THESIS neglecting the perils related with the






the divulgence of oil and gas in the Western district of Ghana, most
accomplices essentially family unit, have come into conclusion and of the view
that, most Ghanaians would enhance themselves in the briefest possible time
neglecting the perils related with the freshly discovered business and genuine
players. We have seen genuine troubles and money related risks that
oil-conveying countries like Nigeria have looked consistently. In Ghana,
political affiliations including the organization and other critical
accomplices have quite recently checked their benefits without forming the
wants of the all-inclusive community.

the major and key stakeholder(s) in both the upstream and downstream oil and
gas expect the principle part in managing their investors’ values and the
dangers related with the exploration and production of oil and gas. Banks
financing part in the oil and gas industry at all levels makes them exposed to
credit risk in their day-to-day business. Ghana, for a couple of years, has
quite recently been a net buyer of oil and other oil-related merchandise however
with the disclosure and creation of oil in commercial quantities goes with its
own particular advantages and threats to players related with the “black

work twists up evidently essential to reveal the potential credit risk to the
banks as around 85% of banks in Ghana now trade oil and oil-related activities
as part or whole business line as their inside business operations. I am along
these lines persuaded that various banks without much introduction in the oil
and gas trading activities in the developing sector may be caught by seeing financial
booms and face troubles if the idea of credit risk and management related with
the sector are not identified and well understood and the necessary strategies
adapted to mitigate against such happenings in order to prevent losses. The
consequences of not alleviating and overseeing dangers are enormous
misfortunes, for example, the end result for Barings Bank Plc in 1995. Barings
Bank Plc collapsed because of its inability to meet the gigantic exchanging
commitments that a staff uncovered for the benefit of the bank.

primary objective is to identify appropriate credit risk management practices and
its effect on banks profitability and be able to show how these effects affect
such an emerging and young market. In achieving this objective, I will aim at
tackling the following issues;

The nature of credit risks
in the oil and gas industry and banking sector.Risk management practices
and its effect on banks profitability.Relationship between the
credit risk to banks and lending to the emerging oil and gas sector.


plan to examine the current risk and its effect on the profitability of banks
and also credit risk impact on lending to the oil and gas sector in Ghana and
furthermore able to recognize proper procedure or rules as build up guide on
existing credit risk policies for managers and bank staffs for smooth operational
flow. The guidelines shall be consistent with sound and prudent banking
practices applicable on the global front.


is clearly the most significant commodity on the planet, it can be upbraid or
blessing to nations if not properly oversaw, at any rate, and the ‘Dutch
disease’ is still new in literature. The ‘black gold’ on the planet is without
a doubt the biggest source of energy presently. It is situated among the most
flighty non-horticultural items, particularly lately. Over the span of the last
five (5) years, oil prices dropped from 110 USD/barrel in April 2014 to 64
USD/barrel in June 2015 and furthermore dropped to 50 USD/barrel in August
2016. The present oil value remains at 56.63 USD/barrel (47.66 EUR/barrel) as
at September 2017. This evident example shows how unpredictable oil price can
be. In spite of the way that the oil price is an imperative source of instability
on the global economy, it isn’t a measure of credit risk, fear or a check of
future financial wellbeing in the oil production and exploration areas, related
sectors, for instance, the natural gas, utility, chemicals and auto sectors, or
the security markets. Credit Default Swaps (CDS) for these oil and oil-related
sectors measure expected credit risk, fear and the future fiscal quality of
these areas, which is noteworthy information that the oil price may quantify.
Risk management practices impact banks profit and increase firm’s value and may
diminish financial distress. Risk management is considered as an estimating
tool determining banks failure or success. As commercial banks in Ghana looks
for opportunities to invest their capital and their investor’s value, the
energy sector (oil and gas) turns into an emerging business sector for
opportunities and also dangers as they are exposed to credit and counterparty
risks. This work seeks to bring to limelight, the need for Banks to critically
pay attention to credit risk management practices while achieving profitability.
The problem of this study is to identify the potential credit risk to the banks
and its effects on banks profitability as about 70%-80% of banks in Ghana
currently trade in oil and oil related activities as part or wholly business
line as their core business operations. 

has been a general conviction that the banking sector in Ghana is decently
enduring with individual banks having great risk profiles and sound risk
administration structures. The banking industry had not experienced any misfortunes
in the face of the global financial crisis until recently, the collapse of UT
Bank Ghana limited and Capital Bank Ghana limited which has subsequently been
acquired by Ghana Commercial Bank. Some financial analyst and experts have
blamed huge outstanding debts owed to the banking sector by various energy
companies such as Tema Oil Refinery (TOR), the Volta River Authority (VRA), the
Electricity Company of Ghana (ECG) and the Bulk-oil Distribution Companies
(BDCs) as a severe strain on the banking sector of which UT and Capital banks
fall a victim. Additionally, the industry throughout the years has seen
worsening asset quality in the face of weak macroeconomic factors such as
depreciating of the local currency, high inflation rates and interest rates
resulting in high default rates of major players in the energy sector (oil and
gas). Moreover, there has, however, not been any major test to ascertain the
resilience of the banking industry to withstand major shocks until recent
policies by the Bank of Ghana to increase minimum capital requirements of banks.
There is, in like manner, a vacuum between the general conviction on the risk
position of the Ghanaian banking industry and the evidence to back this conviction.
It is also experimental that different banks without much introduction in the
oil and gas business in the emerging sector might be gotten by seeing financial
booms and face challenges if the nature of credit risks and management related
with the sector are not recognized and relieved against such happenings remembering
to avert financial distress.


