Effect of Financial Risk on Banks’ Performance in Ghana

Commercial banks assume various kinds of financial risks which are related to the financial operation of a business and arise due to the volatility of market conditions, credit quality, and liquidity position. This study empirically examines the effect of financial risk on performance of some banks listed on the Ghana Stock Exchange (GSE) covering the period of 2016-2021 using quarterly data. The study used panel autoregressive distributed lag (ARDL) estimation technique for the empirical analysis. The findings of the study show that the long run estimates of all the three explanatory variables have negative but significant impact on banks’ performance. Furthermore, the short run relationship showed that liquidity risk negatively affects banks’ performance. Based on these findings, the study recommends that commercial banks need to determine the optimal percentage of their deposits that should be given out as loans so that bank liquidity is not threatened due to their pursuit for higher profitability, the banks need to also determine the optimal current ratio so as to improve their level of profitability and commercial banks need to consciously reduce their market risk so as to improve profitability