EFFECTS OF NON-PERFORMING LOANS ON THE PROFITABILITY OF COMMERCIAL BANKS - A CASE OF SOME BANKS ON THE GHANA STOCK EXCHANGE

ABSTRACT

The aim of this study was to establish the effect of non-performing loans on profitability of four of the major banks listed on the Ghana Stock Exchange (GSE) as this could enhance profitability in banks and consequently contribute to a healthy financial system. Panel regression analysis was employed to establish the relationship between credit risk and profitability in order to account for heterogeneity among selected banks; Agriculture Development Bank (ADB), EcoBank Ghana (EBG), Ghana Commercial Bank (GCB) and CalBank (CBG) for a data span of 2006 to 2015. By the use of Eveiws, the analysis was conducted based on Fixed effects model and Correlated Random fixed effects - Hausman test. The study proxied return on equity (ROE) for profitability -dependent variable. Non-performing loan ratio (NPLR) and capital adequacy ratio (CAR) were the two key explanatory variables. The study revealed that NPLR negatively affect profitability of banks but rate of CAR showed a significant positive relationship with profitability. Bank Size equally showed a positive relationship with profitability. The R2 explained 89 % of the variations on profitability performance of the banks. Managers of banks are to comply strictly with the rules that regulate the operations of banks in Ghana especially on the issue of capital adequacy ratio. Banks should also be cautious on the rate they expand since bank size can equally affect the fortunes of banks. The central bank must also be up and doing to ensure that banks keep- to all ratios set down by the Central Bank, the banking regulations and the various bards.