Hye and Islam 2013; Liang and Reichert, 2012). The banking and currency crisis
literature explains the negative relationship between financial development and economic growth in terms
of over-lending or careless lending which normally emanates from over-liberalization of the financial sector
(e.g., Gourinchas, Landerretche, and Valde´s, 2001, Kaminsky and Reinhart, 1999). This accentuates the
importance of lending to economic growth. Indeed, the late 2000s financial crisis that hit the world leading
to the demise of hitherto blossoming organizations was triggered by poor lending practices in the United
States’ banking system. The crisis had global effects. It is reported that for the first quarter of 2009, the
annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia,
9.8% in the Euro area and 21.5% in Mexico. One can also mention the Asian crisis in the late 1990s.
Evidence exists that the problems encountered by Asia’s banking systems in the mid-1990s were the fruits
of years of bad lending practices catalyzed by inadequate supervision and regulation that fertilized rapid
lending growth and excessive risk taking (Lindgren, et al, 1999; Caprio and Klingebiel, 2003).

59
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

The evidence adduced above justify the need for macro as well as firm-level investigations into the
predictors of credit risk so that proper measures can be put in place to circumvent the horrors of credit risk
in the banking sector. We recognize that several studies on the determinants of bank credit risk have been
done on banking systems of many economies (Ahmad and Ariff, 2007; Kraft and Ljubinko, 2005;
Cebenoyan and Strahan, 2004; and Ariff and Marisetty, 2001). However, the banking industry in Ghana is
yet to receive its fair share of these copious studies despite the fact that over the years some dimensions of
the industry have seen much attention (Adusei, 2011; Marfo-Yiadom and Agyei, 2011, Aboagye-Debrah,
2007). To the best knowledge of the researchers the determinants of the credit risk in the Ghanaian banking
industry is one of the few grey areas that are yearning for intellectual exploration. Consequently, the current
study seeks to contribute to the literature on the universal banking industry in Ghana by exploring the
determinants of bank credit risk with emphasis on whether board structure matters in the credit risk
management process of universal banks. The main motivation behind this study is to improve the
understanding of credit risk modeling at the micro level. The study is especially significant for one main
reason. Unlike the previous studies which exclude the board structure factor, the current study incorporates
the board structure factor in the bank credit risk analysis. The rest of the paper is structured as follows. The
next section provides the review of the extant literature followed by data and methodology section. The
penultimate section presents the results. The paper ends with conclusion, policy implication and limitations
of the paper section.

REVIEW OF EMPIRICAL STUDIES AND HYPOTHESES DEVELOPMENT

Two schools of thought have dominated bank credit risk literature. Spearheaded by Hassan et al., (1994)
and Corsetti et al., (1998), the external variables theory posits that changes in external variables in the
financial markets, regulations and economic conditions affect bank risk. In a study covering OECD and
Asian countries, Ariff and Marisetty (2001) find that Gross Domestic Product (GDP) is negatively related
to bank risk. Ahmad (2003) has also reported a significant negative relationship between GDP and credit
risk of banks in Malaysia. Recently, Ali and Daly (2010) in their comparative study of United States of
America (USA) and Australian economies on the macroeconomic determinants of bank credit risk find that
GDP has a negative statistically significant relationship with credit risk measured by default rate in both
countries. In terms of sensitivity to macroeconomic shocks, the study reports that the USA economy is more
prone to macroeconomic shocks than the Australian economy (Ali and Daly, 2010).

Internal variables theory argues that internal variables are determinants of credit risk (Berger and DeYoung,
1997; and Angbazo, 1997). Bank capital is one of the significant determinants of credit risk (Galloway et
al., 1997). However, Berger and DeYoung (1997) note the evidence is mixed. This is confirmed by Ahmad
and Ariff (2007) in their multi-country study of bank credit risk determinants. They report that in Japan,
Malaysia, and Mexico, capital is significantly positively related to credit risk. They attribute the reason for
their finding to the requirement from banks to increase their capital as a cushion to absorb potential losses
that might arise from an increase in credit risk. On the other hand, the researchers report a significant
negative relationship between bank credit risk and capital in Australia and India, articulating that their
finding supports the assertion that under-capitalized banks take more risks. Their finding reinforces that of
Berger and DeYoung (1997) and deepens the controversy over the relationship between capital and bank
credit risk. Notwithstanding the mixed evidence, the following hypothesis is tested:

H1: Bank capital positively correlates with bank credit risk

Evidence on the relationship between leverage and credit risk is mixed. Whereas in the USA, Galloway,
Lee and Roden (1997) found operating leverage to be positively related to risk in pre-deregulatory period
but negatively related to credit risk in de-regulatory periods, Ahmad and Ariff (2007) found leverage as
irrelevant to credit risk of banks in several economies they studied. Thus, the following hypothesis is tested:

