Effects of macroeconomic conditions, bank-specific variables and management discretion on agricultural sector credit quality in Ghana: an econometric analysis
Akwasi Agyeman BritwumPurpose
This study investigates how macroeconomic conditions, bank-specific factors and managerial discretion influence agricultural credit quality in Ghana, assessing whether internal prudential buffers serve as effective risk management tools in a high-volatility agrarian lending environment.
Design/methodology/approach
Adopting a quantitative, explanatory longitudinal time-series design, the study employs secondary monthly data (2013–2022). An autoregressive distributed lag model with an embedded error correction model, not a separate vector error correction model system, captures long-run equilibrium and short-run dynamics, supported by comprehensive diagnostic testing.
Findings
The Composite Index of Economic Activity is the dominant determinant, exhibiting a significant negative long-run relationship with the loan loss rate (H1 supported). Agricultural credit expansion generates both a persistent long-run risk premium and an acute short-run adverse selection shock (H2 partially supported). The long-run insignificance of capital adequacy and liquid assets reveals that internal prudential buffers function as regulatory constraints rather than effective discretionary risk management tools (H3 and H4 not supported).
Research limitations/implications
This study extends the theoretical application of management discretion, as conceptualized by Caporale et al. (2018), to a high-risk agrarian economy. The findings demonstrate that the efficacy of prudential buffers as discretionary tools is context-dependent. In Ghana’s agricultural sector, exogenous systemic risks overwhelm bank-level governance, suggesting that managerial discretion theory must be integrated with sectoral risk-structure analysis for emerging markets. This necessitates a shift in theoretical focus from universal buffer efficacy to the contingent power of discretion in different institutional and risk environments.
Social implications
Economic downturns disproportionately restrict smallholder credit access, deepening rural poverty. The recommended insurance and guarantee schemes can stabilize credit flows, protecting rural livelihoods. Financial inclusion policies require complementary investments in farmer financial literacy.
Originality/value
The study provides novel evidence that structural and macroeconomic forces outweigh managerial discretion in high-risk agricultural sectors, demonstrating that traditional prudential frameworks are insufficient for covariant agricultural risks in emerging economies.