Influence of Macroeconomic Factors on Nonperforming Loans in the Ghanaian Economy: A Panel Regression Analysis

Abstract

This research is aimed at determining the influence of key macroeconomic indicators on Non-Performing Loans (NPLs), and its consequences on banks in the Ghanaian economy. The presence of NPLs poses threats to financial institutions across the globe, leading to lower economic performance and diminished investor confidence. Previous studies have identified other key factors of NPLs. However, the present study is focused on the key macroeconomic indicators of the Ghanaian economy: GDP, inflation, exchange rate and unemployment. The study adopted the quantitative approach utilizing panel regression analysis covering 2007 to 2021, sourced from 15 banks listed on the Ghana Stock Exchange. The study employs secondary data, panel study or longitudinal design, and econometric techniques, to assess the weight of the key economic indicators on NPLs. The outcomes revealed GDP (????=0.400, t=2.740, p=0.016); inflation (????=0.607, t=4.939, p<0.001); unemployment (???? = 0.112, t = 2.555, p = 0.023); and exchange rate (????= -0.065, t== -0.382, p=0.709). The study concludes that GDP, inflation and unemployment have substantial impacts on NPL; whilst exchange rates have no significant relationship with NPL. The paper thus posits that policy makers must consider macro-prudential policies like counter-cyclical capital buffers to reduce the risks connected with NPLs. Government should also develop policies to boost employment and economic growth, and reduce inflation, to mitigate the adverse effects of these key economic variables on bank NPLs.