60
The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

H2: Bank Leverage positively correlates with its credit risk

It is reasonable for one to argue that if total loans to total deposits ratio of a bank increases its credit risk
increases. This argument has empirical support. Ahmad and Ariff (2007) have reported that loans to deposit
ratio is a significant positive determinant of credit risk in Malaysia, the USA., and France. This leads to the
following hypothesis:

H3: Bank loan portfolio relative to deposit size positively correlates with bank credit risk

The spread of a bank which represents the net interest margin of the bank has been found to be a determinant
of bank credit risk but the empirical studies provide mixed evidence. Ahmad and Ariff (2007)’s study
provides evidence of negative correlation for banks in India and Thailand but positive correlation for banks
in France. The following hypothesis is to be tested:

H4: Bank spread negatively correlates with bank credit risk

The work of Bikker and Metzemakers (2005) reveals that bank provisioning behavior is related to business
cycle. They find that banks make substantially higher provisions against potential loan loss or higher credit
risk when GDP growth is low. It is, therefore, reasonable to conclude that higher loan loss provision
indicates higher credit risk potentials of a bank. This leads to this hypothesis:

H5: Bank loan loss provision is positively related to its credit risk

Indeed several variables have been found to have some correlation with credit risk: size (Hassan et al.
1994); and management efficiency (Ahmad and Ariff, 2007 and Angbazo, 1997). According to Angbazo
(1997) earning assets to total assets ratio reflects a bank’s management efficiency in managing its assets to
earn interest income. The following hypotheses are to be tested:

H6: Bank total assets (size) positively correlate with its credit risk

H7: bank earning assets to total assets ratio positively correlates with its credit risk

Studies on corporate boards have always modeled two specific elements of the boards: board size and board
composition (i.e. independent directors) as points of reference (Pathan and Skully, 2010). Board size refers
to the headcount of directors constituting the board of an entity. Klein (2002) and Andres and Vallelado
(2008) argue that a large board size should be preferred to a small size because of the possibility of
specialization for more effective monitoring and advising functions. However, Fama and Jensen (1983);
Lipton and Lorsch (1992); and Yermack (1996) have proffered counter argument that the benefit of
specialization which Klein (2002) and Andres and Vallelado (2008) emphasize may be swallowed by the
incremental cost of poorer communication and decision-making associated with larger groups. Jensen
(1993) who is one of the proponents of small board size school of thought has questioned the effectiveness
of boards with more than about seven to eight members, arguing that such boards are not likely to be
effective. He advances that large boards result in less effective coordination, communication and decision
making, and are more likely to be controlled by the Chief Executive Officers of such firms. His hypothesis
has since received empirical corroboration from studies by Yermack (1996) and Eisenberg et al. (1998).
Eisenberg et al. (1998), in particular, find a significant negative correlation between board size and
profitability in a sample of small and midsize Finnish firms. Cheng (2008) also lends credence to Jensen’s
hypothesis. His study provides empirical evidence that firms with larger boards have lower variability of
corporate performance. Switzer and Wang (2013) examine the impact of corporate governance variables
on bank credit risk. After controlling for firm-specific characteristics, the study provides evidence that

61
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

commercial banks with larger boards and older CFOs are associated with significantly lower credit risk
levels (Switzer and Wang, 2013). This leads to the following hypothesis:

H8: Bank board size negatively correlates with bank credit risk

There is a school of thought that argues that effective boards consist of greater proportions of outside
directors. Arosa et al. (2010); Ezzamel and Watson (1993); and Lorsch and MacIver (1989) are members
of this school of thought. Their studies have reported a positive relationship between independent directors
and firm performance.Two theoretical perspectives have fueled the penchant for outside directors: the
resource dependence theory and the agency theory. Spearheaded by writers such as Burt (1983) the
resource dependence school of thought hypothesizes that outside directors are a critical link to the external
environment of the firm. Such board members, in the view of the proponents, may provide access to valued
resources and information especially in times of adversity (Sutton and Callahan, 1987). Agency theory
(Eisenhardt, 1989, and Jensen and Meckling, 1976) argues that due to the separation of ownership and
control in modern organizations which creates information asymmetry between corporate owners and
managers, the latter are likely to feed fat on the amount and quality of the information they have by engaging
in self-serving ventures that are injurious to the interest of the former. One of the primary duties of the
board of directors, the theory submits, is to serve as the monitoring agent for shareholders to check the
behavior of corporate managers (Fleischer et al., 1988). Therefore, having an insider-dominated board of
directors is likely to aggravate the situation as the board’s role as a monitoring agent of shareholders will
be attenuated, paving way for managers to undermine shareholders’ wealth maximization. Thus, the agency
theory maintains that effective boards will consist of outside directors. However, there are studies that
challenge this view. Zahra and Stanton (1988) have found no relationship between board composition and
firm performance. Thus, this hypothesis is to be tested:

