Research Journal of Finance and Accounting www.iiste.org ISSN 22221697 (Paper) ISSN 22222847 (Online) Vol 3, No 7, 2012 6          Samuel Hymore Boahene 1* Dr. Julius Dasah 2 Samuel Kwaku Agyei 3 1. Internal Audit Officer, International Commercial Bank (Ghana) Limited, AccraGhana. Email: hymoresb@yahoo.com Tel: +233 (0) 261 690 125 2. Bank of Ghana, Accra  Ghana 3. Department of Accounting and Finance, School of Business, University of Cape Coast, Cape CoastGhana. Email: twoices2003@yahoo.co.uk Tel: +233 (0) 277 655 161 * Corresponding Author  This study attempts to reveal the relationship between credit risk and profitability of some selected banks in Ghana. A panel data from six selected commercial banks covering the fiveyear period (20052009) was analyzed within the fixed effects framework. In Ghana, the average lending/interest rate is about 30%  35% per annum. From the results credit risk (nonperforming loan rate, net chargeoff rate, and the preprovision profit as a percentage of net total loans and advances) has a positive and significant relationship with bank profitability. This indicates that banks in Ghana enjoy high profitability in spite of high credit risk, contrary to the normal view held in previous studies that credit risk indicators are negatively related to profitability. Our results can be attributed to the prohibitive lending/interest rates, fees and commission (non interest income) charged. Also, we found support for previous empirical works which depicted that bank size, bank growth and bank debt capital influence bank profitability positively and significantly. : Credit Risk, Profitability, Banks, Ghana.   Even though one of the major causes of serious banking problems continues to be ineffective credit risk management, the provision of credit remains the primary business of every bank in the World. For this reason, credit quality is considered a primary indicator of financial soundness and health of banks. Interests that are charged on loans and advances form sizeable part of banks’ assets. Default of loans and advances poses serious setbacks not only for borrowers and lenders but also to the entire economy of a country. Studies of banking crises all over the world have shown that poor loans (asset quality) are the key factor of bank failures. Stuart (2005) stressed that the spate of bad loans (nonperforming loans) was as high as 35% in Nigerian Commercial Banks between 1999 and 2009.Umoh (1994) also pointed out that increasing level of nonperforming loan rates in banks’ books, poor loan processing, undue interference in the loan granting process, inadequate or absences of loan collaterals among other things, are linked with poor and ineffective credit risk management that negatively impact on banks profitability. As a result of the likely huge and widespread of economic impact in connection with banks failure, the management of credit risk is a topic of great importance since the core activity of every bank is credit financing. According to the bank theory, there are six (6) main types of risk which are linked with credit policies of banks and these are; credit risk (risk of repayment), interest risk, portfolio risk, operating risk, credit deficiency risk and trade union risk. However, the most vital of these risks, is the credit risk and therefore, it demands special attention and treatment. This paper attempts to make a modest contribution to literature on credit risk by assessing its impact on a developing economy, Ghana. The rest of the paper is organized into four sections: review of relevant literature; methodology; discussion of empirical results; and summary and conclusions.  !   " The significant role played by banks in a developing economy like Ghana (where access to capital market is limited) cannot be overemphasized. In fact, well functioning banks are known as catalyst for economic growth whereas poorly functioning ones do not only impede economic progress but also exacerbate poverty (Barth et al, 2004). However banks are exposed to various risks such as credit, market and operational risk. Although all these risk militate against the performance of banks in several ways, Chijoriga (1997) argues that the size and the level of loss caused by credit risk as compared to others were severe to collapse a bank. 2.1 Credit Risk Management System of Banks Numerous researchers had studied reasons behind bank problems and identified several factors (Chijoriga, 1997, Santomera 1997, Brown, Bridge and Harvey, 1998). Problems in respect of credit especially, weakness in credit risk management have been identified to be the main part of the major reasons behind banking difficulties. Loans forms huge proportion of credit as they normally accounted for 10 – 15 times the equity of a bank (Kitwa,