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factors leading to non performing loans

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factors leading to non performing loans
ECON 434: MONEY AND BANKING II

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GROUP MEMBERS
BOATENG GODWIN 10277955
BOSE-DUKER THEOPHILINE 10278103
BUGRE ABRAHAM 10278302
CANTREPH GEORGE 10278330
COMMODORE-MENSAH ESTHER 10278411
DANSO BRIGHT 10278628

1.0 INTRODUCTION
Lending is one of the main activities of banks in Ghana. This is evidenced by the volume of loans that constitute bank assets and the annual volume of credit granted to borrowers in the private and public sectors of the economy. Loans are therefore, typically, the largest and the most important asset and source of revenue for banks through significant interest income earnings. A survey in 2006 on the Ghanaian Banking Sector revealed that loans account for about 50% of total bank assets. In 2007, the figure increased to 53% of the industry’s total assets of GH₵7,795.60 million. (Infodata Associates, 2009).
The facts above give ample evidence that healthy loan portfolios are vital assets for banks in view of their positive impact on the performance of banks. Unfortunately, some of these loans do not perform and are defaulted and eventually result in bad debts which affect banks earning on such loans. These types of loans are on-performing loans or simply bad loans. In February, 2009, a Bank of Ghana report revealed that the non-performing loans ratio had increased from 6.4% in 2007 to 2008.
These bad loans become cost to banks and can fuel banking crisis and result in the collapse of these institutions with their attendant repercussions on the economy as a whole considering the fact that the banking industry plays an important role in the development of the economy. Due to the negative relationship between bad loans and financial performance of banks in Ghana and the economy as a whole, the prevailing high non-performing loans ratio in Ghana has raised some concerns among the stakeholders of these institutions.
This study therefore mainly seeks to fish out the

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