H9: Bank board independence negatively correlates with bank credit risk

Running counter to the resource dependence and agency theories of outside directors is the stewardship
theory which argues that managers are inherently trustworthy and are not susceptible to the abuse of
corporate resources (Pieper et al., 2008; Donaldson and Davis, 1994). Indeed, Donaldson and Davis (1994)
suggest that ‘managers are good stewards of the corporation and diligently work to attain high levels of
corporate profit and shareholder returns.’ The theory affirms that the main role of the board of directors is
to advise and support management rather than to discipline and monitor, a view which runs counter to the
agency theory. The theory maintains that the relationship between board independence and firm
performance potentially exists due to the counsel and advice that outside directors offer, rather than their
monitoring and control activities (Anderson & Reeb, 2004). In effect the stewardship theory advocates a
greater proportion of executive directors. In consonance with stewardship theory, some studies have found
that inside directors are associated with higher firm performance. In a study of Fortune 500 corporations,
Kesner (1987) reports a positive and significant relationship between the proportion of inside
directors and returns to investors. Vance (1978) has also reported a positive association between
inside directors and firm performance. This leads to the following hypothesis:

H10: Bank inside directors negatively correlate with bank credit risk

RESEARCH METHOD

This section chronicles how the study was undertaken. It describes the econometric model employed, the
sample and the data sources consulted. Credit risk is the dependent variable in the model and it is defined
as the non-performing loans to gross loans of a bank. In line with the studies of Anderson and Reeb (2003);
De Andres et al. (2005); Jackling and Johl, 2009) board size is measured using the natural logarithm of the

62
The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

total number of members of the board of directors. Board composition construed as board independence
(BINDEPEND) is measured as the proportion of non-executive directors on the board of a bank.
Independent director has been defined as one that could get a seat in the board without the controlling
shareholder's votes (Lefort and Urzúa 2008). Stewardship theory is tested by including the natural logarithm
of executive members (INSID) on the board of a bank. Other explanatory variables are the size of a bank
(ASSETS) which is calculated as the natural logarithm of the total assets (Barontini and Caprio, 2006);
capital (CAP); leverage (LEV); spread (SPREAD); loans to time deposit ratio (LD); loan loss provision to
gross loans ratio (LLP); and earning assets to total assets ratio(MGT). The panel data model for relating a
dependent variable to independent variables is compactly stated thus:

𝑌𝑌𝑖𝑖𝑖𝑖 = α + 𝛽𝛽𝛽𝛽𝑖𝑖,𝑡𝑡 + µ𝑖𝑖,𝑡𝑡 (1)

Where:

Subscripts i and t represent the cross-sectional and the time-series dimensions of the data respectively.
Y represents the dependent variable in the model which is bank credit X represents the set of independent
variables in the estimation model μ represents the error term The primary estimation method of regression
is ordinary least squares (OLS). Definitions of the variables used in the model are given in Table 1.

Table 1: Variables and Their Definitions

Variable Definition
Dependent variable: = Total non-performing loans/Total Gross Loans
Bank Credit Risk
Independent Variables
Size (LnASSETS) = Natural logarithm of Total Assets
Capital (CAP) = Tier 1 capital/Total Loans
Management Efficiency (MGT) = Earning Assets/Total Assets
Leverage (LEV) = Total liabilities/Total Assets
Board Size (LnBSIZE) = Natural logarithm of number of directors on the board
Inside Directors (LnINSID) = Natural logarithm of the number of executive directors
Board Composition/Independence (LnBCOM) = Natural logarithm of the number of non-executive directors
Loan Loss Provisioning Behavior (LnLLP) = Natural logarithm of Total loan loss provisions/Total Gross Loans
Loan to Deposit Ratio (LD) = Total loans to Total Time Deposits
Spread (SPREAD) = (Total Interest Income/Total Earning Assets)- (Total Interest Expense/Total
interest-bearing Liabilities
This table shows sample variables and their definitions.

A total sample of 14 out of 26 universal banks in Ghana representing approximately 54% of the study
population was used in the study. Data for the study were extracted from the annual reports of the 14 banks.
The website of each of the banks was visited. On the website the annual reports for the chosen period of
study (2006-2010) were downloaded. Not all banks provided their annual reports for all the years under
review. However, any bank that provided at least a three-year financial report was included in the study.
The 12 banks excluded from the study were excluded because of the non-availability of their annual
financial reports covering the study period. In all, 58 observations were obtained after editing the annual
reports of the 14 banks and were, therefore, used for the study.

