Abstract
The primary purpose of this research is to examine the effect of Non-Performing Loans (NPLs) on the profitability of universal banks in Ghana. The study is focused on the effect of non-performing loans on return on assets and return on equity of universal banks in Ghana. The study uses quarterly time series data collected by Bank of Ghana on all universal banks operating in the banking sector for the period 2007 - 2018. The multiple regression technique is used to analyse the models developed. The study reveals that non-performing loans have a significant negative effect on return on equity of universal banks in Ghana. The study also reveals a significant negative relationship between non-performing loans ratio and return on asset. The study recommends an improvement in the profitability of universal banks by reducing non-performing loans in individual banks. Universal banks must improve their loan monitoring strategies and manage their loan risk exposure to customers. The study recommends an improvement of the regulatory system of the central bank. Appropriate guidelines must be instituted by the central bank to prevent universal banks from advancing loans to customers with high credit risk. Keywords: non-performing loans, banks profitability, time series, universal banks DOI: 10.7176/RJFA/13-2-03 Publication date: January 31 st 2022
Highlights
Banks as part of the financial system enables lenders, investors, and borrowers to exchange funds through accepting deposits and granting loans to customers
Bank of Ghana after an Asset Quality Review (AQR) in 2016 reveals a severe deterioration in the asset quality of universal banks in the sector which has resulted in toxic balance sheets (BoG, 2018)
The study finds a negative relationship between non-performing loan ratio and return on asset of universal banks
Summary
Banks as part of the financial system enables lenders, investors, and borrowers to exchange funds through accepting deposits and granting loans to customers. This crucial role banks play improves the economic conditions of nations in different ways. The main operation of the bank is lending and the bulk of the bank’s assets are cumulated in loans (Kipyego & Wandera, 2013; Richard, 2016). According to Eston, Willy and Agnes (2016), the core revenue generating function of banks is lending it exposes the banks to default risk on the part of clients leading to non-performing loans. The phenomenon has gained significant attention over the last decades as a result of the challenges it poses to banks (Kipyego & Wandera, 2013; Joseph et al, 2012)
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