Nonperforming loans and bank profitability: evidence from an emerging market

Abstract

PurposeThe purpose of this paper is to investigate the bank-specific and macroeconomic determinants of nonperforming loans (NPLs) as well as the impact of NPLs on bank profitability.Design/methodology/approachUsing a sample of 22 Ghanaian banks over the period 2005-2010, the study employs a fixed effect panel model in estimating three different empirical models.FindingsThe study finds new evidence of bank-specific factors as well as macroeconomic factors determining NPLs. Inflation and industry concentration are not significant in determining NPLs, although both are positively related to NPLs.Practical implicationsThe findings of this study have important implications for policy makers and bank managers.Originality/valueThe paper offers significant value in shaping and improving the banking sector of emerging markets.