Improving Loan Repayment in Ghana: Does Financial Literacy Matter?

Loan defaults continue to be a major challenge that confronts financial

institutions in developing countries and this impedes their potential role in sustainable

development. Given the enormity of loan defaults, policymakers have

devoted much attention to the phenomenon by implementing strategies and policies

aimed at improving loan repayment to avert the situation. To complement the

effort of policymakers, several empirical studies have also been conducted regarding

loan repayment determinants; but what is worrying is that none of these studies

emphasises the role of financial literacy, especially in the Ghanaian context. This

study therefore examines the potential effect of financial literacy on loan repayment.

We rely on primary data and employ the binary probit regression for the

analysis. The results reveal a positive and significant relationship between financial

literacy and loan repayment. This means that enhancing financial literacy improves

loan repayment significantly which will in turn ensure sustainability of the financial

institutions. The level of education of borrowers is also revealed to play a key role in

loan repayment. Given the findings, the study sheds new lights on how loan

repayment can be improved to ensure a vibrant banking sector.