Non-performing loans and monetary policy dynamics in Ghana

Abstract

Purpose The sharp rise in non-performing loans (NPLs) with its associated effect on financial institutions in Ghana has become very alarming. This has led to the collapse of distressed institutions and associated repercussions such as loss of private savings, investments, businesses and livelihoods. The purpose of this paper is to test the hypothesis that the monetary policy rate can be used to influence NPLs in Ghana. Design/methodology/approach Using quarterly data spanning from 2000 to 2016, the authors used the autoregressive distributed lag econometric approach to estimate the effect of monetary policy on the percentage growth of NPLs in Ghana. The results are presented for both short-run and long-run periods. Findings In the short run, the authors find evidence of no statistically significant effect of monetary policy on the percentage growth of NPLs. However, in the long run, the authors find a statistically significant effect of monetary policy on the percentage growth of NPLs. Practical implications The authors recommend that policymakers should focus on building a strong financial environment, so that monetary policy can be used to influence the commercial bank’s interest rate. In effect, this will help reduce the growth of NPLs, reduce risk and attract competitors into the financial market, increase asset base, increase credit to support viable ventures and subsequently boost economic growth in Ghana. Originality/value The paper shows its value by using quarterly data whereas most literature have considered annual data. Also, the paper includes a policy variable measured by the Monetary Policy Rate (MPR) as the key variable of interest which is normally not the case with most studies.