The impact of internal and external factors of credit risk on businesses: An empirical study of Chinese commercial banks

• Author: Tan ZhongMing,Rahmatu Chibsah,Angelina K. Twum,Emmanuel C. Ayamba,Andrew O. Agyemang
• DOI: http://doi.org/10.1002/jcaf.22482
• Date: 01 January 2021
• Published date: 01 January 2021

J Corp Acct Fin. 2021;32:115–128. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals, Inc. 115

BLIND PEER REVIEW

The impact of internal and external factors of credit risk on

businesses: An empirical study of Chinese commercial

banks

Angelina K. Twum | Tan ZhongMing | Andrew O. Agyemang |

Emmanuel C. Ayamba | Rahmatu Chibsah

School of Finance & Economics, Jiangsu

University, Zhenjiang City, China

Correspondence

Angelina K. Twum, Jiangsu University,

301 Xuefu Road, Zhenjiang 212013,

Jiangsu Province, China.

Email: 5102191206@stmail.ujs.edu.cn

Abstract

Credit risk has great impact on the banks' profitability as large chunk of banks'

revenue and interest income comes from loans. Factors that affects credit risk

can be classified into microeconomic and macroeconomic factors. These fac-

tors have an impact on credit risk levels. Using secondary data from 2005 to

2018 for listed commercial banks on the two stock exchanges in China main-

land, the study explored the effect of both internal and external factors that

influences credit risk in the banking industry. A positive relationship was

found between bank solvency and credit risk. Similarly, the study revealed a

positive correlation between credit risk and interest rate. On the contrary,

operation efficiency and gross domestic product growth rate revealed an

inverse relationship with credit risk. The findings will add up to existing litera-

ture and guide policy-makers in implementing measures to control the

influencing factors of credit risk in the banking industry.

KEYWORDS

China, commercial banks, credit risk, influencing factors

1|INTRODUCTION

Credit risk has great impact on the banks' profitability as

large chunk of banks' revenue and interest income comes

from the loans. Thus, the long run success of banks

depends on their effectiveness in management of differ-

ent types of risks associated with their activities. Hence,

credit risk management is the core to any banking service

and the ability to gauge credit risk and take appropriate

action is the key to success of banking (Ogboi &

Unuafe, 2013).

According to a recent report by the World Bank, the

loans from Chinese commercial banks attributed to the

private sector as a percentage of GDP, households and

enterprises was 126.579% in 2010 but recorded a sharp

increment of 161.138% in 2018. These factors among

others can be seen as internal factors that may trigger the

rate of credit risk in commercial banks. The credit risk

management of China's commercial banks is subjected to

many pressures from the external environment thus, eco-

nomic and financial environment (Yao et al., 2008). Since

2008, China's credit scale has been expanding, and the

real estate industry, city investment companies, and other

industries related to infrastructure construction and over-

capacity have become the biggest beneficiaries

(He, 2016).

As China continues to deepen its economic reforms

and is increasingly improving its industrial policy adjust-

ments, it has inevitably pose new challenges to the over-

all asset quality of the banking industry (Suzuki &

Received: 18 September 2020 Revised: 18 November 2020 Accepted: 19 November 2020

DOI: 10.1002/jcaf.22482

J Corp Acct Fin. 2020;1–14. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals LLC 1