Determinants of non-performing loans of commercial banks in Ghana

Abstract

Banks in Ghana have recorded that non-performing loans from customers contribute greatly to the industry’s poor financial performance. Arguably, the influence of the cost of borrowing, and the return on savings are what contribute to increasing non-performing loans. Irrespective, subsequent to the financial sectoral clean-up there is a paucity of literature on the determinants of non-performing loans which was a main cause of the sector instability. Thus, using a descriptive research design and a quantitative approach, this study adopts a census sampling of all 23 commercial banks to identify the determinants of non-performing loans in Ghana. Using annual secondary data from 2017 to 2021, the Statistical Package for Social Sciences (SPSS) for regression analysis, the study reports a significant, negative relationship between non-performing loans and lending rates. Also, the results showed a significant correlation between interest rates and commercial banks’ financial performance. Lastly, a significant and positive relationship between banks’ non-performing loans and cost-efficiency ratio was adduced. Inherently, interest rate, lending rate, and cost-efficiency affect the magnitude of non-performing loans in Ghana. As such, the study recommends that banks should implement proficient and successful credit risk management practices. This can be achieved by establishing suitable interest rates and lending terms through the implementation of macroeconomic policies. This would ensure that loans are aligned with the borrowers’ capacity to repay them, accurate projections are made for potential loan defaults, and appropriate steps are taken to reduce the likelihood of default by setting the right interest rates and lending rates on loans through the policies.