ESTIMATION RESULTS

This section consists of two parts: Initial results and robustness check.

Initial Results

Table 2 shows that the average credit risk in the universal banking industry is approximately 6.89%.
Although this is above the international standard of 2 per cent, yet as a developing economy this is

63
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

suggestive of effective and efficient loan appraisal, monitoring and collection systems in the industry.
Average capital to loans ratio is approximately 25.70 % with leverage recording 88.34% indicating banks
in the industry have about one-fourth of their loans secured with capital and that they are highly geared.
Loans to deposits ratio is about 438%. Spread which reflects the net interest margin of banks is about 129%,
smacking of high interest rates in the industry. The average loan provision in the industry is 4.23%. The
mean total assets of the industry is GH¢730,000,000 which is equivalent to US$486,666,666. The
management efficiency (MGT) ratio reflects how well management is managing its assets to generate
interest income. The higher the ratio the better. Thus, the mean management efficiency (MGT) ratio of
80.88% is encouraging. The average board size is 8 with board independence and inside directors recording
6 and 2 respectively. The average board size is in line with international standard. The correlations between
the variables have been presented in Table 3. Except the correlation between board size and board
independence which is two points above the acceptable standard of 0.80, all the other correlations fall within
0.80. In correcting this multicolinearity problem the natural logarithm of board size was used in the
equation.

Table 2: Descriptive Statistics

STATISTIC NPL CAP LEV LD SPREAD LLP ASSETS MGT BSIZE BCOM INSID
Mean 0.0689 0.2571 0.8834 4.3853 12.918 0.0423 730,000,000 0.8089 8.586 6.379 2.207
Median 0.0485 0.2236 0.8866 2.6033 0.0791 0.04 458,000,000 0.8327 8 6 2
Maximum 0.48 1.0094 0.9568 27.603 216.07 0.21 6,990,000,000 1.0859 14 11 5
Minimum 0.00 0.1076 0.6453 0.3548 -0.0663 0.01 19,602,200 0.4972 6 4 1
Std. Deviation 0.0712 0.1368 0.0467 5.7705 48.075 0.0335 979,000,000 0.1034 1.697 1.461 0.9507
This tables provides descriptive statistics of the variables used for the study.

Table 3: Correlation Matrix

NPL CAP LEV LD SPREAD LLP ASSETS MGT BSIZE BCOM INSID
NPL 1
CAP 0.0836 1
LEV -0.3130 -0.7759 1
LD 0.0326 0.0609 -0.2849 1
SPREAD 0.0004 -0.0017 -0.1191 -0.1305 1
LLP 0.2394 -0.0199 -0.1111 0.0235 -0.0608 1
ASSETS 0.1372 0.0548 -0.0007 0.0783 -0.1479 0.0811 1
MGT 0.0749 -0.5056 0.3431 0.1352 -0.2909 4.6300 0.1951 1
BSIZE 0.1229 -0.0040 -0.2038 0.4823 0.0061 0.0907 0.3891 0.2319 1
BCOM 0.1188 0.0233 -0.2701 0.3587 -0.0072 0.0796 0.1003 0.1158 0.8289 1
INSID 0.0369 -0.0431 0.0513 0.3095 0.0220 0.0396 0.5402 0.2359 0.5108 -0.0575 1
This table presents the correlations among the variables used in the study

The predictive power of the model R2 is 54%. It means that the explanatory variables in our model explain
53% variation in the dependent variable. The significance of the F-statistic reported in Table 4 implies that
the explanatory variables jointly and significantly explain the variations in the dependent variable. From
Table 4 it can be observed that contrary to the literature (Ahmad and Ariff, 2007; Galloway et al., 1997 and
Berger and DeYoung, 1997) bank capital has no relationship with bank credit risk. The argument for the
relationship between bank credit risk and bank capital is that banks rely on their capital to cushion
themselves against credit losses. Thus, it is reasonable to expect that as the capital of a bank increases its
credit risk also increases. However, this argument appears to be defeated in Ghana. Banks in Ghana do not
increase their capital base for cushioning against credit risk. H1 is, thus, unsupported. Table 4 shows that
leverage is significantly negatively correlated with bank credit. This implies that highly leveraged banks
are less likely to engage in lending operations that may exacerbate their credit risk. Hypothesis H2, is, thus,
rejected. Bank loan portfolio to time deposit ratio as well as the spread of a bank which indicates the net
interest income it generates from its operations has been found to be irrelevant in determining the credit
risk of the bank. Therefore, hypotheses H3 and H4 do not have any empirical support. There is evidence in
Table 4 that the loan loss provision to total gross loans ratio has a significant positive relationship with bank

64
The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

credit risk. This finding strikes a chord with the extant literature (Ahmad and Ariff, 2007; Ahmed et al.
1998; Ahmad, 2003 and Bikker and Metzemakers, 2005). It suggests that as the loan loss provision of a
bank increases it is indicative of the deterioration of its credit risk. Hypothesis H5 is, thus, supported. It can
be explained that the officers of a bank that makes high provision for loan losses are likely to be reckless
in loan appraisal, monitoring and collection thereby creating more non-performing loans in the books of
the bank.

