Bank Credit Risk and Profitability: The Role of Intellectual Capital Efficiency in an Emerging Economy in Africa

While it is empirically evident that credit risk reduces profitability, it is empirically unclear how intellectual capital efficiency (ICE) mitigates the effect of credit risk on bank profitability. Hence, this study explores whether ICE can moderate the relationship between credit risk and bank profitability. Data was collected from the audited annual reports of 23 commercial banks in Ghana, and two-step generalized method of moments (GMM) was used for regression analysis. The findings reveal that while credit risk negatively affects bank profitability, dimensions of ICE namely human capital and structural capital efficiency positively influence bank profitability. Additionally, the study revealed that aggregated ICE (i.e., both value-added intellectual coefficient (VAIC) and modified value-added intellectual coefficient (MVAIC) and its individual components (i.e., human, financial, and relational capital efficiencies) can reduce the detrimental impact of credit risk on bank profitability, suggesting that intellectual capital efficiency plays a key role in managing credit risk to enhance bank profitability. This suggests that regulators and bank managers can rely on intellectual capital efficiency as a credit risk mitigation tool to promote banking profitability, especially in emerging markets. Hence, banks must invest in developing and harnessing intellectual capitals as they synergistically reduce credit risk to promote banking profitability.