DETERMINANTS OF NON PERFORMING LOANS OF MICROFINANCE COMPANIES IN GHANA

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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Item Type: Ghanaian Postgraduate Material  |  Attribute: 74 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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