Policy Rate and Non-Performing Loans in Ghana

Abstract

The study examined policy rate and non-Performing loans in Ghana. The study employed ordinary least square, Johansen cointegration method, Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) to achieve the objectives of the study. The findings revealed that total debt service, annual broad money supply, and total trade as a percentage of GDP affect policy rate in the country. Further, the study revealed that policy rate has positive and significant effect on NPLs. Again, the lag levels of non-performing loan negatively affect the present level of banks non-performing loan. Furthermore, the study found that the deviations from the equilibrium of the NPLs quickly adjust with an approximately 1-year period. Again, in the short-run, the lags of the dependent variable-non-performing loan positively affect the NPLs in present levels. However, in the long-run, the relationship is negative although the results are not statistically significant. Besides the study recommends that Bank of Ghana must strengthen monetary policy regulation, particularly the policy rate to ensure that commercial banks lend with lower interest rate. Again, the government of Ghana must implement export-based policies to increase the percentage of trade earnings