An Assessment of the Effects of Economic Factors on Non-Performing Loans: A Case of Selected Universal Banks in Ghana

Abstract

The main objective of the study was to assess the effect of economic factors (inflation, lending rate, budget deficit, exchange rate, GDP growth, credit growth, savings) on non- performing loans of selected universal banks in Ghana. Its specific objectives were to identify why firms in the banking industry are not able to recover debts; to investigate the influence of economic factors on NPLs of selected universal banks in Ghana: to examine the relationship between bank related factors. The empirical results revealed that non-performing loans was statistically significant at 1% (0.01) including gross domestic product, lending rate, exchange rate, savings, budget deficit and domestic credit growth. The result of the correlation analysis showed that lending rate has a significant influence on savings. The result indicated that there is a significant relationship between exchange rate and savings. In addition, the correlation analysis shows that exchange rate has a significant influence on budget deficit in the country. The result further indicates that savings has a positive and significant relationship on domestic credit growth to private. This study employed regression model to examine the influence of one variable on another variable. The regression analysis examined the relationship between non-performing loans and lending rate. The result shows that there is a positive and significant relationship between non-performing loans and lending rate. The implication is that, most loans will be defaulted on if the lending rate is very high and vice versa. The relationship between inflation and non-performing loan also shows that inflation rate has a positive significant effect on non-performing loan. High inflation rate results in an increase the standard of living in the country and causes a reduction in peoples’ spending power. This affects the economic growth of the country and can result in non-performing loans. The result further indicated that there is significant relationship between credit growth and non-performing loans.