The Impact of Capital Adequacy on the Financial Performance of Commercial Banks: A Ghanaian Perspective

Abstract

This study is about the impact of capital adequacy on financial performance on of commercial banks: A Ghanaian perspective. The study sought to investigate the impact of capital adequacy on the financial performance of commercial banks. Nine banks were selected for five years (2013 to 2017). Capital adequacy is among the most regulated aspects in the banking industry in the world. The three major Basel Accord as international standard of capital adequacy recognize worldwide and it is the best for the banking industry. The key concern is that all the financial institutions must have enough capital to meet its obligations. This study adopted descriptive and panel data methodology and the population was the 35 commercial banks from which 9 listed on the Ghana Stock Exchange (GSE) were selected. Secondary data was collected from audited financial statements and the Banking Sector Reports for the period under review. Stata 14 Statistical Software was used for the analysis. The study concluded that capital adequacy (CAR) had a negative and significant relationship on Return on Asset (ROA) and Return on Equity (ROE). Likewise, capital adequacy ratio (CAR) also had an adverse impact on the Total Deposits (TD) of the selected commercial banks. The empirical study showed that capital adequacy requirement was a move by regulators to protect the sovereignty of depositors and the continual existence of the banks rather than improving upon performance. The study further recommended that other indicators of performance such as risk and macro-economic indicators be looked at as a way of positively impacting on the performance of banks in Ghana.