The Influence of CAMEL Ratios on Credit Rating Evaluation in Tanzanian Commercial Banks: An Empirical Analysis (original) (raw)
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USING CAMEL RATING SYSTEM TO ASSESS THE PERFORMANCE OF LOCAL AND FOREIGN BANKS IN GHANA
Measurement of Bank’s performance has become increasingly important in recent times due to significant loan losses and the increasing effects of global financial crises. The need to have stable and robust financial system that will meet the financial needs of the economy is of prime interest to both investors and policy makers. The increasing liberalization of economies has given way for multinational companies including financial institutions to operate in foreign lands. They do this either by acquiring existing banks or opening foreign branches. Various Authors and stakeholders however hold different view as to the importance of foreign Banks entry. Whiles one group is the opinion that, the presence of foreign banks is detrimental to local banks, others are also of the opinion that, foreign banks will help improve the general banking systems in the developing through the offering of cutting edge products and services. This results in intense competition among the banks that compete for the bankable populace. This therefore calls for the need to analyze and compare the performance of these banks, and what actually underpins such performance. Various performance methods have been used to analyze Banks performance in worldwide. CAMEL rating system has become important means of measuring the overall soundness and safety of banks in the light of global financial crisis and bank failures. The system analyzes capital adequacy, asset quality, management quality, earnings, and liquidity of Banks incorporating relevant financial ratios. This study investigated the performance of local and foreign Banks using the CAMEL rating system with data from the bank’s annual report. For the purpose of generalization, twelve banks made of six foreign and six local banks were selected using simple random sampling method. The banks were selected based on their years of operation, market share, bank size, and nature of business. The performance of the banks were then analyzed using the CAMEL rating system with ROA, and ROE as dependent variables and selected accounting ratios as independent variables. A multiple regression analysis was employed to draw inference for the results of the study and also to establish therelationship between the variables. The results of this study shows that foreign banks perform better on capital adequacy,asset quality, and management efficiency. The local banks on the other hand performed better than their foreign counterparts on the earnings ability and are also more liquid than their foreign counterparts. A model developed for this study revealed that not all the CAMEL variables impacted significantly on the performance of commercial banks in Ghana. The results from the study show that there is a positive relationship between ROA, OPTR, and NIM. Also a similar relationship exist between OPTR, NPLTAM and ROE of commercial banks in Ghana, however CAR and ROE are negatively correlated.
Credit Risk Management and Performance of Banks in Ghana: the ‘Camels’ Rating Model Approach
International Journal of Business and Management Invention (IJBMI), 2019
The primary aim of the study was to assess the performance of Ghanaian banks using the CAMELS rating model. The model is an acronym for capital adequacy, assets quality, management efficiency, earning, liquidity, and sensitivity. The rating is based on ratio analysis of the financial statements together with an onsite examination by the regulatory authority. A total of 10 banks were selected for a seven-year period. A standard multiple regression was employed in the study to analyze the effect the various components of the CAMELS model have on the performance of banks in Ghana. The findings from the analysis of the computed ratios from the financial statements of the selected banks indicated that Earning stood out as the highly significant factor that affects the performance of banks in Ghana. A percentage change in earning will result in a whopping 82.5% increment in bank performance measured by ROE. Capital adequacy, assets quality, management efficiency, and liquidity were equally found to be significantly affecting the performance of Ghanaian banks. Sensitivity, on the other hand, was found to be the only insignificant factor of the CAMELS model that affects the performance of banks in Ghana.
THE RELATIONSHIP BETWEEN FINANCIAL PERFORMANCE AND CAMEL RATING OF COMMERCIAL BANKS IN ETHIOPIA
isara solutions, 2019
Banking sector is the key element in the financial sector and determines development of any country’s economic success. This paper aimed to analyse the financial performance of Ethiopian commercial banks by using CAMEL framework and to rank the banks according to their performance. Census sampling method were used and 15 banks were considered for the study. For measuring performance of the banks data was collected from National Bank of Ethiopia for the period of 2012 to 2017 and ROA and ROE are considered as dependent variables and, Capital adequacy, Asset quality, Management efficiency, Earning ratio and Liquidity ratio were considered as independent variables. Descriptive analysis were conducted by using ratio analysis and econometric analysis were conducted by constructing regression model by using e-views 9 software. The regression result for ROA is explained by independent variables is 62.11 percent, and ROE is explained by independent variables is 82 percent. Capital adequacy, asset quality, management efficiency are significant variables whereas the earning ability and the liquidity position ratios are insignificant in both models.
Camel Rating System and Financial Performance of Rwandan Commercial Banks
Financial institutions hugely contribute to Rwandan economic development. However, different studies showed that they expose to risks that limit them from attaining their objectives. The banking sector's liquidity, efficiency, and profitability in Rwanda have weakened in the past four years-2015 to 2018 and its performance indicators collapsed. This study intended to examine the effect of the CAMEL rating model on the financial performance of commercial banks in Rwanda for the period ranging from 2014 to 2018. It was underpinned by four theories namely; cash management theory, agency theory, liability management theory, and market power theory. This paper covered11 commercial banks operating in Rwanda and adopted secondary data published by the Central Bank of Rwanda and the official websites of mentioned the 11 banks.Descriptive research design and panel regression were employed to evaluate the correlation between the predictor and outcome variables. The findings concluded that capital adequacy and asset quality are positively correlated to determine the value of financial performance. Liquidity management, management efficiency, and earnings management have a negative correlation. However, capital adequacy, asset quality, management efficiency are statistically significant to predict the ROA at a 5% level. This paper recommends that both the banks' management and financial regulatory body should work together to formulate policies that would help improving banking sector efficiency without violating the right of their clients. When it comes to the evaluation of financial institutions, all the CAMEL model factors should be considered.