other risks faced by banks, credit risk plays an important role on banks’
financial performance since a large chunk of banks’ revenue accrues from loans
from which interest margin is derived (Kolapo, Ayeni & Oke, 2012, p.31). I
subsequently mean to look at the connection between credit risk management in
the emerging oil and gas industry and its impact on the profitability of banks
and also the connection between credit risk to banks and lending to the oil and
gas sector. There has not been an unmistakable research that has possessed the
capacity to set up the connection between credit risk management and banks profitability
and in addition lending to oil exploration and production (E&P) companies.

have the capacity to secure the information of the impact of risk management
practices on banks profit and look at the connection between credit risk to
banks and lending to E&P companies, I offer the following research

To what extent are Banks in
Ghana exposed to credit risks in the emerging oil and gas industry?What is the relationship
between credit risk management and the profitability of commercial banks
in Ghana?What is the relationship
between credit risk to banks and lending to oil E&P companies?What monitoring tools or
actions should be adopted in managing credit risk exposures to banks in
the oil and gas industry?


research topic is vital to the overall awareness and success of commercial
banks in Ghana in the wake of Ghana developing its oil and gas sector and will
bring the following to bear on the banking sub-sector. The fundamental reason
is to analyse how credit risk management of the oil and gas industry will impact
the productivity of banks in Ghana and also loaning to the oil and gas E&P companies.
In breaking down this impact, it is essential to build up whether there is a
connection between the factors or not. The real issue is the indicators of
credit risk management and profitability as well as debt repayment capacity of
E&P companies. I intend to use capital adequacy ratio (CAR) and
non-performing loan ratio (NPLR) as the variables to represent credit risk
management and ROE and ROA as variables to measure commercial banks’ profitability.
Since credit risk to banks that finance oil E companies arises from the
ability or inability of the E borrower to repay debt with operating cash
flow generated from production and sale of oil and natural gas (source:, Net operating
cash flow of E companies will be used as the variable to represent repayment
capacity of E borrowers. After examining the existence of a relationship,
I will intend to establish the effects of the relationship.

the work can become a guide to help improve corporate supervisory roles in banks
in-house credit risk management units and an insight to improving risk
management practices understanding of other stakeholders and players in the oil
and gas industry. The work is also significant in fulfilling the University of
Siena requirement of awarding me MSc Finance degree.


proven, banks’ strength plays a vital role in the stability and growth of an
economy.  Ghana’s oil and gas sector will
receive boost and develop with the strength of banks. And the stability of
banks depends on the profitability and capital adequacy (Tabari et al., 2013,
p.1624). Studies relating to banks profitability have made us mindful of the
lacking conclusion of relationship between credit risk management and banks
profitability. Most researchers concentrate on the more extensive components of
risk management practices and shows diverse outcomes. Researchers have not
possessed the capacity to set up the impacts of risk management practices in
the emerging oil and gas industry on banks profitability in Ghana. In this way,
there is the need to fill this exploration hole.

principle, the study will cover the research gap on the impact of credit risk
management in the energy sector on the productivity of banks. Banks are using diversified
derivatives (futures, options, and swaps) to hedge counterparty default risks (Jones
& Pérignon, 2013, p. 373). I plan to give more extensive knowledge to
readers. Additionally, the work will give the premise to different researchers
who wish to advance on the topic.

a down to earth viewpoint, the data used in this work will offer a” mirror” for
bank administrators, investors, E companies and bank supervisors,
contingent upon the result. Bank directors could give careful consideration to
enhance banks’ execution by dealing with the credit risk banks confront dealing
in the oil and gas industry. Banks along these lines can better orchestrate and
distribute their resources in regards to the position of credit risks.
Moreover, private financial specialists can have a more far reaching viewpoint
of how profitability will be influenced. By assessing the risk management from
the risk report that banks give, they may have more resources on basic
leadership as indicated by the observational outcome. Finally, bank supervisors
will be given more confirmation to the effect of credit risk management and to
explore on the off chance that it is important to deregulate or impose further
regulation. In the event that the outcome shows that no relationship exists,
the commitment could be that there is no requirement for different researcher
to endeavour into this zone or more compelling elements ought to be considered
to create more critical relationship.


