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SCHOOL OF BUSINESS
A Thesis Submitted to the School of Business, Kwame Nkrumah University of Science and Technology in Partial Fulfillment of the Requirements for the Degree Of
June, 2011
ABSTRACT
This study aims to find the impact of the capital structure on performance of banks in Ghana. Existing literatures conclude that, capital structure of a firm has impact on the performance of the firm. The study uses ROE as performance indicator; the researcher employs the uses of correlation analysis by using the Pearson correlation coefficient to find the multicollinearity among the variables used. Regression analysis was use to find the impact or the contribution of each of the variables used. It was found that banks in Ghana uses leverage in its financing and was noted that, banks in Ghana operates above its minimum requirements stated by the bank. It became evidently known through the analysis that, short term debt contributes higher to the performance of banks. the higher the short term debt of the bank, the higher its performance. However long term debt financing was also recorded to have a positive impact on the profitability of the bank even though it is minimal. Moreover, the findings show that, assets held by banks increase its profitability if managed efficiently. The research is aimed to be added to the existing literature on the capital structure and performance.
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DECLARATION
I hereby declare that this submission is my own work towards the award of master of Business Administration and that to the best of my knowledge it contains no material previously published by another person nor material which has been accepted for the award of any other degree of the University except where due acknowledgement has been made in the text.
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DEDICATION
This project is dedicated to my parents, siblings and friends for their love and care throughout this course.
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ACKNOWLEDGEMENT
I express my profound gratitude to the Almighty God for seeing me through this course. I would also like express special appreciation to my supervisor, Mr. Newlove G. Asamoah for his penetrating criticism, guidance, and unceasing assistance in every aspect of my work. Recognition is given to all the academic facilitators who taught me during the two years masters program. I also thank Price water house coopers for their help in gathering my data for this project.
Table of Contents
ABSTRACT...ii DECLARATION ....................................................................................................................... iii DEDICATION ........................................................................................................................... iv ACKNOWLEDGEMENT .......................................................................................................... v Table of Contents ....................................................................................................................... vi LIST OF TABLES ..................................................................................................................... ix
CHAPTER ONE INTRODUCTION....................................................................................... 1 1.2 Problem Statement ................................................................................................................ 3 1.3 Objectives of the Study ......................................................................................................... 4 1.4. Research Questions .............................................................................................................. 5 1.5 Justification of the Study ....................................................................................................... 5 1.6 Scope of the study ................................................................................................................. 6 1.7 Overview of the Research Methodology............................................................................... 7 1.8 Organisation of the Study...................................................................................................... 7 1.9 Limitations of the Study ........................................................................................................ 8
CHAPTER TWO LITERATURE REVIEW ......................................................................... 9 Introduction ................................................................................................................................. 9 2.1 Performance Theory .............................................................................................................. 9 2.2 Capital structure theory ....................................................................................................... 11 2.2.1 Static Trade-Off Theory ................................................................................................... 11 2.2.2 Agency Cost Theory......................................................................................................... 14 2.2.3 Information Asymmetry Theory ...................................................................................... 15 2.2.4 Capital Structure Life Stage Theory and Performance .................................................... 16 2.2.5 Pecking Order Theory ...................................................................................................... 17 2.3 Strategic Management Research and Capital Structure ...................................................... 18 2.4 Overview of the banking industry in Ghana ....................................................................... 21
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CHAPTER THREE METHODOLOGY .............................................................................. 26 Introduction ............................................................................................................................... 26 3.1 The Research Paradigm. ...................................................................................................... 26 3.2 The Research Method.......................................................................................................... 27 3.2.1 The Study Population ....................................................................................................... 27 3.2.2 Sampling Techniques ....................................................................................................... 27 3.2.3 Sample Size ...................................................................................................................... 27 3.2.4 Data Source and Collection Method ................................................................................ 28 3.3 Data Analysis ...................................................................................................................... 