Effect of non-performing loans on profitability: a case study of selected rural banks in ashanti region of ghana
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Date
2023
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KNUST
Abstract
This study examines the influence of non-performing loans (NPLs) on the financial performance of rural banks, with a specific emphasis on the Ashanti Region in Ghana. The study takes into account the recent economic development in the country. The population of the study consisted of all 29 rural banks that were in existence as of December 30, 2022. The data are from audited annual reports spanning over nine years period, 2013 - 2021. The study employs the Panel Least Squares (PLS) technique as an analytical method to evaluate the impact of non-performing loans on the profitability of rural banks. The research found that internal factors such as the financing-to-deposit ratio are statistically significant in determining non-performing loans. However, the capital adequacy ratio, bank size, operating expenses ratio, and bank profitability are not significant determinants of rural banks non-performing loans in Ghana. The research also finds that the nonperforming loan ratio has an adverse effect on rural banks return on assets, but it is statistically insignificant. The results further reveal that the moderating role of economic growth on NPLs is established to have a positive effect on banks' return on assets. Based on these results, it is recommended that rural banks in Ghana should focus on strengthening their risk management practices, particularly concerning the financing to deposit ratio. Also, rural banks should focus on diversifying their loan portfolios to mitigate the potential negative impacts of NPLs on profitability. A diverse portfolio can help distribute risks and ensure that the adverse effects of NPLs are offset by other income-generating assets. Rural banks should also recognize the importance of economic growth as a moderating factor in their profitability. In periods of economic expansion, they should be cautious not to become overly aggressive in lending, leading to a surge in NPLs when the economic cycle turns.
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A thesis presented to the department of accounting and finance, kwame nkrumah university of science and technology in partial fulfilment of the requirement for the award of master of science (accounting and finance)