The effect of loan portfolio quality on the performance of banks in Ghana

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JUNE, 2015.
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The purpose of the study was to examine the effect of loan portfolio quality on the financial performance of selected universal banks in Ghana. Using dataset from the annual reports for 10 Ghanaian universal banks from 2007 to 2013, the study employed panel regression technique with the aid of STATA Statistical Software. Among the various panel data techniques, fixed effect model was identified as the best technique based on the Hausman test between fixed and random effect. Return on Equity (ROE) and Net Interest Margin (NIM) were used to proxy financial performance whiles Loan Portfolio Profitability (LPP) and Loan Loss Provision to Gross Loan Advances (LLP/GLA) were used as proxies for loan portfolio quality. Cost Income Ratio (CIR), Liquid Funds to Total Assets and Total Assets were used as control variables. The result from the analysis indicates that LLP/GLA has a negative effect on the financial performance of banks in Ghana. In addition, the findings of the study indicate that net interest margin has a positive effect on the financial performance of the selected banks. The result further established that firm size has positive effect on financial performance of banks. Thus, the larger the size of the bank, the more profitable it becomes due to economies of scale. Finally, the research findings revealed that cost-to-income ratio has a negative significant effect on the performance of universal banks in Ghana. The findings of the study therefore established that loan portfolio quality has significant effect on the financial performance of the selected Ghanaian universal banks. The study recommends that universal banks in Ghana should develop effective and efficient strategies and policies to improve the quality of their loans in order to improve their profitability. It further recommends that, efficient cost management must be adopted by Ghanaian universal banks to improve performance.
A Thesis submitted to the School of Business, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of MASTER of Business Administration (Mba) In Finance ,