Short-run dynamics of interest rates and non-performing loans: Evidence from Ghana's banking sector (2008-2023)

Lawrence Sackey

No WP/001/25, Working Papers from Ghana Association of Banks (GAB), Accra

Abstract: This study examines the short-run dynamics between interest rates and non-performing loans (NPLs) in Ghana's banking sector, with particular emphasis on how fluctuations in lending rates influence credit risk and financial stability. Using quarterly data spanning 2008 to 2023, the study applies time-series econometric techniques, including unit root tests and a dynamic autoregressive distributed lag (ARDL) framework, to capture lagged responses and adjustment behaviour in NPLs. The findings reveal a statistically significant short-run relationship between interest rates and NPLs, with increases in lending rates leading to higher credit risk after a lag. Inflation is found to mitigate NPLs in the short term, while credit expansion initially improves loan performance but subsequently contributes to higher default levels, suggesting that NPL dynamics are driven primarily by short-run adjustments rather than persistent long-run relationships. By providing updated empirical evidence on the short-run monetary policy-credit risk nexus in an emerging market context using an extended Ghanaian dataset, the study contributes to the literature on monetary transmission and financial stability. The results highlight the need for monetary authorities to balance inflation control with credit market stability and underscore the importance of coordinated macroeconomic and prudential policies in sustaining credit access, protecting borrower viability, and strengthening the resilience of Ghana's financial system.

Keywords: Interest rate; Non-Performing Loans; Inflation; credit risk; Financial Stability; ARDL (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:gabwps:336970

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