Applying the breaks to non-performing loans in Ghana

Abstract

PurposeThis paper acknowledges the rising levels of non-performing loans (NPLs) and the consequences associated with such patterns to an emerging economy like Ghana. In theory, one would expect rising NPLs to have a negative impact on an economy, especially regarding credit creation and private sector growth. This research, consistent with empirical literature, constructs a measure of financial market development to investigate its effect on Ghana's NPLs.Design/methodology/approachThe fully modified ordinary least squares (FMOLS) econometric technique is used as a way of addressing common time series identification issues such as endogeneity and serial correlation.FindingsThe study finds that the growth of the financial market has a negative and statistically significant relationship with NPLs in Ghana. Therefore, building a stable financial sector is key to addressing Ghana’s rising rates of NPLs.Practical implicationsApplying the breaks to Ghana's NPLs would involve deepening credit and improving efficiency through good governance. The study suggests that such a mechanism would increase financial sector performance and reduce the growth risks arising from the industry.Originality/valueThe study analyzes the influence of financial market development on the quarterly growth of NPLs in Ghana. Most studies only focus on annual growth of NPLs.