28 3.4 Proposed Model Used for the Study ................................................................................... 29 3.4.1 The proposed model is outlined below ............................................................................ 29 3.4.2 Research Variables ........................................................................................................... 30 3.4.3 Variables Rationalization ................................................................................................. 31 3.4.4 Predictor or Explanatory Variables .................................................................................. 31 3.4.5 Control Variables ............................................................................................................. 32 3.5 Hausman Specification Test ................................................................................................ 34 3.6 Pearson Correlation Coefficients ........................................................................................ 35
CHAPTER FOUR DATA PRESENTATION, ANALYSIS AND DICUSSIONS ............. 36 Introduction ............................................................................................................................... 36 4.1 Descriptive Statistics ........................................................................................................... 36 4.2 Pearson Correlation Analysis .............................................................................................. 38 4.3 Regression Results from Stata 10 Output ........................................................................... 41 4.3.1 Discussions from Model One on Bank Performance, Bank Capital and the Control Variables.................................................................................................................................... 43 4.3.2 Discussions on Model Two on Bank Performance, Short term Debt and Control Variables.................................................................................................................................... 47 4.3.3 Discussions of Mode Three on Bank Performance, Long-term Debt and the Control Variables.................................................................................................................................... 50
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4.3.3 Discussions of Model Four on Bank Performance, Total Debt and the Control Variables ................................................................................................................................................... 53
CHAPTER FIVE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS ........... 54 Introduction ............................................................................................................................... 54 5.1 Findings ............................................................................................................................... 54 5.1.1 Key findings ..................................................................................................................... 54 5.2 Conclusions ......................................................................................................................... 56 5.3 Recommendations ............................................................................................................... 56 References ................................................................................................................................. 58
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LIST OF TABLES Table 4.1 Descriptive Statistics of Variables 38 Table 4.2: Pearson Correlation Coefficients .39 Table 4.3A: Regression Result for Model One, with Total Assets ..41 Table 4.3B: Regression Result for Model One, with Loans and Investments .42 Table 4.4A: Regression Result for Model Two, with Total Assets .45 Table 4.4B: Regression Result for Model Two, with Loans and Investments 46 Table 4.5A: Regression Result for Model Three, with Total Assets ..48 Table 4.5B: Regression Result for Model One, with Loans and Investments 49 Table 4.6A: Regression Result for Model Four, with Total Assets 51 Table 4.6B: Regression Result for Model Four, with Loans and Investments ..52
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CHAPTER ONE INTRODUCTION 1.1 Background Study A firms performance is very important for different groups of people. All agents that have made financial decisions about companies were concerned with its financial position and its performance. Thus, owners, managers, potential investors, banks, other financial institutions, creditors, business partners, employees, and government had been interested in the capital structure of the company in order to analyse and predict its performance. Much of the groundbreaking work in the field of corporate finance focused on why firms chose differing proportions of debt and equity to finance their operations. Perhaps the most famous work in this field was the arbitrage argument of Modigliani and Miller (1958) which spawned a flood of research in the area of capital structure. Most capital structure researches have been concentrated on the search for an optimal capital structure. Three main theories have been subsequently advanced: Pecking Order (POH), Agency Cost (ATF) and Static Trade-off (tax based). Pecking order theory ( information asymmetry theory) states that firms prefer to finance new investment, first from internally with retained earnings , then with debt , and finally with an issue of new equity (Myers,1984). The agency cost of capital structure states that an optimal capital structure will be determined by minimizing the cost arising from conflict between the parties involved. Even in the absence of agency problems the presence of asymmetric information may cause firms to under invest which in itself is a source of inefficiency (Myers and Majluf 1984). The existence of asymmetric information is the root cause of these inefficiencies (Brooks and Davidson, 2003).
Five major sub-theories within capital structure theory which attempt to explain why capital structure matters and how it contributed to the overall value of the firm have emerged, however, none of the researches had proved conclusive (Myers, 2001). One of the five sub-theories proposed that capital structure may be influenced by the organisational life stage of a firm, as financing needs change with the changing circumstances of the firm (Damodaran, 2001; Bender & Ward, 1993). However, capital structure theory and performance theory are generally approached in isolation. Capital structure research has typically been carried out by researchers with a background in corporate finance or economics, while performance has evolved out of research in the field of strategic management. While the link between capital structure and performance has been suggested by researchers on the periphery of both fields, it appears never to have been directly tested.
