ABSTRACT
The study examined the determinants of non-performing loans
of microfinance companies in Ghana. The qualitative approach was adopted for
the study. Through the use of purposive sampling technique, 10loan officerswere
selected to participate in the study. The structured interview guide was used
to gather the requisite data for the study. The data were analyzed through the
thematic approach based on the various themes according to the research
questions that guided the study.The study among other things found out that
non-performing loans were high around 2011 through to 2013, however, were less
in 2010, 2014 and 2015. The year 2015 observed a massive decline indicating
that the MFIs have taking proactive measures to help recover majority of their
loans as mostly agree in the loan agreement. Also, the study found that
external and internal factors such as poor management and economic downturns
accounted for majority of non-performing loans in Ghana. Once more, there was a
statistically significant negative effect of inflation on non-performing
loans.However, no significant effect was observed by interest rate on
non-performing loans.The study recommended that,NPL Management of MFIs should
acquire the technical skills and managerial expertise needs to examine the
trend and incidence of non-performing loans so that critical measures can be
taken in that effect. Also, government and other policy makers should help
invest more in growth enhancing sectors of the economy so that government loans
can be repaid on time to MFIs. Again, MFIs should consider international
competivenessin order to impact on abilities of borrowers to several exports
and imports sectors of the economy so that they can repay loans.
CHAPTER ONE
INTRODUCTION
Background to the Study
The International Monetary Fund (IMF, 2009) iterates that a
non-performing loan is any loan in which interest and principal payments are
more than 90 days overdue; or more than90 days’ worth of interest has been
refinanced. In the view of Rawlin,Shwetha,Sharan and Pradeep(2012), the
principal aim of any business is to make profits and that is why any asset
created in conduction of business should generate income for the business. In
this regard, banks do grant loans and advances to individuals, business
organizations as well as government in order to enable them operate on
investment and development activities as a means of contributing toward the
economic development of a country in general and aiding their growth in
particular.
Rawlin et al. (2012) stipulates that, deposits in banks are
offset by higher margins from creation of credits as loans. However, if such
assets do not generate any income, the banks` ability to repay the deposit
amount on the due date would be in question. This is an indication that, the
banks with such asset would become weak and such weak banks lose faith and
confidence of customers”. Ultimately, “unrecoverable amounts of loans are
written off as non-performing loan (Mallick et al. as cited in Rawlin et al.,
2012). The Bank of Ghana also classify loan as Non Performing when it is
overdue for 90 days or more. In Ghana, Microfinance Institutions (MFIs)
currently provide financial services to an estimated 15 percent of the country’s total population as
compared with 10 percent for the commercial banking sector (Obuobi& Polio,
2010).
The financial sector (Banking and non-banking) plays a very
important role in every economy. “There is evidence to suggest that
well-functioning lending institutions help to accelerate economic growth and
conversely, poorly functioning ones impede progress and aggravate poverty”
(Barth, 2004). A key function of most banking and Microfinance institutions is
lending with interest incomes on loans and advances constituting a large source
of revenue for these financial institutions. According to GHAMFIN Annual Report
(2014), the total NPLs of the MFI stood at 6% in 2012 and by 2013, it has shot
up to 9%. With loans and Advances making over 50% of the total operating assets
of MFIs according to Bank of Ghana annual report, if the trend of the incidence
of NPLs continues, it will have a huge negative impact on the operations of the
MFIs in Ghana.
According to Berge (2007), “although credit risk has always
had the highest importance in bank’s management in the Sub-Saharan region,
financial crisis and recession have made non-performing loans one of the major
concerns for both bank managers and regulatory authorities in developing
countries”. The recent crisis in the Sub-Saharan region, as well as others that
occurred in the past, confirm that bad loan portfolio is one of the most
important factors of fragility of a specific bank and banking system, and could
produce negative effects on the overall economic activity (Bruneau, Bandl,&
De Amri, 2012). According to Bruneau et al. (2012), “at high level of
non-performing loans, a bank’s net worth is exposed to high risk and this
could lead to the bank’s insolvency”. This means that, even for banks that do
not go bust, non-performing loans negatively influence their overall
performance. That notwithstanding, should the problem of non-performing loans
arise in a substantial part of the banking sector, financial stability of
microfinance institutions (MFIs) and the whole sector at large is jeopardized
hence, the need to pay much attention and give consideration to what causes
non-performing loan.
Wondimagegnehu (2012) conducted a study on determinants of
non-performing loans and found that poor credit assessment, unfair competition
among banks, failed loan monitoring, underdeveloped credit culture, lenient
credit terms and conditions, compromised integrity, aggressive lending, weak
institutional capacity, fund diversion for unexpected purposes and overdue
financing had an effect on the occurrence of Non-performing loans. Furthermore,
Mileris (2012); Tomak (2013); Ahmad and Bashir (2013) and Shingjerji (2013)
stipulated that non-performing loans are determined by different factors which
include level of Gross Domestic Product, capital adequacy, inflation, bank
size, unemployment, volume of deposit, return on equity, total loan, liquidity,
return on asset, excessive lending, interest rate and credit growth.
That notwithstanding, Louzis, Vouldisand Metaxas (2012)
assert that, “the uncertainty created by non-performing loans makes difficult
for banks to allocate funds efficiently from surplus economic units to deficit
economic units with productive investment opportunities”. The banks are
unwilling to take new credit risk and to lend funds. This results in an excess
of demand for loans, especially those of enterprises and microfinance
institutions (Louzis et al., 2012). In this case, the subsequent credit
rationing leads to the decline of economic activity.
From the findings of a study conducted by Keeton and Morris
(2012) it was revealed that loan losses are highly positively related to
adverse economic conditions. The findings of Keeton and Morris (2012) were
confirmed by Gavin and Hausmann (2015) who examined the relation between
macroeconomic developments of and banking crises in Latin America. Furthermore,
Fofack (2005) investigated the macroeconomic factors that led to the rise of
non-performing loans in Sub-Saharan Africa in the 1990s and concluded that,
exchange rates, interest rate, GDP per capita are robust significant
macroeconomic factors that determine non-performing loans of microfinance
companies. However, Festic and Beko (2008) in the study stipulated that
non-performing loans can be curbed by improving economic conditions through the
growth of real Gross Domestic Product.
Moreover, the issue of non-performing loans has gained
increased attention in recent years because of its adverse effects on the
banking and non-banking financial institutions especially, microfinance
institutions and the country’s economy as a whole (Berge, 2007). The immediate
consequences of non-performing loans are the reduction in profitability through
disposal costs like provisions for credit losses and direct write-offs for bad
debts and shrinking of loanable funds. That notwithstanding, Bofondi and Ropele
(2011) assert that, non-performing loans are significantly related to annual
growth rates, unemployment rate and interest rates. That aside, large amounts
of non-performing loans in the banking and non-banking financial
system have at many times threatened the failure and actually collapsed many
banks and microfinance institutions.
Having explained that, many researches on the causes of bank
failure show that poor quality of loan portfolio is statistically a major
predictor of insolvency (Dermigue-Kunt, 1989; Barr and Siems, 1994) with
failing banks usually having high levels of non-performing loans prior to
failure. Capario and Klingebiel (1996) indicated that non-performing loans
represented 75% of total loan assets in Indonesia, which led to the collapse of
over sixty banks in 1997. Drawing inference in Ghanaian banks and microfinance
institutions are not insulated from the problem of delinquent loans (Non-performing
loans) hence, the purpose for conducting this study.
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