ABSTRACT
This research investigates into the determinants of non-performing loans of listed banks in Ghana using a quantitative research design which allows for both entity and time dimension. Data for macroeconomic variables for the years 2006 to 2016 were obtained from World Development Indicators (WDI) whiles Bank specific data were collected from the annual reports of banks.
The study found banks size to be positively related to NPLs. ROA is negatively related to NPLs but it was not significant. Efficiency variable is also not significantly related to NPLs. Inflation and GDPG were significantly related to NPLs while M2GDP was not significant.
The study recommends a firm policy reform that pays attention to credit appraisal mechanisms to improve the quality of bank loan portfolios. Also, large local banks should do a thorough check on their borrowers so that loan default rate can be minimized. Management must also take some strategic decisions that can reduce the rate at which default rate rises.
CHAPTER ONE INTRODUCTION
Background
The role plays by banks in the financial system of every economy because they help to facilitate and develop country’s economy. One of the major roles bank play is the intermediation role that enable them to transfer funds from depositors to borrowers. Banks extend credit facilities to all sectors of the economy as well as government with the motive of supporting businesses and ensuring growth in the country which ultimately brings about development. Due to the important roles played by bank in economic development, there is the need to ensure its sustainability and stability in the economy. For a bank to be sustainable it must be profitable, thus optimizing the utilization of its assets to yield a profitable return. Njanike (2009) was with the view that majority of bank’s asset are loans and these loans are used in generating incomes for bank.
The banking sector continuously remain dedicated in the provision of funds through loans for financing businesses and economic activities globally (Levine, Loayza, & Beck, 2000). The lending capacity in Ghanaian banks are seen in a large volume of loans which form greater portion of banks assets. Most of these loans given out to borrowers tend not to yield a profitable return or perform well as intended by banks and hence stability becomes a challenge to banks. This is because, one major source of revenue to a bank is interest on loans and this is in line with the research done by Reed and Gill (1989) who asserted that about 85% of bank income is coming from loan interest. Many banks face challenges with issue where borrowers do not pay their loans facilities and in Ghana for instance both domestic and foreign banks face this challenge. A non- performing loan (NPL) basically refer to the amount of loan scheduled unpaid on a credit facility
granted to a borrower for a period of at least 90 days or more.
NPLs may be in a state of default or close to default. Once it is classified as non performing, there is a lower possibility that repayment will be made in full. When it happens that the borrower decides to make the loan payment on loans that have been classified as non performing, then that particular loan turns to a re-performing loan, whether full payment has been made or not by the borrower. Most banks over the years have not been able to fully reap returns associated to loans given out due to some internal and external factors in relation to banks operation. One major concern of management and regulatory authorities is loan default which means a nonpayment of loans or when loan portfolio goes bad. In 2017 February, the central bank reported that the ratio of NPLs in the banking sector rose by 36.17% and this represents an increase of 4.7 to 6.4 billion cedis within the 12 months’ period. The recent collapse of UT and Capital bank as a result of a takeover bid by GCB Bank evidenced the weak nature of loan portfolio of indigenous banks situated in Ghana. Some concerns raised as a result of the takeover were on the poor performance of banks loans given out and a high rate of loan default. Since sustainability and stability of banks are important to economic development, it is imperative to delve into and critically examine some bank specific and macroeconomic variables that could be a cause in the rise of NPLs so as to reduce the risk associated with having higher values of NPLs outstanding.
Problem Statement
The worsening situation in portfolio loan quality of banks have been seen as a major cause of many financial challenges within the banking sector, which results in financial crises witnessed previously across the world. One of the key causes of economic stagnation, non-profitability of banks and the failure of commercial and saving banks (Federal Deposit Insurance Corporations
(FDIC) Division of Research and Statistics) in some countries appear to be related to NPLs as reported by (Alhassan, Kyereboah-Coleman & Andoh, 2014).
Indeed, a number of researches have been done to assess the factors that leads to rise of NPLs among Ghanaian banks. These research works have evidenced that bank specific and macroeconomic factors are associated with NPLs. However, there have been a lot of variations in the findings of these studies with regard to the kind of relationship that exists between NPLs and its determinants. For example, whilst some researches reported an inverse nexus between NPLs and the size of bank (Dash & Kabras, 2010; Rajan & Dhal, 2003; Hu et al., 2004; Salas & Saurina, 2002) due to the fact that banks with larger size allow for more diversification opportunities. Some researchers such as Hasan and Wall (2004) and Rahja (2016) found NPLs to be positively related to high levels of loan loss reserves. Despite these differences in findings, it is concluded that bank specific factors can cause either a decrease or increase in NPLs.
Furthermore, many research studies from the developed world have also proven that country specific economic factors are also a contributing factor to the disparities in NPLs of banks (Rajan & Dhal, 2003). For instance, whilst some researchers found share prices, real GDP growth, lending rate and exchange rate, economic growth, real interest rate, net interest margins and inter-bank loans to be significantly related to NPLs ratios (see for instance: Beck et al., 2013; Fofack, 2005). Other studies evidenced insignificant results (see for example: Khemraj & Pasha, 2009). As a result of the inconsistency in the results of these previous studies, it is conjectured that NPLs determinants of banks are inconclusive.
In Ghana although a little study on the determinants of NPLs have been conducted using 25 banks
from 2005 to 2010 (see for example: Amuakwa-Mensah & Boakye-Adjei, 2015 Latif, Kyereboah- Coleman & Andoh, 2014) with findings showing that market structure of bank, loan growth, bank
size, GDP growth, real exchange rate loan growth, inflation and real effective exchange rate have significant influence on banks NPLs. This research has extended the data from 2006 to 2016 with listed banks as the focus.
Research Objectives
The broader research objective is to identify what determines NPLs of banks in Ghana. Below are the specific objectives;
- To examine bank-specific variables that causes NPLs of listed banks to rise.
- To assess macroeconomic factors that may cause NPLs to increase.
Research Questions
- What bank-specific variables are responsible for the deterioration in listed banks NPLs?
- What macroeconomic factors account for the deterioration of listed banks NPLs?
Relevance of Study
The outcome of the research outlines what determines NPLs of banks in Ghana. It is useful to the banking industry, academicians, researchers and analyst. It is also important to the regulators because it will help them to formulate the policies that will help the banks in Ghana to better assess whether a customer is capable of honoring his/her loan obligations and the creditworthiness of the customer. The findings of this study might also be used in development of regulatory standards with regards to central bank’s lending policies. The findings will also help management of banks to identify those specific variables that causes deterioration in nonperforming loans so that they can be managed properly to enhance loan performance.
