The Effect of Non-Performing Loans on the Profitability of Banks in Africa

The study examines the impact of non-performing loan (NPL) on the profitability of banks in Africa. This research further investigate the bank specific factors and macroeconomic indicators on the profitability of the African banks by employing return on equity (ROE) to be the profitability measurement. The panel data estimation framework on the 26 African countries from 2017-2023 was analysed using Stata statistical software. The study used descriptive statistics, correlation and regression analysis. With regards to the based model, fixed effect model was preferred and this research found that NPL had a negative impact on the profitability of banks in Africa. Also, liquidity, operating efficiency and net interest margin also had negative effect on the profitability of banks in Africa. Concerning the expanded model of the non-bank specific variables, random effect model was selected and the results show that inflation had a significant positive impact on ROE, while exchange rate was not significant; gross domestic product (GDP) also had a negative impact on the African banks’ profitability. The study therefore recommends that, there should be policies and actions that can tighten loan granting procedures so as to reduce loan losses especially during economic booms and there should be policy measures which are suitable for credit risk management in helping build a quality loan book among banks in the African countries.