Determinants of Non-Performing Loans in the Banking Sector of Ghana Between 1998 and 2013

Abstract

This paper studied determinants of non-performing loans in Ghana, using historical time series annual data covering the period of 1998-2013. Using Seemingly Unrelated Regression model and Principal Component Analysis, the study found money supply, financial development and macroeconomics variables to be significant determinants of non-performing loans, except real income. The study recommends policies targeted at influencing non-performing loans. Contribution/ Originality:This study is one of very few studies which have investigated the determinants of non-performing loans in Ghana using Seemingly Unrelated Regression model and Principal Component Analysis. INTRODUCTIONThe banking sector plays an important role in the development of an economy. The stability of the sector is therefore very vital since it determines the step for development of an economy. Basically, extension of credit facilities is one of the major activities of all banking institutions. This is usually confirmed by the greater proportion of loans representation in the overall operating assets of banking institutions. An efficient financial intermediation requires a stable banking system to channel surplus funds into savings for investments to promote rapid economic growth. High and rising levels of non-performing loans (NPL's) in many countries continue to a large extent exert strong pressure on bank's balance sheet with possible adverse effect on bank's lending operations.According to Nkusu (2011) a non-performing loan is any loan in which interest and principal payments are more than 90 days overdue; or more than 90 days' worth of interest has been re-financed. The sustainability of banks is largely threatens by loan default. These bad loans become cost to banks in terms of their implications on the quality of their assets portfolio and profitability. This is in line with the banking regulation which requires the banks to make provisions for non-performing loans and charge for bad loans that reduce their income as well as the loan portfolio. According to World Bank Group (2014) non-performing loans as proportion of total loans is 24.6 %

Relationship between Macroeconomic Variables and their Impact on Non-Performing Loans in Jordanian Banks

“…Some studies have also focused on identifying the economic factors affecting non-performing loans, such as Khemraj and Pasha (2009); Espinoza and Prasad (2010); Adebola et al (2011); Hsing (2014); Dimitrios et al (2016); Kumarasinghe (2017); Malimi (2017); Adusei (2018). Khemraj and Pasha (2009) identified the determinants of nonperforming loans in Ghana's banking sector.…”

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