The impact of non-performing loans on the financial performance of some selected rural banks in the Ashanti Region of Ghana

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May, 2016
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The main objective of the study was to find the impact of non-performing loans (NPL) on the financial performance of some selected rural and community banks in the Ashanti region of Ghana. Specifically the study sought to find the trends in the profitability measured by the ROA of these banks and the impact of NPL, CAR and TD on their profitability. The outcome of the study was made possible by the use of the random effect model through the hausman test on annual dataset spanning the period 2008-2012. The study considered ten different rural and community banks due to the availability and accessibility of the data including Juaben rural bank, Sekyere, Bosomtwe, Akrofoum, AtwimaMponua, Kumawuman, Nwabiagya, KomfoAnokye, Adansi and Asokore rural and community banks in the Ashanti region of Ghana. The study found non-performing loans (NPL) to be a statistically insignificant determinant of the financial performance of these rural banks despite an NPL percentage of 7% which is far above the requirement of 5% by the BOG. It implies that more loans are impaired than usual, thus having a negative effect on the profits and performance of the banks though very minute impact. However, the statistically insignificant state of NPL in explaining profitability of the banks is justified by the very scanty economic impact it has on the ROA of about 0.06%. Furthermore Time deposit to loan ration was also insignificant but the capital Adequacy ratio (CAR) was found to be significant and have a positive impact on the profitability of the rural banks. The significance of CAR is justified by the higher capital adequacy ratio of these banks of 11% above the usual 10% which keeps the bank was robust and able to control any unexpected risk they face.
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A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology in partial fulfillment for the award of a Master of Science degree (MSc) in Economics,
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