Capital Adequacy and Performance of Banks Licensed in Ghana

Abstract

Concerns on capital adequacy has received much attention especially because of the recent financial predicaments in the economy and the role it played in the closure of some commercial banks in Ghana in 2017 and 2018. Empirical studies have shown that substantial capital adequacy is one of the sure ways of circumventing credit risks which plunges the profits and sustainability of the banks. The motivation for the study is that prior to 2019, most of the studies on banking risk focused on rural, small and just few bigger banks. Also, most empirical studies assessing the relationship between capital adequacy and bank profitability in Ghana have focused on return on assets and return on equity as measures of performance. Thus the study sought to examine the effect capital adequacy has on bank performance, by employing net profit after tax and return on capital employed as measures of performance. The study employed the explanatory research design, quantitative research approach. The study employed the General Least Squares random effects panel estimating approach to estimate the effect of capital adequacy ratio on bank performance. First, the results reveal that the capital adequacy ratio generally increase bank performance in terms of net profit after tax. Again, the results revealed that capital adequacy ratio generally decreases bank performance in terms of return on capital employed. Thus, the study recommended that to enhance performance, banks should strive to keep their capital adequacy ratio at the required levels to make them competitive.