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Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana

Author

Listed:
  • Richard Apau

    (Department of Finance, Risk Management and Banking, University of South Africa, Pretoria 0003, South Africa)

  • Athenia Sibindi

    (Department of Finance, Risk Management and Banking, University of South Africa, Pretoria 0003, South Africa)

  • Leward Jeke

    (Department of Economics, Nelson Mandela University, Port Elizabeth 6001, South Africa)

Abstract

This study assesses the dynamic relationship between macroeconomic factors and bank asset quality based on changes in the condition of stock market returns. A dynamic panel two-step system, the Generalized Method of Moments (system GMM) model, is employed using panel data from 18 universal banks spanning the period of 2007 to 2021. The analysis revealed that the real GDP growth rate, the average lending rate, and the real exchange rate represent a set of macroeconomic factors with a marked influence on banks’ asset quality, where a unit increase in these variables drive 0.02 percent, 0.98 percent, and 0.27 percent improvement in asset quality, respectively. In addition, a high-inflation rate was found to exert an adverse effect of −0.32 percent on asset quality, as it affects borrowers’ financial ability to meet loan repayment obligations. Furthermore, the study verified the existence of a positive relationship between market condition and asset quality, where a rise in the market return drives a 0.07 percent improvement in bank asset quality. This implies that bank performance adapts to changes in market conditions as posited under the Adaptive Market Hypothesis (AMH). Bank managers should consolidate banks’ asset bases during conditions of market stability to withstand periodic market fluctuations to boost trading momentum. Policy recommendations are suggested to foster a conducive business environment for bank stability.

Suggested Citation

  • Richard Apau & Athenia Sibindi & Leward Jeke, 2023. "Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana," Risks, MDPI, vol. 11(9), pages 1-15, September.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:9:p:158-:d:1232528
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    References listed on IDEAS

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    1. Altavilla, Carlo & Boucinha, Miguel & Peydró, José-Luis, 2018. "Monetary policy and bank profitability in a low interest rate environment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 33(96), pages 531-586.
    2. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    3. Sebastian Kripfganz, 2019. "Generalized method of moments estimation of linear dynamic panel-data models," London Stata Conference 2019 17, Stata Users Group.
    4. V. Santi Paramita & Bahri Jafar & Ifan Wicaksana Siregar, 2017. "Market timing and stock selection performance of mutual fund in bull and bear market condition," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 10(3/4), pages 309-321.
    5. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
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