This study examines the short-run dynamics between interest rates and non-performing loans (NPLs) in Ghana's banking sector, focussing on how fluctuations in lending rates influence credit risk and financial stability.
The study employs quarterly data spanning 2008 to 2023 and 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 results indicate 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 mitigates NPLs in the short term, while credit expansion initially improves loan performance but subsequently contributes to higher default levels. The evidence suggests that NPL dynamics are driven primarily by short-run adjustments rather than persistent long-run relationships.
The findings highlight the need for monetary authorities to balance inflation control with credit market stability and for regulators to strengthen credit risk monitoring in response to evolving macro-financial conditions.
The study underscores the importance of coordinated macroeconomic and prudential policies in sustaining credit access, protecting borrower viability and strengthening the resilience of Ghana's financial system.
This study provides updated empirical evidence on the short-run monetary policy–credit risk nexus in an emerging market context, using an extended dataset for Ghana and a dynamic ARDL approach focused on short-run transmission mechanisms.
