Non-performing loans and bank performance, the case of rural banks in Ghana

Abstract

The long-term viability of rural banks is heavily reliant on their profitability, which is affected by a variety of factors, including firm-specific and macroeconomic variables. Previous research on the impact of these factors has mainly concentrated on mainstream banks, often overlooking the context of rural banks in Ghana. The inquiry examined the relationship between NPL and financial performance of rural banks, investigate the effect of liquidity risk on the financial performance of rural banks and finally, to examine the nexus between policy rate and financial performance of rural banks in Ghana. The investigation used the explanatory research design, quantitative approach and employed the purposive sampling technique to draw 14 rural banks. The robust least square estimation technique was employed to analyze 11years data. Results revealed a positive statistically significant relationship between NPL and financial performance. Again, the inquiry discovered a negative effect of liquidity risk on financial performance. Finally, the investigation found a positive statistically significant nexus between policy rate and financial performance of rural banks. The outcome of the study shed more light in the bank performance literature while enlightening managers of rural banks in Ghana. The inquiry implores rural banks should invest in advanced risk management systems and training to better anticipate and respond to changes in policy rates. Also, the bank of Ghana should ensure rural banks regularly comply with regulatory standards and maintain adequate capital reserves to manage the risks associated with high NPLs and sustain profitability.