There is evidence to accept hypothesis H6. The size of a bank proxied by its total assets has a significant,
positive correlation with bank credit risk. The implication is that as a bank in Ghana grows in size its credit
risk also increases. This contradicts the finding of Hassan et al. (1994) that bank size is significantly
negatively related to risk of banks in the U.S.A. This finding is understandable in the sense that loans and
advances constitute about 80% of the total assets of a commercial bank. Therefore, as a commercial bank
piles up non-performing loans in its books, its total assets skyrockets thereby deteriorating its credit risk.
Management efficiency measured by the earning assets to total assets ratio has no significant relationship
with bank credit risk. This is contrary to the work of Ahmad and Ariff (2007) and Angbazo (1997).
Hypothesis H7 is, therefore, unsupported.

Evidence in Table 4 shows that board size is negatively related to bank credit risk. This is statistically
significant. Hypothesis H8 is, therefore, tenable. It presupposes that as a bank increases its board size, it is
likely to reduce its credit risk. This finding defeats the small board theory which argues that smaller boards
are more effective than their larger counterparts (Fama and Jensen, 1983; Lipton and Lorsch, 1992; and
Yermack, 1996) and upholds the theory of Klein (2002) and Andres and Vallelado (2008) who argue that
a large board size should be preferred to a small size because of the possibility of specialization for more
effective monitoring and advising functions. Table 4 shows that board composition/independence has a
positive relationship with credit risk, implying that as the number of independent directors on the board of
a bank increases, there is a corresponding increase in the credit risk of the bank. Hypothesis H9, thus, lacks
empirical support.

Table 4: Estimation Results-Dependent Variable=Credit Risk

Variable Coefficient Std Error t-Statistic P-value

CAP -1.062 1.196 -0.8875 0.3794
LEV -9.343 3.526 -2.6499 0.0110***
LD -0.0218 0.0171 -1.2734 0.2093
SPREAD 0.0016 0.0020 0.8098 0.4222
LnLLP 0.5995 0.1228 4.8832 0.0000***
LnASSETS 0.2691 0.0981 2.7434 0.0086***
MGT -0.1529 1.1174 -0.1368 0.8918
LnBSIZE -5.155 2.5144 -2.0503 0.0461**
LnBCOM 0.5332 0.2747 1.9409 0.0584*
LnINSID) 1.230 0.5959 2.0640 0.0447**
C 10.984 4.9214 2.2321 0.0691*
R2 0.54
F-statistic 5.390 Prob(F-statistic) 0.000031
This table shows the results of our panel regression: Yit = α +βXi,t +μi,t . ***, **, * represent 1%, 5% and 10% significance levels

Impliedly, the agency theory and the resource dependence theory of board independence appear to have
lost their locus as far as credit risk is concerned. Evidence in Table 4 indicates that banks that appoint more
executive/inside directors are more likely to increase their credit risk than their counterparts because there
is a significant positive correlation between bank executive directors and bank credit risk. Hypothesis H10
is, therefore, rejected. This finding, undoubtedly, challenges the stewardship theory (Pieper et al., 2008;
Donaldson and Davis 1994).

65
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

Robustness Check

To ascertain the robustness of our findings, our model is re-estimated eliminating the insignificant variables
in the initial results. The results of the robustness check are presented in Table 5. As can be observed, all
the variables except leverage (LEV) have maintained their significant impact on credit risk. Thus,
confirming the robustness of our initial findings.