Lizal (2002) states three reasons of firms failure: wrong asset and capital structure, wrong financial structure, corporate governance problems. According to the neoclassical approach liquidation is an instrument for reallocation of resources from inefficient to efficient use. By going liquidation a firm frees the wrongly allocated resources for their more efficient use within the same or even another industry. These come as a result of low performances of the firms. Another reason for firms liquidation may be wrong financial structure, even if the asset structure is appropriate. This means that firm goes bankrupt in the short run, even though it would survive in the long run the quality of the capital markets is important in this case as they could provide some support for temporarily financially constrained firms. There is also a corporate governance problem, which often leads to liquidation, but changing the management of the firm would be a better solution in such case. Creditors (banks, different financial
institutions, business partners, suppliers) are interested in predicting performance of the company as a means of risk management. They should be able to evaluate the credit quality of the company in order to adjust the contracts and create the appropriate reserves.
investigated the relationship between capital structure and profitability of listed firms on the Ghana Stock Exchange (GSE) and;. The difference that this study sought to brings is on the basis of the objectives as Kyereboah-Coleman (2007), limited the study to only micro-finance institutions in Ghana and therefore did not include banks whereas this study looks at banks only, moreover, Abor (2005), study was too broad to be applicable to the unique
characteristics of banks and also did not include unlisted banks. However, Amidu (2007) did not look at the relationship between capital structure and bank performance but rather the determinants of bank capital structure Issues such as corporate governance, agency cost, and capital structure also play important role because of the crucial roles played by banks in providing credit to non-financial firms, in transmitting the effects of monetary policy, and in providing stability to the economy as a whole ( Pratomo and Ismail, 2006). These have placed strong emphasis on the need to study the relationship between capital structure and bank performance. The researchers attention, however, shall be concentrated on differences across banks and not between banks and other firms, since banks in the proposed sample are subject to essentially equal regulatory capital and other constraints.
Hypothesis Ho: Profitability of banks has no relationship with its capital structure. Ha: Profitability of banks has a relationship with its capital structure .
performance of a firm as it exists today on some selected banks in the banking industry in Ghana. As a result of the discoveries of crude oil in Ghana, it is becoming imperative that, the sector needs huge financial inflows to invest in these areas, however, the participation of a financial
companies depend on the capital structure and agency cost associated with the firms and its influences on the performance of the firm. Internal funds plays a major role in financing the sector, nevertheless, most investors assess the performance and the capital structure of the bank in order to assigned a contract to it due to the fact that these areas needs a huge financial capital In addition to the above, these banks as a result of increasing their financial base to place itself in a strategic level in order to attract foreign and local investors, capital structure and performance have become the tool use to assess these banks as it serves as the bench mark one will used to asses the bank to draw conclusion whether the bank has a strong capital base to support such huge investment or not.. Thus, assessment can be based on the firms debt financing method and its eventual effects on the performance, capital structure plays a major role for most investors and the general banking industry to asses its performance and to know if these have a relationship. Capital structure and performance of a firm will play an important role to determine the healthy of a firm that will help investors and financial educators to know the trend and stand of a particular firm in order to attract investors. This will have an impact on the local economy if local banks will have the needed capital to invest in this major sector of the economy of which banks capital structure and its performance will be the sole indicator to choose which entity and medium will be appropriate for financing.
central bank for operation. This study is not a case study approach of one particular bank; however, it covers all other players in the banking industry to reflect in the entire industry response to the effect of capital structure on their performance. Hence the result would be generalized and placed in the relevant context of the performance of banks in Ghana.
