Impact of Credit Risk Management on the Financial Performance of Commercial Banks in Mauritius

Abstract

The recent global financial crisis has had many unprecedented costs for numerous financial institutions, mostly banks in nearly all countries. Subsequently, during the past decade, this has led to dramatic changes in most bank’s risk management frameworks. Undeniably, credit risk management became one of the most important elements for any commercial bank.This research aims to investigate whether credit risk management has significant impacts on the financial performance of commercial banks in Mauritius.The indicator used to measure the financial performance of commercial banks is return on equity (ROE) while the proxies for credit risk management are nonperforming loans ratio (NPLR), capital adequacy ratio (CAR), loan to deposit ratio (LTDR), bank size. Macroeconomic variables such as inflation and Gross Domestic Product (GDP)have also been used. moreover, this study is based on a quantitative secondary research. The data are collected from seven (7) commercial banks in Mauritius covering ten years period from 2008 to 2017. Several diagnostic tests and the Ordinary Least Square regression model are performed.The results indicate that only two out of the six variables tested i.e. nonperforming loan ratio and bank size are the main factors having a significant impact on the financial performance of Mauritian commercial banks. The study further explains why CAR, LTDR, inflation and GDP did not radiate any influence on bank performance.This research also holds some recommendations that Mauritian commercial banks can implement better credit collection approach in order to reduce their credit risks. Besides, the policymakers in Mauritius should also take size of the banks into account when formulating credit risk management framework.

 Keywords: Credit Risk Management,Nonperforming loan ratio, Bank Size,Financial performance, Commercial Banks