Table 5: Robustness Check Results-Dependent Variable=Credit Risk

Variable Coefficient Std Error t-Statistic P-value

LEV -34.1324 25.3436 -1.3468 0.1865
LnLLP 0.7024 0.3590 1.9566 0.0582*
LnASSETS 2.0585 1.2850 1.6019 0.1179
LnBSIZE -68.155 34.0895 -2.0019 0.0529**
LnBCOM 8.0000 3.9620 2.0192 0.0510*
LnINSID) 16.8775 9.4613 1.7839 0.0829*
C 75.852 53.6971 1.4126 0.1664
R2 0.54 Durbin-Watson Stat=2.5 N=58
F-statistic 2.051 Prob(F-statistic) 0.000031
This table shows the results of our robustness check on our initial results. ***, **, * represent 1%, 5% and 10% significance levels

CONCLUSION, POLICY IMPLICATION AND LIMITATIONS OF THE PAPER

The study investigates the predictors of credit risk in the universal banking industry in Ghana. Purposively
sampled panel data (2006-2010) from 14 out of the 26 universal banks in Ghana have been used for analysis.
We have employed panel data regression techniques to estimate our chosen model. The study finds that
leverage, assets (size), loan loss provision, board size, board independence, and the number of executive
directors on the board of a universal bank are the predictors of its credit risk. The study, therefore, submits
that universal banks in Ghana could improve their credit risk management by formulating policies around
these factors. Obviously, these results demonstrate the relevance of board structure to credit risk
management of universal banks in Ghana. One major policy implication in terms of governance of
universal banks in Ghana is that having a large board size consisting of people with relevant experience and
expertise is likely to augur well for credit risk management. We, therefore, recommend that, subject to their
scope of operations, universal banks in Ghana should consider increasing the size of their boards with
competent directors if they would like to reduce their credit risk. One limitation of this paper is that it has
relied on financial reports of the selected universal banks. Thus, the validity of the findings and conclusions
is limited to the extent to which these data are reliable. Another limitation is that the study period (2006-
2010) is a bit short due to lack of data. We, therefore, recommend that future researchers should explore
the possibility of investigating the determinants of credit risk in the universal banking industry over a longer
period for more reliable results. Notwithstanding the above-mentioned limitations, the paper makes a
significant contribution to the extant literature on credit risk by establishing the relevance of board structure
to the credit risk management discourse.

REFERENCES

Aboagye-Debrah, K. (2007), Competition, Growth and Performance in the Banking Industry in Ghana , A
Dissertation Submitted in partial fulfillment of the Requirements for the Award of the Doctor of
Philosophy (Strategic Management) of the St Clements University

Adusei, M. (2011), Board Structure and Bank Performance in Ghana, Journal of Money, Investment and
Banking, 19, 72-84.

Adusei, M. (2012), Financial Development and Economic Growth: Is Schumpeter Right? British Journal
of Economics, Management & Trade, 2(3), 265-78.

66
The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

Adusei, M. (2013a), Financial Development and Economic Growth: Evidence from Ghana, International
Journal of Business and Finance Research, 7(5), 61-76.

Adusei, M. (2013b), Does Finance Promote Growth in Botswana? Research in Applied Economics, 5(2),
70-81.

Ahmad, N.H. and Ariff, M. (2007), Multi-country Study of Bank Credit Risk Determinants, International
Journal of Banking and Finance, 5 (1), 134-152.

Ahmad, N.H., (2003), Credit Risk Determinants: By Institutional Type, Proceedings of Malaysian
Finance Association Conference.

Ali, A. and Daly, K. (2010) Macroeconomic Determinants Credit Risk: Recent Evidence from a Cross
Country Study, International Review of Financial Analysis, 19, 165-171.

Anderson, C. R. and Reeb, M.D. (2003), Founding-family Ownership and Firm Performance: Evidence
from the S&P500, The Journal of Finance, LVIII (3), 1301–1328.

Andres, P. D. and Vallelado, E. (2008), Corporate Governance in Banking: The Role of the Board of
Directors, Journal of Banking & Finance, 32, 2570–2580

Angbazo, Lazarus, (1997), Commercial Bank Net Interest Margins, Default risks, Interest Rate Risks and
Off-balance Sheet Banking, Journal of Banking and Finance, 2, 55-87.

Ariff, M. and Marisetty, V.B., (2001), A New Approach to Modeling Multi- Country Risk Premium
Using Panel Data Test Method, Proceedings of MFS Conference in Cyprus

Arosa, B., T. Iturralde, and Maseda, A. (2010), Outsiders on the Board of Directors and Firm
Performance: Evidence from Spanish Non-listed Family Firms, Journal of Family Business Strategy 1,
pp.236–245.

Barontini, R., and Caprio, L. (2006), The Effect of Family Control on Firm Value and Performance:
Evidence from Continental Europe, European Financial Management, 12(5), 689–723.

Berger, A. N. and DeYoung, R. (1997), Problem Loans and Cost Efficiency in Commercial Banks,
Journal of Banking and Finance, 21, 849-870.

Bikker, J.A., and Metzemakers, P.A.J. (2005), Banks Provisioning Behavior and Procyclicality, Journal
of International Finance Markets, Institutions and Money, 15(2), 141-157.

