Banking Supervision and Nonperforming Loans in Africa: Does Institutional Quality Matter in the Ghanaian Banking Space?

ABSTRACT

In this paper, we reexamine the determinants of nonperforming loans through the impact of supervisory devices in credit risk management in Africa. The paper employs bank-specific, macroeconomic and institutional data for a panel of 14 universal banks over the period 2009 to 2020. We develop models that capture the role of regulatory supervision on credit risk. Findings from the Panels Corrected Standard Errors (PCSE) and the system GMM shows that previous year’s NPL and inflation significantly affect NPLs in the banking space of Gana. Bank size and financial development are inversely associated with NPLs. The interactive term of regulatory quality and government effectiveness on NPLs has net negative effect. This suggest that regulatory quality enhances the reductive effects of government effectiveness on NPLs. Our findings in general lends credence to the financial instability theory as NPLs in the Ghanaian context has been the outcome of activities of speculative borrowers.

KEYWORDS:

• Nonperforming loans (NPLs)
• banking industry
• supervisory devices
• institutional quality
• Ghana

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Current Exchange rate GHC 5.7 = $1 (November, 2020 rate)

2 GN Bank has challenged the revocation of its license in court and proceedings are ongoing.

Additional information

Funding

Funds for this research is provided through the budgetary allocation of the Department of Applied Finance and Policy Management of the University of Education, Winneba (UEW) under its Project/Research Development Expenditure;University of Education Winneba Budgetary allocation for Research and Innovation.