Chapter two captures the review of relevant literature to the study. The third chapter of the study presents detailed methodology that was used in this study. Chapter four contains data presentation, analysis and discussion whilst the final chapter concludes the summary of major findings, recommendations and conclusion.
of cash flows and increases manager fractional ownership of the residual claim. Jensen (1989) predicts that the firms that have optimal capital structure should be characterized by high leverage to aid it to perform creditably. Previous study by Myers (1977) finds that higher leverage can mitigate conflict between shareholders and manager concerning the choice of investment and the eventual performance of the company. For firms that need to finance a new investment, Myers (1984) recommends using a low risk debt than increasing equity. The reason is that if there is an asymmetric information where investor is less well-informed than current firm insiders about the value of firms assets, then it leads to a mis-priced of equity in the market. Investors do not believe on the new profitable project and make the security is so severely undervalued. Berger (2002) supports Myers argument. He argues that increasing the leverage ratio should result in lower agency costs of outside equity and improve firm performance, all else held constant. He suggests that under the efficiency risk hypothesis, more efficient firms choose lower equity ratio than other firms, because higher efficiency reduce the expected costs of liquidation and the financial distress. Higher profit efficiency may create a higher expected return for a certain capital structure and a corresponding higher performance, and this condition does not protect firms against future crises. Profit efficiency is strongly positively correlated with expected return and higher expected return is substituted for equity capital to manage risks. The empirical studies on those relationship have been conducted, among others are Titman and Wessel (1988), Mester (1993), Pi and Timme (1993), Gorton and Rosen (1995), Mehran (1995), McConnell and Servaes (1995) DeYoung, Spong and Sullivan (2001). Although these empirical literatures have been successful in the sense that many of the capital structure plus some control variables are correlated with firms performance.
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Banks in the sample are subject to essentially equal regulatory constraints, and we focus on differences across banks, not between banks and other firms. Most banks are well above the regulatory capital minimums, and our results are based primarily on differences at the margin, rather than the effects of regulation.
Millers value invariance theory, we would not expect capital structure to vary from firm to firm, or over the performance of a single firm. But the theory was developed under a deliberately artificial set of conditions (Barclay et al, 1995) of no information costs, no personal or corporate taxes, no contracting or transaction costs, and a fixed investment policy. Unravelling Modigliani and Millers assumptions introduce us to the other major capital structure theories. The introduction of taxation effects implies that firms should, theoretically, seek to increase their debt levels in order to increase performance as far as possible (Miller, 1988). However other theorists (Stiglitz, 1974) added limitations to the optimal level of firm debt by arguing that liquidation costs increase as the firms level of debt increases, and this places an upper limit on the amount of debt that should be present in a firms capital structure. This evolved into the static trade-off theory, which proposes that firms attempt to achieve an optimal capital structure that maximises the value of the firm by balancing the tax benefits, with the liquidation costs, associated with increasing levels of debt (Myers, 1984). Some researchers have identified problem areas in the ability of static trade-off theory to explain actual firm behavior and its performance. Myers (2001) argued that static trade-off theory implies that highly performed profitable firms should have high debt ratios in order to shield their large profits from taxation, whereas in reality, highly profitable firms tend to have less debt than less profitable firms. Warner (1977) suggested that liquidation costs are much lower than the tax advantages of debt, implying much higher debt levels than predicted by the theory. There is, however, also some empirical evidence and theoretical support for the idea that firms at least in part construct their capital structure to take advantage of the interest tax shield (net of the interest tax burden to investors), while ensuring that they avoid incurring excessively high financial distress costs for the sake of performance. Kayhan and Titman (2004) found that, over the long term, firms do
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tend to move towards target debt ratios consistent with the theory to build a formidable capital structure and to improve performance. Static trade-off theory therefore offers one possible explanation of how firms choose their capital structure. It also provides some important support for capital structure theory and performance. Warner (1977) found that the ratio of the value of direct liquidation costs to the market value of the firm appears to fall as the value of the firm increases due to a higher performance, a view that has also found support from Esperenca (Esperenca et al, 2003). We might expect, therefore, to see liquidation costs reducing in importance as firms grow and develop, resulting in higher optimal debt ratios and higher levels of debt in larger, more mature firms and higher performance. Opler and Titmans (1994) study of indirect performances of banks using liquidation costs among retailers suggested that firms in the infancy, and adolescence life stages should have lower debt levels than firms in later life stages, as their liquidation costs are higher due to lower performances associated with them. It has also been argued that optimal firm leverage is related inversely to the variability of firm earnings (Bradley et al., 1984), which suggests that prime and stable firms, with more predictable earnings streams, should have higher debt ratios than younger, less predictable firms. Graham (2000) found that firms with unique products, low asset collateral or large future growth opportunities in other words, firms at early stages of development (infancy to adolescence) tend to have lower levels of debt than firms in the stable or aristocracy life stages. In summary, static trade-off theory suggests that firms in infancy, go-go and adolescence cannot afford debt as their liquidation costs are high, and their earnings are too low to use the tax benefit of increasing interest payments. In the prime and stable stages, the larger, more predictable
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earnings makes the tax shield advantage of debt more beneficial. Liquidation costs are also smaller in the prime and stable life stages. In the stages from aristocracy to death, firms are likely to experience a decrease in earnings (and hence a decrease in the tax shield benefit of debt) and as a result might be inclined to use less debt. Static trade-off theory thus suggests that the proportion of debt in a firms capital structure should follow a low-high-low pattern over the firms life stages to enhance performance over the various stages.
