Does Asset Quality Persist on Bank Lending Behaviour? Empirical Evidence from Ghana

Abstract

Purpose: The objective of this study is to examine the persistence of bank asset quality on bank lending behaviour in Ghana. Data/Methodology: Using a dataset from the Bank of Ghana for 25 Ghanaian banks from 2005 to 2010, the study employed a random effects (RE) model with AR(1) and heteroskedastic disturbances to test the relationship between bank lending behaviour proxied as the ratio loans and advances to total asset and bank asset quality (ratio of nonperforming loans to gross loans and advances) while controlling for deposit mobilization, equity, management efficiency, intermediation spread and income diversification. Findings: The empirical estimation found that the effect of the deterioration of bank asset quality (high levels of non-performing loans) on bank lending behaviour is persistence and not contemporaneous. Additionally, bank deposit mobilization, intermediation spread and equity were also found to influence bank lending behaviour. Originality/Value: This paper is the first study to examine the persistence impact of the three classes of asset quality on bank intermediation functions in Ghana.