Effect of Non-Performing Loans on the Profitability of Universal Banks: A Time Series Analysis of the Ghanaian Banking Industry

Abstract

The primary purpose of this research is to examine the effect of Non-Performing Loans (NPLs) on the profitability of universal banks in Ghana. The study is focused on the effect of non-performing loans on return on assets and return on equity of universal banks in Ghana. The study uses quarterly time series data collected by Bank of Ghana on all universal banks operating in the banking sector for the period 2007 - 2018. The multiple regression technique is used to analyse the models developed. The study reveals that non-performing loans have a significant negative effect on return on equity of universal banks in Ghana. The study also reveals a significant negative relationship between non-performing loans ratio and return on asset. The study recommends an improvement in the profitability of universal banks by reducing non-performing loans in individual banks. Universal banks must improve their loan monitoring strategies and manage their loan risk exposure to customers. The study recommends an improvement of the regulatory system of the central bank. Appropriate guidelines must be instituted by the central bank to prevent universal banks from advancing loans to customers with high credit risk.

Keywords: non-performing loans, banks profitability, time series, universal banks

DOI: 10.7176/RJFA/13-2-03

Publication date: January 31^st 2022