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Jensen (1986) argued that agency costs are especially severe when the organisation generates substantial free cash flow, and that the control function of debt is most important in old, declining organisations that actually need to shrink. In the context of the Adizes life stage model this suggests that firms in the prime, stable, aristocracy, recrimination and bureaucracy life stages should take on more debt to control agency costs which will ultimately leads to higher performance. Jensen also argued that debt is less effective in reducing agency costs in rapidly growing organisations with large and highly profitable investment projects but no free cash flow . The firm with the lowest agency costs is, by definition, the one that is run by its owner (Ang et al, 2000) and therefore one would expect start-up firms (the infancy, go-go and adolescence life stages) that are run by the entrepreneur to have the least debt and higher performance. The agency cost argument therefore also offers support for capital structure theory. This time, however, the pattern of the relationship pattern is low-high-high. In terms of agency cost theory, we would expect young owner managed firms to have the least debt, and that debt levels will gradually increase as the firm develops and acquires a greater number of shareholders and more professional managers.
prospects that the market does not have, then managers choice of a capital structure may signal some of this information to the market (Ross, 1977). Increasing leverage, he reasoned, would signal to the market that the firms managers are confident about being able to pay interest in future, and hence are confident about future earnings prospects and performance. Increasing leverage would, therefore, increase the value of the firm by signalling to investors the size and stability of future cash flows (Ross, 1977). Fama and French (1988), on the other hand, countered by pointing to the fact that more profitable firms which are associated with higher performances tend to have lower levels of debt. They argued that increasing debt actually signals poor prospects for future earnings and cash flow as there will be less internal financing available to fund development. Therefore, while it has been argued that information asymmetries decrease over the lifetime of a firm (Baeyens & Manigaart, 2003), there is insufficient clarity on exactly how signalling, within the context of information asymmetries, affects capital structure decisions. We cannot, therefore, look directly to information asymmetries, and how they change over time, as an explanation of why capital structure might change over a firms periods of operation to increase performance.
as they mature. This is supported by Damodaran (2001) who proposed that expanding and highgrowth firms would finance themselves primarily with equity, while mature firms would replace equity with debt. Capital structure life stage theory would seem to suggest, therefore, that debt ratios should increase as the firm progress and performance through the early life stages. From an empirical point of view, however, little work has been done to support or refute this idea. Most of the evidence for and against appears in the context of other arguments. In their analysis of the venture-capital financing of biotech ventures, for example, Morgan and Abetti (2004) argued that high technology ventures are so risky that they can only be financed by venture capital and private equity sources, a view that supports the theory that riskier firms in the infancy, adolescence and go-go life stages should use more equity. There has been little research focusing directly on capital structure life stage theory and its performance, but the little there is suggests, in line with static trade-off theory, that debt ratios should follow a low-high- low pattern over the firms life. Firms in infancy, go-go and adolescence have a high business risk and cannot afford financial risk, while firms in prime and stable can afford the extra risk that accompanies debt financing. Firms in the declining life stages would again experience a growth in business risk and would need to decrease their exposure to debt.
