Abstract
The main purpose of the study was to examine the relationship among non-performing loans, Commercial Banks’ lending rate and financial performance of Commercial Banks in Ghana. The time series design was used along with the quantitative research approach. Secondary data on the selected variable and some control variables were accessed from the economic and monetary data base of the Central Bank of Ghana from 2006 to 2019 and used for the analysis. Both theoretical and empirical literature was reviewed to create a research gap for the study. Time series properties of the variables such stationarity and descriptive were done to assess the stability of the time series variables. The Augmented Dickey-Fuller unit-root test was used for the stationarity test since the time series plots indicated no possibility of serious structural breaks. Return on assets before tax, return on equity after tax, Commercial Banks interest rate, inflation and inter-banks interest rate were found to be significant determinants of Non-performing loans in the financial sector of Ghana. It was concluded that simultaneous relationships exist among the level of non-performing loans, Commercial Banks’ lending rate and financial performance of Banks in Ghana, hence anyone of them could serve as a lead variable or policy variable in ensuring a stable financial system in Ghana. It was recommended that the management of commercial banks must exploit other avenues of generating income such as direct project financing among others and reduce reliance on interest payment through increase in interest charges.
Highlights
Financial performance is at the heart of every organization of which Commercial Banks are not exception
The development of a well-functioning financial system leads to the emergence of financial intermediaries such as banks to mob up excess liquidity from net lenders and makes it available to net borrowers at a fee called the lending rate [3]
The monetary policy rate is determined by the Monetary Policy Committee (MPC) as and when the need arises as benchmark interest rate in the financial sector of Ghana
Summary
Financial performance is at the heart of every organization of which Commercial Banks are not exception. Commercial Banks occupy a central role in the inter-temporal choice market by linking net lenders with net borrowers. The loanable funds market was predominantly informal before the development of a well-organized and functional financial system and required the physical meeting of the lender and the borrower [1, 2]. The main aim of financial intermediation by Commercial Banks is to transfer funds from the net lenders to the net borrower for investment with the view to engendering economic growth and development. The Commercial Bank rewards the net lenders with an interest on their deposits while it charges the net borrower an interest on borrowing. The interest rate on borrowing (lending rate) is a mark-up on the interest rate on deposit and which explains the disparity between lending and borrowing rates
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