The The impact of credit risk on the profitability of banks in South Africa

Abstract

The purpose of this study is to determine the impact of credit risk on the profitability of commercial banks in South Africa. This study purposefully chose five banks that control more than 70 % of the market in South Africa. The secondary balanced panel data was gathered from each bank's audited annual financial statements over a ten years (2013-2022). This study was conducted using an explanatory study as our research design. The return on equity was used to measure profitability, while the credit loss ratio, the ratio of loss allowances to total loans and advances, and the ratio of total loans and advances to total assets were used to assess credit risk for each bank. The Variance Inflation Factor was used to test for multicollinearity, while Hausman model specification test was used to determine the preferred model for the study. The data were analysed using a balanced panel data regression with the random effects model. The study's findings show that the credit loss ratio has a positive effect on profitability, whereas the ratio of loss allowances to total loans and advances has a negative effect. The ratio of total loans to total assets was discovered to have a positive and significant relationship with bank profitability. As a result, this study concluded that banks should be aggressive in deploying deposits to extend credit to customers while maintaining effective credit management practices.