ABSTRACT

The case of non-performing loans has gained increased attention in recent years because of its adverse effects on banking and non-banking financial institutions and the country’s economy as a whole. Despite the various interventions implemented by the central bank to reduce this phenomenon, non-performing loans continue to grow in the books of financial institutions. The study therefore, seeks to examine credit officers’ perspectives on the causes of non-performing loans in commercial banks in Ghana.

This study is an interpretative qualitative research which adopts a case study approach. The instruments used were interviews and publicly available documents. The data is analyzed using thematic analysis.

The study finds that commercial banks subject loan applicants to stringent loan requirement processes to ensure that loans are given to borrowers with low default risk who have the ability to pay regularly. The study also reveals that good credit history of the loan applicant, cash flows projections and collateral security in the form of assets or a guarantor are the main factors considered in the loan acquisition process. The study also finds that several factors ranging from business and industry challenges, economic conditions, legal amendments and new regulations, inadequate collateral security are the main causes of non-performing loans in commercial banks. The study recommends that commercial banks should ensure due diligence and effective monitoring of loans granted to loan applicants. The banks should also communicate constantly with loan applicants and adjust the payment terms if they are going through any business crises that threatens their cash flows. Again, there should be proper credit referencing bureau that allows banks to share customers’ credit history among themselves.

CHAPTER ONE INTRODUCTION

            Introduction

This study examines credit officers’ perspectives on the causes of non-performing loans in commercial banks in Ghana. The chapter introduces the entire study. It provides a general background of the study. It further discusses the problem statement, research objectives, research questions, the methodology used for the study and the organization of the study.

            Background of the study

Commercial banks are the dominant financial institutions in most emerging economies, particularly, Ghana. Greuning and Bratanovic (2003) argue that commercial banks play a critical role to emerging economies where most borrowers have no access to capital markets. According to Khan and Senhadji (2001), well-functioning commercial banks accelerate economic growth while poorly functioning commercial banks are an impediment to economic progress and aggravate poverty. The contribution of financial institutions, particularly, commercial banks to economic growth happens through the process of taking deposit from surplus units and lending to deficit units who have business opportunities to explore but lack financial resources to do so.

The traditional role of a bank is lending and loans make up the majority of the total assets of commercial banks (Njanike, 2009). According to the research by Havrilesky and Boorman (1994), interest on loans contributes significant portion (about 85%) of all incomes generated by commercial banks. Lending is a herculean task for banks because if not assessed cautiously, it

will lead to high risk of default by borrowers leading to more non-performing loans in the books of the banks (Chhimpa, 2002). Past studies including (Bonilla, 2012 and Khemraj & Pasha, 2009) found that accumulated bad loans play a major role in bank failures. The 2008 global financial crisis and the subsequent recession in  many economies has contributed to large accumulated bad loans in the books of commercial banks due to increased households’ and firms’ defaults, causing significant losses to the banks. Ultimately, unrecoverable amounts of loans are written off as non-performing loan (Mallick et al. 2007). Bank of Ghana classifies loan as Non Performing when it is overdue for 90 days or more.

Greenidge and Grosvenor (2010) find that the magnitude of non-performing loans is a key element in the initiation and progression of financial and banking crises. Guy (2011) agrees adding that non-performing loans have been widely used as a measure of asset quality among lending institutions and are often associated with failures and financial crises in both the developed and developing world. Reinhart and Rogoff (2010) as cited in Louzis et al (2011) point out that non- performing loans can be used to mark the onset of a banking crisis. Despite ongoing efforts to control bank lending activities, non-performing loans continue to rise which is a major concern for both international and local regulators (Boudriga et al, 2009).

The immediate consequences of non-performing loans are the reduction in profitability through disposal costs like provisions for credit losses and direct write-offs for bad debts and shrinking of loanable funds to the private sector. It is therefore imperative to investigate the causes of this phenomenon. It is against this background that this study seeks to examine credit officers’ perspectives on the causes of non-performing loans in commercial banks in Ghana so that specific measures can be put in place to reduce the rate of NPLs in the books of banks.

            Problem statement

Several studies including (Amuakwa-Mensah, Marbuah, & Marbuah, 2017; (Amuakwa-Mensah, 2015) Tomak, 2013; Warue, 2013; Ahmad and Bashir, 2013; Shingjerji, 2013; Warue, 2012; Bofondi and Ropele ; 2011 ) have identified several factors as the determinants of non-performing loans but these majority of these studies used general surveyed questions and perceptions from bank practitioners to study this phenomenon. However, to the best of my knowledge, no studies have used qualitative approach. It is therefore imperative to engage specific bank workers, particularly, credit officers whose actions and inactions have the potential of causing non- performing loans in the commercial banks.

Again, despite moves by the central bank to sanitize the banking sector, the industry’s asset quality remains a source of concern as Non-Performing Loans (NPLs) ratio remain as high as 18% (Bank’s Sector Report, 2019). According to the Bank of Ghana report (2018), the stock of NPLs increased from GHC 7.1billion as at April 2017 to GHC8.63billion in April 2018. The continuous increase in NPLs in the books of commercial banks is a worrying situation as it has the potential of slowing economic growth. It is therefore crucial to examine credit officers’ perspectives on the causes of non-performing loans in commercial banks in Ghana.