Macroeconomic Determinants of Nonperforming Loans in Ghana
Date
2020-07
Authors
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Publisher
University of Ghana
Abstract
The core activities of banks are essential for the development of a country. They support the economy through their depository and lending activities. However, there are risks associated with performing these functions, which should be managed effectively to avoid jeopardizing the advancement of the financial sector. Major economies of the world have suffered various degrees of financial sector deterioration due to the failure of banks to maintain healthy loan portfolios.
The present research was undertaken to measure the impact of changes in Ghana’s macroeconomic conditions on loan books of Ghanaian commercial banks. Quarterly time series data covering June 2004 to December 2016 were used for the study, and the Autoregressive Distributed Lag (ARDL) was carried out to establish the existence of cointegration among the variables. The results reflected the existence of long-run relationships among the variables employed in the study. Gross Domestic Product, Inflation, and Exchange Rate were found to have negative coefficients in the Nonperforming Loans equation, -0.44, -1.05 and -4.19 respectively, whilst Money Supply, Monetary Policy Rate had positive coefficients, 0.12 and 1.94 respectively. However, the estimated impact was insignificant for Gross Domestic Product as evidenced by probability value of 0.785, though significant for Money Supply, Monetary Policy Rate, Inflation and Exchange Rate evidenced by probability values of 0.000. It is recommended that the Central Bank include in their monetary policy decisions strict measures to be complied by banks to limit the extent to which lending rates are adjusted upwards in response to upward adjustments in the policy rates. Additionally, banks are to ensure proper risk underwriting procedures to minimize nonperforming loans in the short run and long run.
Description
MPhil. Economics
Keywords
Banks, Economy, Depository, Lending, Financial sector, Loan, Short run, Long run