Credit Risk Management and the Financial Performance of Domiciled Banks in Sierra Leone: An Empirical Analysis

Abstract

This study assesses the nexus between credit risks and performance of commercial banks in Sierra Leone using data collected from the Bank of Sierra Leone (BSL) on relevant Financial Soundness Indicators like ROA, Bank Liquidity, NPL, and Credit over the 2008Q1-2018Q4 period. Evidence from (unbalanced) panel data estimation within the fixed effects model shows that the fragility of the banking system stems from high NPLs. We further provide evidence that a low productive base in the domestic economy influences the state of high NPLs in the banking system. The study revealed the need for collaboration between the research arm of monetary policy and financial stability departments in a bid to monitor risk in the financial system, which the entire banking system experienced around 2015-2017 that resulted in stringent measures adopted by the BSL to rescue the two state–own commercial banks. Equally, vigilant approaches should be explored by the BSL authority that leads to (positive) structural changes in banks’ approach to improving efficiency while at the same time minimizing continued risks to high NPLs and many more. The study finally recommends that ROA and ROE be adopted as independent indicators by the regulatory authorities to effectively monitor performances across the banking industry, as this would help monitor unexpected shocks in the banking system.

Keywords: Credit Risk, Profitability, Non-Performing Loan, Panel Data, Sierra Leone]

JEL Classification: G21 , G28 , G32