The Impact of Capital Structure on Profitability of Commercial Banks in Ghana

Abstract

Article History KeywordsCapital structure Commercial banks Profitability Ghana. JEL Classification: D24The study examined the effect of capital structure (measures as short term debt ratio, long term debt ratio, and total debt ratio) on profitability (measured as Return on Assets and Return on equity) of commercial banks in Ghana. The study sampled 23 banking over a six year period from 2010 to 2015 and extracted data from the annual of these banks. Data was analysed using descriptive statistics, correlation analysis as well as panel regression analysis. The results showed that banks in Ghana are highly leveraged with debt financing constituting 84% of total capital out of which 77% is short term debt despite the increase in minimum equity capital of these banks. The regression analysis revealed that short term debt ratio and long term debt ratio are negatively related with profitability of banks in Ghana. However, total debt ratio was positively associated with profitability of Banks in Ghana. On the control variables, firm size, foreign ownership and age of the bank were positively associated with banks profitability whiles growth in customers' deposits was negatively associated with banks' profitability. The results show that commercial banks in Ghana reliance on short term financing (deposits) reduces banks profitability and as such banks should shift their financing focus from deposits to other sources. The results call for firms to choose the right mix of short term and long term debt that will maximize profitability of bank. Contribution/ Originality:The study contributes to literature by examining the impact of capital structure on banks profitability in the context of regulated equity capital for commercial banks both listed and non-listed. The study is among the few capital structure and performance studies on banks is developing countries. The study serves as a basis for future research into the right mix of capital for commercial banks in Ghana that will enhance profitability.

The Effect of Mergers and Acquisitions on Bank Performance in Ghana

“…The first control variable is firm size. Researchers established that the size of commercial banks in Ghana influence firm performance (Maama et al, 2017;Musah, 2017). These studies argue that bigger banks enjoy economies of scale and are able to undertake bigger transactions, which have lower risk and improve their performance.…”

“…Banks that have operated for a long time in Ghana understand the industry-the risk profile of their clients and the macroeconomic environment, and are able to take steps that will improve their financial performance. The last control variable is foreign ownership, which have also been found to be a potential determinant of bank performance in Ghana (Musah, 2017).…”

Impacts of Capital Structure on Bank Performance

“…Moreover, short term debt might not be good for a bank because of their short periods. Musah (2017) believes that commercial banks in Ghana should depend on other financial sources and not just depend on short deposits because profitability could be increased by focusing on long term debts in a sample of twenty three banks over six years. Mouna et al (2017) examined the influence of capital structure on companies' performance in 53 Moroccan firms over the period 2014 to 2016.…”

“…The system of the banking structure in Iraq is divided into four groups, such as public banks, survive without capital and these capitals come from different sources, such as debts and equity. Muhammad et al (2014), Pinto et al (2017), Mouna et al (2017), Musah (2017), Mehar (2018) and Rahman et al (2019) believe that an important decision in each financial institution is capital structure. For instance, Tanni (2013) believes that a major topic in finance nowadays is capital structure.…”

Capital Structure, Profitability and Firm’s Value: Evidence from Jordan

“…Also they gave a cautionary warning that the firm will not necessary maximize their value by using 100 per cent debt due to bankruptcy costs (Al-Nsour and Jresat, 2018). Since then, three different theories on the subject have been developed: The Static Trade-Off Theory, Pecking-Order Theory, and the Agency Theory (Musah, 2017). According to the Static Trade-Off Theory an optimal capital structure is obtainable; where the tax benefit of debt is equal to the leverage associated costs which may include cost of financial distress and bankruptcy while investment decision and firm asset are held constant.…”