An Assessment of Bad Loans and Its Impact on the Profitability of Banks in Ghana: A Case Study of Agricultural Development Bank Limited (ADB LTD.)

Abstract

This study was conducted to assess bad loans and its impact on the profitability of banks in Ghana using Agricultural Development Bank Limited as a case study. The study is a descriptive survey which made use of semi-structured questionnaire to collect primary data from respondents. Additionally, a retrospective approach was taken to collect secondary data from the published financial reports of the bank (ADB Ltd) for a period of 5 years (2010-2014). Data collected for the study were analysed quantitatively using Microsoft software ‘‘Statistical Package for Social Sciences (SPSS) version 16.0. From the data analysed the study found an undulating trend of bad loans at an average of 6% bad loan ratio to total loan disbursed over the 5-year period understudy. Additionally, the study found customer’s business failure, high loan interest rate, inadequate loan monitoring and wrong timing of loan disbursement as the main factors accounting for bad loans at the bank. The study further observed that bad loans substantially impact negatively on the bank's interest income draining an average of one-fifth of the bank's interest income over the study period (2010-2015). Nearly the same amount of net profit earned by the bank is lost to bad loans. The study then concluded that the incidence of bad loans at the bank was great and requires effective credit management policies and procedures by the board and management of the bank. The study, therefore, recommended that board and management reduce loan interest rate, adequately resource credit officers for effective loan monitoring and ensure timely processing and disbursement of loans. It is also recommended for a future study to assess the credit management practices of the bank.   

Keywords: Loans, Bad Loans, and Bank Profitability.