Burt, R. S. (1983) Corporate Profits and Cooptation, New York: Academic Press.
Caprio, G. and Klingebiel, D. (2003), Episodes of Systemic and Borderline Financial Crises, available at
www.siteresources.worldbank.org/INRES/Resources

Cebenoyan A. Sinan and Philip E. Strahan, (2004), Risk Management, Capital Structure and Lending at
Banks, Journal of Banking and Finance, 28, 19-43.

Cheng, S. (2008), Board Size and the Variability of Corporate Performance, Journal of Financial
Economics 87, 157–176.

67
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

Chow, W.W. and Fung, M.K. (2013), Financial Development and Growth: A Clustering and Causality
analysis, The Journal of International Trade & Economic Development: An International and
Comparative Review, 22(3), 430-53.

Corsetti, G, Pesenti, P. and Roubini, N. (1998), Fundamental Determinants of the Asian Crisis: A
Preliminary Empirical Assessment, Paper prepared for the JIMF-Fordham University Conference on
“Perspectives on the Financial Crisis in Asia”.

de Andres, P.A., Azofra, V.,and Lopez, F. (2005), Corporate Boards in some OECD Countries: Size,
Composition, Functioning and Effectiveness, Corporate Governance. An International Review, 13, 197–
210.

Donaldson, L. and J.H. Davis (1994), Boards and Company Performance: Research Challenges the
Conventional Wisdom, Corporate Governance: An International Review, 2(3), 151–160.

Eisenberg, T., S. Sundgren & Wells, M.T. (1998), Larger Board Size and Decreasing Firm Value in Small
Firms, Journal of Financial Economics 48, 113–139.

Eisenhardt, K.M. (1989), Agency Theory: An Assessment and Review, Academy of Management Review,
14, 57–74.

Esso, L.J. (2010), Re-examining the Finance-Growth Nexus: Structural Break, Threshold Cointegration
and Causality Evidence from the ECOWAS, Journal of Economic Development, 35(3), 57-79.

Ezzamel, M. A. and Watson, R. (1993), Organizational Form, Ownership Structure, and Corporate
Performance: A Contextual Empirical Analysis of UK Companies, British Journal of Management, 4(3),
161–176.

Fama, E.F. and Jensen, M. C. (1983), Agency Problems and Residual Claims,” Journal of Law and
Economics, 26, 327–342.

Fleischer, A., Hazard, G.C and Klipper, M.Z. (1988), Board Games: The Changing Shape of Corporate
Power. Boston, MA.: Little Brown

Galloway, T.M., Lee, W.B. and Roden, D.M., (1997), Banks’ Changing Incentives and Opportunities for
Risk Taking, Journal of Banking and Finance, 21, 509- 527.

Gourinchas, P., Landerretche, O. and Valde´s, R. (2001), Lending booms: Latin America and the World,
Economia, 1, 47–100.

Hassan, K.M, Karels, G.V. and Peterson, M.O., (1994), Deposit Insurance, Market Discipline and Off-
balance Sheet Banking Risk of Large U.S. commercial banks, Journal of Banking and Finance, 18, 575-
593.

Hye, Q.M.A. and Islam, F. (2013), Does Financial Development Hamper Economic Growth: Empirical
Evidence from Bangladesh” Journal of Business Economics and Management, 14(3), 558–82.

Jackling B. and Johl, S (2009), Board Structure and Firm Performance: Evidence from India’s Top
Companies, Corporate Governance: An International Review, 17(4), 492– 509.

68
The International Journal of Business and Finance Research ♦ VOLUME 8 ♦ NUMBER 5 ♦ 2014

Jalil, A. and Feridun, M. (2011), Impact of Financial Development on Economic Growth: Empirical
Evidence from Pakistan, Journal of the Asia Pacific Economy, 16(1), 71-80.

Jensen, M. C. and Meckling, W.H. (1976), Theory of the Firm: Managerial Behavior, Agency Costs, and
Ownership Structure, Journal of Financial Economics 3, 305–350.

Jensen, M.C. (1993), The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems,
Journal of Finance, 48, 831– 880.

Kaminsky, G. and Reinhart, C. (1999), The Twin Crises: The Causes of Banking and Balance of
Payments Problems, American Economic Review, 89, 473–500.

Kesner, I. F. (1987), Directors Stock Ownership and Organizational Performance: An Investigation of

Fortune 500 Companies, Journal of Management, 13, 499–508.

King, R. and Levine, R. (1993), Finance, Entrepreneurship, and Growth: Theory and Evidence, Journal
of Monetary Economics, 32, 513–542.

Klein, A. (2002), Audit Committee, Board of Director Characteristics, and Earnings Management,”
Journal of Accounting and Economics 33(3), 375-400.

