Credit Risk Management, Institutional Quality, and Financial Performance of Commercial Banks in Sub-Saharan Africa

Abstract

Purpose

This study examines the relationship between risk management and the financial performance of commercial banks in Sub-Saharan Africa, with particular emphasis on credit risk indicators and institutional quality.

Methodology

The study adopts an ex post facto research design. It uses secondary data from audited annual reports and financial statements of publicly listed commercial banks in Sub-Saharan Africa for the period 2018–2023. A two-step Generalized Method of Moments (GMM) estimator is employed to analyze the panel data and address potential endogeneity concerns.

Findings

The empirical findings reveal that the non-performing loans ratio exerts a statistically significant effect on bank financial performance. While the ratio of total loans and advances to total deposits shows a positive but statistically insignificant impact on profitability, changes in this ratio significantly influence bank profitability. Moreover, institutional quality is found to have a negative, statistically significant relationship with the return on equity (ROE) of commercial banks in Sub-Saharan Africa.

Conclusion

The results indicate that credit risk management and institutional quality play a critical role in shaping banks' financial performance in Sub-Saharan Africa. The study recommends that banks strengthen credit appraisal and risk monitoring mechanisms and ensure strict regulatory compliance to mitigate loan default risks. Additionally, policymakers are encouraged to enhance supervisory and regulatory frameworks to promote sustainable, resilient banking operations across the region.