they fear it will signal that the stock price is overvalued. In addition to the evidence presented by Myers, several other studies have lent support to pecking order theory. For example Allen (1993), like Fama and French (1988 ), found that leverage is inversely related to profitability and performance, which supports the pecking order theory view that debt is only issued when there is insufficient retained income to finance investment. According to the pecking order theory, we might expect firms in infancy, adolescence and go-go, with little retained earnings, to seek the maximum available debt funding before resorting to external equity. Prime and stable firms, in contrast, generate substantial retained earnings and therefore need less debt than they did in their high-growth phase. As they move into the stages of decline, retained earnings will decrease and firms again will increase their debt levels to finance acquisitions of young firms. Pecking order theory, therefore, also suggests a strong relationship between life stage performance and capital structure. In contrast to static trade-off theory, however, pecking order theory suggests a high-low-high pattern of debt ratio over time.
2.3 Strategic Management Research and Capital Structure A firms capital structure refers to the mix of its financial liabilities. As financial capital is an uncertain but critical resource for all firms, suppliers of finance are able to exert control over firms . Debt and equity are the two major classes of liabilities, with debt holders and equity holders representing the two types of investors in the firm. Each of these is associated with different levels of risk, benefits, control and performance. While debt holders exert lower control, they earn a fixed rate of return and are protected by contractual obligations with respect
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to their investment. Equity holders are the residual claimants, bearing most of the risk, and, correspondingly, have greater control over decisions.
Questions related to the choice of financing have increasingly gained importance in management research as it has a bare relationship with performance. Traditionally examined in the discipline of finance, these issues have gained relevance in the past few years, with researchers examining linkages to strategy and strategic outcomes. Bettis (1983) argued that modern capital structure theory and strategic management are based on very different paradigms, resulting in opposing conclusions. He called for more integrative research to resolve the controversies. Strategic management scholars exhibit disparate opinions regarding the possibility of such integration into capital structure. Oviatt (1984) suggested that a theoretical integration between the two disciplines is indeed possible as more and more re structuring of capital within a firm has a significant impact on performance. In contrast, Bromiley (1990) believed that the scope for integration is limited, if at all possible. According to him, capital structure strategy should neither import empirical results from finance, nor should they work towards integration of strategic and financial research. Therefore, while strategy should expand its domain to study areas traditionally considered in finance to increase performance, researchers should be careful to maintain a strategic Perspective on how capital structure should be integrated. Some management researchers have viewed capital structure decisions as arising from the preferences of various stakeholders such as managers (Barton et al, 1987,88), board of directors (Stearns
et al 1993)
and institutional investors (Chaganti et al, 1999). Other researchers have viewed capital
structure as an antecedent to firm strategy, such as diversification into new businesses with
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prime issue on performance (Chatterjee,1990, 91). While these studies have definitely contributed to some understanding of the linkages between performance and capital structure, Does it matter how firms finance their assets? and do different modes of financing make a difference? While anecdotal evidence suggests that the amount and type of financing should be closely tied to a firms strategy and its previous performance (Gupta et al, 1995) few researchers have looked at the strategy/financing interaction (Sandberg et al, 1987). A firm consists of a bundle of resources, some of them able to contribute to sustainable competitive advantage (Penrose, 1959). The financial management function of a firm - including its capital structure decision - deals with the management of the sources and uses of finances. Firms enter into transactions with suppliers of finance raising capital for strategic assets. The different types of financing, however, are also associated with different levels of costs as these affects capital structure.
This paper suggests that the efficient set of transactions, as indicated by an optimal debt-toequity ratio, is determined by the nature of strategic assets in the firm. Therefore, those firms that succeed in setting up the efficient set of transactions will be able to realize the full value of these assets. On the other hand, firms that are not able to determine and/or organize their transactions efficiently (as per asset requirements) will suffer a decline in performance. This decline arises from a decrease in the net benefits available from strategic assets. Consequently, superior financial management matching capital structure to resources can provide a firm added benefit over its competitors.
