The effect of bad loans on the profitability and lending potential of rural banks. A case study of some selected rural banks in the Ashanti Region

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August 2015
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Bad loans have been identified as one of the major factors affecting the profitability and survival of rural and community banks in Ghana. Most rural banks are unable to remain competitive in the turbulent financial sector/industry due to high default rate. Against this backdrop the study examined the effect of NPLs (bad loans) on the profitability and lending potential of selected rural banks in the Ashanti Region of Ghana. Secondary data spanning the period of six years (2008-2013) was sourced from the annual report of the selected banks. In Addition, primary data was collected from the selected banks through questionnaires to help examine the main causes of bad loans in the rural banking industry. Descriptive statistics, Pearson‟s Moment Correlation Analysis and Regression analysis were conducted to examine trends and relationships. The result found that the selected banks are witnessing steady rise in their Non-Performing Loan Ratios (NPL), which raises concern about their effectiveness in managing credit risk. The study further found that NPL (bad loans) has significant negative effect on the lending potential of the selected banks. Also, it was discovered that though NPL has a negative effect on the banks‟ profitability, the effect is not significant. The study further discovered that the main causes of bad loans within the selected banks include laxity in credit monitoring, poor appraisal system and lack of effective credit management policy to govern the disbursement of funds to borrowers. The study recommends that rural banks must take steps to reduce their bad loans since it has effect on their lending abilities and financial performance. Also, effort must be made by these banks to empower their credit staff with the necessary skills and tools to enhance credit administration within the bank.
A Thesis submitted to the Department of Accounting and Finance, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Master of Business Administration (Finance Option)