Effects of Non-Performing Loans on the Financial Performance of Selected Banks on the Ghana Stock Exchange

Abstract

The performance of loans plays a significant role in enhancing the financial performance of banks and maximizing shareholders’ value. Hence, the study explores the effects of Non-Performing Loans (NPLs) on the Financial Performance of Selected Banks on the Ghana Stock Exchange. To this end, the researcher employed a quantitative research approach with a descriptive research design where the impact of NPLs on financial performance was examined through regression analysis and fixed effect, random effect, as well as Hausman Test with STATA. The panel data were collected from published financial statements of the selected banks from the period of 2012 to 2023. The study revealed that the findings present a nuanced picture that requires immediate attention from stakeholders. While there is strong evidence linking high levels of NPLs with lower efficiency reflected in lower ROA figures, their impact on ROE remains ambiguous based on current data sets. This implies that NPLs have no significant impact on returns from equity, while the high levels of non-performing loans affect the profitability and operational effectiveness of the banks. The study further observed that the interest rate fluctuations do not play any role in the link between NPLs and the returns on assets and equity. Given the results, it is recommended that banks adopt robust risk assessment frameworks specifically focused on closely monitoring non-performing loans. It is also suggested that financial institutions must implement strategies aimed at minimizing defaults through improved credit assessments and borrower support programs. Instead of simply expanding asset bases without strategic oversight, banks should focus on improving operational efficiency along with growth.