intend to focus on 10 largest commercial banks in Ghana between the periods
2012 to 2016 which directly and indirectly finance major players in the oil and
gas industry (upstream and downstream) and also five (5) major oil and gas
exploration and production companies. Moreover, huge banks could have blended
activities from banking and investment banking, e.g. the fundamental risks confronted
by banks and investment banks are not normally indistinguishable. For example, credit
risk is the biggest risks for banks while market risk and credit risk are
imperative to investment banks.

in order to gather enough data to make generalization, I have chosen the time
horizon from 2012 to 2016, which covers the year of Ghana’s oil discovery and
commercialization in 2012. In this case, I do not take into account the impact
of oil discovery in 2007 could have on the result of the study, which might
cause bias to the estimates.


the fact that, there are different banks and non-bank financial institutions
authorized with the mandate to do business in the emerging oil and gas industry
in Ghana, this  study will focus on the
biggest 10 licensed banks both household and universal as indicated by their
current size (Total assets 2015-2016) for a much better observation and
analysis. I am additionally aware of the time allotment as a constraining variable;
consequently steady interaction and review with my supervisor through e-mails
will be adopted.


though banking is as primitive as human society, it has gone through changes in
many ways world-wide throughout the years. Most banks today offer a wide range
of products and services than ever before, and their central functions of
putting the community’s surplus funds (deposits and investment) to work by
lending to people remain unchanged as it has always been. These changes came as
a result of government policies, globalization, economic deregulation and
information, communication technology (Mohammed and Robert, 2006).

Ghana, the banking industry has not only increased in products and services,
but also increased in terms of numbers. The first bank, the Bank of British
West Africa (now StanChart Bank) was established in 1896. Vidal et al., (1999)
testified that within a short time the bank was able to acquire the business of
maintaining the Government accounts and introduced the use of cheques in
settlement of Government accounts which helped to educate the public on the
usefulness of banking. Vidal et al., (1999) further testified that due to
successful operation of the above mentioned bank, another bank, the Colonial
Bank now Barclays Bank Ghana was also establish in 1918. The largest indigenous
financial institution in the country, Ghana Commercial Bank was established in

Bank of Ghana which is the central Bank of the Republic of Ghana was formed in
1957.The Agricultural Development Bank (ADB) was set up by an Act of Parliament
(Act 286) in 1965 to promote and modernize the agricultural sector through
appropriate but profitable financial intermediation. Its original name then was
the Agricultural Credit and Co-operative Bank and the establishing Act gave its
main objective as “to provide credit facilities to agriculturists and
persons for connected purposes” ( Essel and Michael (2011)
stated that the ADB which was created to service the rural sector began to
concentrate on traditional urban-based banking activities.

1.11 Disposition:

Chapter 1:

the section, I have provided a brief introduction to my research topic. It
includes the problem background
which introduces general knowledge according to the research topic and other
researcher’s for a better understanding to the readers. I have also outlined the research questions and
purpose with the analysis of the contribution, limitation and delimitation. I
have also given a brief overview of the Ghanaian banking industry, the current
state of the banking industry and a brief history of oil discovery.

Chapter 2: Literature

Theoretical and
Empirical literature

chapter will seek to describe and motivate the research process definitions and
method of collecting and analysing data. My aim is to provide a description for
readers to have critical review and understand the methodological choice. A
brief summary of theoretical methodology will be provided and a discussion made
on the societal and ethical considerations for this study.

Theoretical framework

section involves research made and relevant theories which provide readers
deeper understanding to this thesis. I intend to review theories from three
areas: regulation, profitability and credit risk management of banking
industries. Key indicators (ROE, ROA, CAR and NPLR) and theories in the
research will be defined hence it will be feasible for readers to eliminate the
obstacle of reading.

Chapter 3: Methodology

this chapter, I will provide a practical research methodology in a statistical
manner. Discussion will be made on how data will be acquired, including the
sample, population as well as time horizon. A detailed method of data
collection will be introduced and the hypothesis will be explained according to
the research questions.


section will present the practical methodology of the work and the variables to
be used in the statistical tests. I intend to describe the population and
sample which will justify the study, the time horizon and proxies.

an introduction of the main concepts of statistical tests such as variables,
multivariate regression analysis, R square, multicollinearity and heteroscedasticity
will be made.

Chapter 4: Practical
methodology Findings and Analysis

Empirical Findings

chapter will show the result from the last chapter from two perspectives.  First, I will present all descriptive
statistics of variables and illustrate the distribution of sample banks according
to total assets. Then I will present the regression result of all statistical
tests and find the feature of these results.

Analysis and

this part, an explanation of the findings will be made based on the results
from the previous chapter. I will analyse the results from both significant and
insignificant meaning of indicator’s relationships. I will discuss the
stability and effect of the relationship established. This analysis will link
to the theoretical framework, previous research and quality criteria.

Chapter 5: Conclusion
& Recommendations for further research

chapter is the conclusion for the entire work. The first part of this chapter
is the general review and main results for the whole work. More light will be
thrown on the quality of the research from reliability and validity
perspectives. I will then present both the theoretical and practical
contribution of this study and suggestions for further research.


















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