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IMPACT OF NON-PERFORMING LOANS ON BANK PROFITABILITY: EMPIRICAL EVIDENCE FROM COMMERCIAL BANKS IN GHANA

Abstract

This study examined the influence of non-performing loans on Ghana commercial banks’ profitability in the 2009–2018 period. The factors that explain the NPL contain very essential information for banks. The results indicate that the effect of non-performing loans on profitability is not statistically significant: operating expense efficiency and return on equity, have a positive and statistically significant relationship with profitability. The sample consisted of the banking sector (commercial banks) in the 2009–2018 period. The factors include return on assets as a function of the ratio of non-performing loans, credit risk, exchange rate, inflation, unemployment, and bank size as a control variable. The estimation was done by regression using multivariate linear regression through SPSS software. The study considered limited banking indicators as determinants of non-performing loans and was limited to the specific 2009–2018 time frame. The regression results indicate that bank profitability is strongly impacted by the increase in non-performing loans. The multivariate linear regression shows that profitability has a positive insignificant influence on non-performing loans. On the other hand, operating expense efficiency and return on equity have a positive and statistically significant relationship with profitability. Hence, when the banking sector’s expenses are higher as compared to its revenue, the banks’ overall profit would be low, impacting non-performing loans of the banks. The operating expenses should therefore be maintained as low as possible.

Keywords:

non-performing loans, credit risk, commercial banks

Details

Issue
Vol. 2 No. 33 (2021)
Section
Research article
Published
2022-05-13
DOI:
https://doi.org/10.19253/reme.2021.02.002
Licencja:
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

This is an Open Access journal, all articles are distributed under the terms of the Creative Commons (CC BY 4.0) License (http://creativecommons.org/licenses/by-nc-sa/4.0/). You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits. 

Authors

Dramani Angsoyiri

Kwame Nkrumah University of Science and Technology

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