NON-PERFORMING LOANS, CAPITAL ADEQUACY, LOAN LOSS PROVISION, AND BANK PROFITABILITY: A CASE OF LICENSED GHANAIAN BANKS

Abstract

This article explored the affiliation between a non-performing loan, capital adequacy ratio, loan loss provision, and bank profitability. The study was conducted on the licensed commercial banks in Ghana for the era 2014-2019. The two-step system generalized method of moments estimator was utilized to test the hypothesis developed for the study. The independent study variables altogether demonstrated a negative and immaterial association with the bank's profitability as proxied by ROA. A robustness test was conducted utilizing the Three-Stage Least-Squares Regression (3SLS); the outcome was analogous to that of the Two-Step System Generalized Method of Moments estimator. The study suggests that the Central Bank fortifies the capital requirement and keenly monitors banks' risk-taking conduct and banks undertaking due diligence procedures to moderate the shock of non-performing loans and loan loss provision in other to augment the profitability of universal banks. KEYWORDS: Non-Performing Loans, Capital Adequacy, Loan Loss Provision, Bank Profitability, GMM JEL Codes: E58, G21, G32