Kraft, E. and Ljubinko, J. (2005), Does Speed Kill? Lending Booms and their Consequences in Croatia,
Journal of Banking and Finance, 29, 105-121.

Lefort, F. and Urzu´a, F. (2008), Board Independence, Firm Performance and Ownership Concentration:
Evidence from Chile, Journal of Business Research, 61, 615–622.

Levine, R., Loayza, N. and Beck, T. (2000), Financial Intermediation and Growth: Causality and Causes,
Journal of Monetary Economics, 46, 31–77.

Liang, H. and Reichert, A.K. (2012), The Impact of Banks and Non-bank Financial Institutions on
Economic Growth, The Service Industries Journal, 32(5), 699-717.

Lindgren, C.,Balino, T.J.T., Enoch, C., Gulde, A., Quintyn, M., and Teo, L. (1999). Financial Sector
Crisis and Restructuring: Lessons from Asia available at www.imf.org/external/pubs/ft/op/opfinsec/op1.

Lipton, M. and Lorsch, J. (1992), A Modest Proposal for Improved Corporate Governance Business
Lawyer, 48, 59-77.

Lorsch, J. W. and MacIver, E. (1989), Pawns or Potentates, Boston, MA: Harvard Business School Press.

Marfo-Yiadom, E. and Agyei, S. K. (2011), Determinants of Dividend Policy of Banks in Ghana,

International Research Journal of Finance and Economics, 61, 99-108.

Ono, S. (2012), Financial Development and Economic Growth: Evidence from Russia, Europe-Asia
Studies, 64(2), 247-256.

Pathan, S. and Skully, M. (2010), Endogenously Structured Boards of Directors in Ghana, Journal of
Banking and Finance, 34, 1590–1606.

69
M. Adusei et al | IJBFR ♦ Vol. 8 ♦ No. 5 ♦ 2014

Pieper, T. M., SKlein, S. and PJaskiewicz, P. (2008), The Impact of Goal Alignment on Board Existence
and Top Management Team Composition: Evidence from Family-influenced Business, Journal of Small
Business Management, 46(3), 372–394.

Sutton, R. I. and Callahan, A.L. (1987), The Stigma of Bankruptcy: Spoiled Organizational Image and its
Management, Academy of Management Journal, 30, 405–436.

Switzer, L.N. & Wang, J. (2013), Default Risk Estimation, Bank Credit Risk and Corporate Governance,
Financial Markets, Institutions and Instruments, 91-122.

Vance, S. C. (1978), Corporate Governance: Assessing Corporate Performance by Boardroom Attributes,

Journal of Business Research, 6, 203–220.

Yermack, D. (1996), Higher Market Valuation of Companies with a Small Board of Directors, Journal of
Financial Economics, 40, 185-211.

Zahra, S. A. & Stanton,W.W. (1988), The Implications of Board of Directors Composition for Corporate
Strategy and Performance, International Journal of Management 5,229–236.

BIOGRAPHY

Michael Adusei is a lecturer in the Department of Accounting and Finance, School of Business, Kwame
Nkrumah University of Science and Technology (KNUST), Ghana. He has publications in renowned
journals including Journal of International Development; British Journal of Economics, Management and
Trade; Journal of Money, Investment and Banking; Global Journal of Business Research; and Journal of
African Business. He reviews papers for a number of refereed journals including Applied Economics,
Applied Financial Economics, British Journal of Economics, Management and Trade, African
Development Review, Journal of African Business and The International Journal of Business and Finance
Research. You can reach him on [email protected] & [email protected].

Samuel Yaw Ameako is a lecturer in Marketing and International Business in the Department of Marketing
and Corporate Strategy, KNUST School of Business, Kwame Nkrumah University of Science and
Technology, Kumasi. He is also a legal practitioner and shows interests in international business, banking
and SME-related research. He is currently pursuing PhD in International Business at the Aalborg
University, Denmark and has been a member of Academy of International Business (AIB) since 2006. You
can contact him via [email protected].

Ralph Nyadu-Addo is a lecturer in Entrepreneurship and Small Business Management Kwame Nkrumah
University of Science and Technology, Kumasi. He is the foundation Business Development Officer of
KNUST and Manager of the Kumasi Business Incubator. He has Masters in Small Business, Germany. He
is about starting his PhD in internationalization of SMEs and entrepreneurship in Germany. His research
interest is in the areas of internationalization of Small and Medium Business, Entrepreneurship Education,
Innovation, and Industry-Academia relations. He belongs to the Small Enterprise Promotion Network
(SEPneT, Worldwide and acting President of the Africa chapter). You can reach him via
[email protected]

70