Financial Performance Analysis of Private Commercial Banks of Ethiopia: Camel Ratings
International journal of scientific and research publications, 2017
This study sought to analyze the overall performance of private commercial banks in Ethiopia using CAMEL rating approach. In this study, the financial performance of six sampled private banks was measured using the audited financial reports of 10 years period (2007-2016). Novel feature of this study was the inclusion of more explanatory variables, which were not used by the average researchers i.e. fixed asset to total assets, net profit per employee, total deposit per no. branches, total loan per no. of branches, measurements.
Performance Evaluation of The Sierra Leone Banking Sector Using Camel Rating Framework
Journal of Applied Finance & Banking, 2023
This study aims to evaluate the performance of the Sierra Leone banking sector using Camel rating framework. The study adopts a descriptive research design in which the Least Square regression method is used. The study covers the period from 2012 to 2021 inclusive. The variables considered for this study include capital adequacy, asset quality, earnings ability of the banks and liquidity management within the banking sector. From the findings of the study; all the variables used have positive relationships or coefficients except Asset Quality and Liquidity Management, which has a negative coefficient of-0.007021 and-0.03513 but these relationships are insignificant to banks' performance in Sierra Leone. The findings from the study also indicate that Capital Adequacy and Earning Ability are having positive and significant effect on bank`s performance in Sierra Leone.
International Journal of Economics and Finance, 2017
The Banking sector in Bangladesh is one of the fast growing sectors and considered as an integral part of the economy. Hence, monitoring, supervision and continuous performance evaluation of the banking sector is compulsory to ensure the financial stability of the economy since the banking sector is becoming more complex than before. The present study is an attempt to evaluate and compare the performance of the banking sector in Bangladesh. One of the most effective supervisory techniques, CAMELS rating system (basically a quantitative technique) has been used to rank the banks based on their performances. In this study, seventeen conventional private commercial banks have been chosen as samples to meet the purpose of the study. Data for analysis has been collected from the banks’ annual reports for the period (2010-2016). The result from this comparative analysis shows that Eastern Bank has stood at the top position among all the selected banks based on CAMEL rating system. However...
Credit Scoring in Ghana: State of Utilization, Challenges, Benefits and Prospects
TJPRC, 2013
Financing businesses is a major challenging task for financial institutions in developing countries. Business enterprises continue to make significant impacts on the economies of many countries. The purpose of the study was to examine methods of credit scoring and risk assessment in the banking sector of Ghana. Interviews were used in a survey to solicit information from bankers randomly selected from the 27 banks in Ghana. Findings of the study indicate that credit scoring and in-house built risk grading system are the most prevalent types of SME risk assessment. Similarly, findings reveal credit scoring as the most prevalent technique used in SMEs risk rating. The importance of risk rating was examined in the study, and most respondents agreed that risk rating serves as an aid in conjunction with other lending considerations. Findings further identified the fact that banks are interested in deploying credit scoring as a lending tool in future. It is recommended that banks employ training methods to equip employees to become expert credit risk assessors. The sector of banking in Ghana must also collaborate with the government to establish a credit bureau to which reference can be made in risk assessment.
International Journal of Financial Research, 2022
The purpose of this article is to study empirically the bank credit risk rating (BCRR) process across country groups (developed countries "DdC" against developing countries "DgC") after the 2012 revision of their methodologies as a response to the global and European crisis. We use the S&P"s ratings of 231 banks from 36 EMENA countries which of 18 are developed. We made this comparison based on the CAMELS model with a proposed "S" to BCRR. We perform "ordered logit" regression for the rating classes and complete our analysis by "linear multiple" regression for the rating grades. The results show that the entire rating process, including the weight of components, the important factors and the relevant variables, of DdC banks differs partly from this of DgC. The intrinsic credit quality component of the rating has more weight for the allocation of rating grades of DdC banks and the environment supports component has more weight for those of DgC. Some important factors represented by relevant variables are specific to each bank group and others are the same for both groups, but with a difference in the influence on the rating assigned. Sovereign rating has become more relevant to define bank groups than the country level of development.
Benchmarking and Rating of Private Commercial Banks of Bangladesh Through CAMELS Components
Bangladesh Journal of Multidisciplinary Scientific Research; Vol. 2, No. 2; 2020 ISSN 2687-850X E-ISSN 2687-8518 Published by CRIBFB, USA, 2020
The banking sector of Bangladesh is becoming more complicated than before. Ensuring the financial stability of the economy, monitoring, supervision, and continuous performance evaluation of the banking sector are compulsory. The present study, therefore, is an attempt to evaluate and compare the performance of our banks. One of the most effective supervisory techniques, CAMELS rating system has been used to benchmark and rate the banks based on their performance. In this study, 21 private commercial banks (PCBs) have been chosen as samples to meet the purpose of the study. Data for analysis has been collected from the banks" annual reports for the period of 2008 to 2018. The result shows that none of the banks could achieve a 'strong' position, and only SEBL was able to secure a "satisfactory" mark. Unfortunately, AB bank was rated "marginal" in the composite rating, which is the lowest rating among the sample banks. Hence, AB bank needs to develop reform and follow-up programs as soon as possible to avoid financial failure.