Non-performing loans and profitability - A case of some listed banks on Ghana stock exchange

Abstract

The importance of loans to the banks’ profitability and for developing the economy cannot be ignored. The default of the loan repayment however, results in the banks losing profits and affecting the countries development. The aim of this research work is to examine the relationship between Non-Performing Loans and Profitability-A Case of Some Banks Listed on Ghanaian Stock Exchange. To achieve this aim, this research covered the trend of non-performing loans (NPL) and profitability of the banks and the determinants of non-performing loans, which specifically included factors related to the bank and macro-economic factors. Most importantly, how the banks’ profitability is impacted by non-performing loans were examined. To this end, the researcher selected seven listed banks found on the Ghanaian Stock Exchange. This current research employed secondary data which is in panel form covering the periods from 2006-2017. The financial report of the banks and the Bank of Ghana website served as the sources of the secondary data. Regression analysis was employed to assess the determinants and how it impacts on the banks’ profitability. The results revealed a downward trend for NPLs for the selected banks. Loan to Deposit ratio (LTD), Capital adequacy ratio (CAR), return on equity (ROE), inflation rate (INF) and gross domestic product (GDP) are significant determinants of nonperforming loan (NPL). ROA was impacted negatively and insignificantly by NPL, whilst NPL has significant and negative effect on ROE. The research concluded that for the banks to decrease their exposure to NPL there in the need to increase their ROE and ROA. The study recommended the use of moderate lending rates in order to decrease their nonperforming loan.