A comparative analysis of the impact of NPL on the performance of foreign banks compared to Indigenous banks operating in Ghana

Abstract

This research presents a comparative examination of the impact of non-performing loans (NPLs) on the performance of foreign banks versus indigenous banks operating in Ghana, concentrating on the Return on Assets (ROA), Return on Equity (ROE), and Liquidity Ratio (LIQDR). Utilizing balanced panel data from 2007 to 2021, a panel fixed-effects estimation technique was employed via EViews 12 to examine credit risk heterogeneity across bank ownership structures. The findings indicate an inverse but statistically insignificant association between NPLs and performance indicators (ROA, ROE, and LIQDR) for indigenous banks. This outcome suggests their greater vulnerability to asset quality deterioration, possibly due to less robust risk management. Conversely, foreign banks exhibit a contradictory direct and statistically significant relationship between NPLs and both ROA and ROE, whereas the effect on LIQDR remains insignificant. This outcome implies that foreign banks leverage superior credit risk mitigation, robust capital buffers, or distinct operational efficiencies (e.g., aggressive write-off policies or high-yield lending) to absorb or manage the NPL impacts more effectively. This study offers original insights by empirically differentiating performance outcomes for foreign and local banks facing credit risk in an emerging market. Practically, these findings necessitate enhanced credit monitoring and capital reform for indigenous banks. Policymakers should also consider capacity-building support for local institutions. Future studies could scrutinize the mediating function of bank governance and specific macroprudential policies.