The Effect Of Non-Performing Loans On The Financial Performance Of Commercial Banks In Ghana

Abstract

Non-performing loans (NPLs) are considered financial pollution as a result of their high risk and effect on the profitability and liquidity of banks. The study examines the effect of non-performing loans on the financial performance of commercial banks in Ghana. The study is guided by the following research objectives: examining the level of NPLs of commercial banks in Ghana, examining the relationship between loan-to-deposit ratio and profitability and determining the relationship between NPLs and the financial performance of selected commercial banks. The data for this study was obtained from financial institutions from 2010 to 2021. The NPL rate shows some volatility but generally decreases from 2010 to 2014. It reached its lowest point in 2014 at 11.3%. However, from 2015 to 2017, there was a notable increase in the NPL rate, with a peak of 21.59% in 2017. The findings show that non-performing loans have a positive and significant relationship with ROA. The finding indicates a positive and significant relationship between loan deposit ratios. The study recommends the need to implement strong risk management practices to identify and mitigate potential credit risks proactively. This includes monitoring and early detection of deteriorating loan accounts, regular portfolio reviews, and stress testing. By identifying high-risk loans early, banks can take timely actions to mitigate potential losses and prevent loans from becoming non-performing. Also, management has to invest in training and development programs for loan officers and credit staff. Ensure they have the necessary skills and knowledge to accurately assess creditworthiness, detect warning signs, and effectively handle loan monitoring and collections.