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The accepting of money on deposit, either with or without interest, from and the collection of money for the Government, local authorities, banks and any other persons;
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the making of loans and advances payable on demand or on expiry of fixed period not exceeding six months against certain specified securities (i.e. stocks, gold, silver etc);
the issue of demand drafts made payable at its own offices or agencies; the purchase and sale of securities; the purchase, sale and rediscount of bills of exchange and promissory notes bearing two or more good signatures and maturing within six months from the date of such purchase of rediscount; or within nine months in the case of bills for the purpose of financing seasonal agricultural operations or the marketing of crops;
the acting as agent for the Government and local authorities or any other persons and; the acting as agent or correspondent of a bank incorporated in any country outside the Gold Coast.
In 1953 the Bank of the Gold Coast was set up by the Government and Alfred Engleston, formerly of the Bank of England. Eventually the Bank was split into two: the Bank of Ghana, operating as a bank of issue, to be developed into a complete central bank; and the Ghana Commercial Bank, to be developed into the largest commercial bank with a monopoly on the accounts of public corporations. In July 1957, Alfred Engleston was appointed as the first Governor of the Bank of Ghana (Buckle et al, 1999). Sowa (2005) indicated that after independence, a number of banks were established to fulfill certain developmental goals of the new State. Thus, the National Investment Bank (NIB) which started operations in 1964 was charged with the main object of assisting Ghanaian entrepreneurs in the establishment and expansion of their enterprises. The Agricultural Development Bank (ADB) which originally was part of the Bank of Ghana Rural Credit Unit was formed in 1965 with the aim of reaching smallscale farmers. The third development, the Bank for Housing and Construction (BHC), was
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established by the state in 1972 to cater for the building and construction industry. It is important to note that the period of the establishment of these banks coincided with the controlled regime when the State arrogated to itself the power to make all economic decisions and allocations, to the exclusion of the private sector. By the late 1980s, the banks had suffered substantial losses from a number of bad loans in their portfolios. In addition, cedi depreciation had raised the banks' external liabilities. In order to strengthen the banking sector, the government in 1988 initiated comprehensive reforms. In regulatory framework, and gradually improved resource mobilization and credit allocation. In 1992 the Government began to privatise, what has for some time been regarded as the flagship in banking, the Ghana Commercial Bank; and in 1994 took steps to divest itself of most of its interests in the Social Security Bank. The liquidation of Bank for Housing and Construction and Ghana Co-operative Bank in January 2000 and the collapse of Bank for Credit and Commerce in June 2000 called for pragmatic approaches in capital adequacy, including holding a capital buffer of sufficient size, enough liquid assets, and engaging in efficient risk management (Amidu, 2007). A critical analysis of some selected banks revealed that Bank for Housing and Construction (BHC) and the Ghana Cooperative Bank (COOP) showed signs of liquidity crunch before their liquidation. On profitability, these banks showed abysmally poor performance while their capital structure ratios did not favour these banks either (BoG, Financial Markets Department, 2000). These led to the enactment of the following Acts: Bank of Ghana Act 2002, Act 612; Banking Act 2004, Act 673 and its subsequent amendments in 2007.
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The abolition of the 15% secondary reserve ( in August , 2006) requirements of banks and the reduction of governments overall domestic debt-to-GDP from 29% (2002) to 10.1% (2006) and reduction in the prime rate 24.5% (2002) to 12.5% (2006) also allowed banks to have more money for private sector freed up significant liquidity for lending to businesses. The National reconstruction Levy, which ranged between 2.5% to 5% of profit before tax was abolished at the end of 2006 (The Ghana Banking survey, 2007). Total Domestic Credit for the period under review rose from GHC635.40 million (in 1999) to GHC 7,290.3 million (in 2008) (ISSER,
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2009). Some other recent improvements in the Banking industry include the introduction of the e-zwitch, Automated Cheque codeline clearing system and the supervision of the redenomination of the cedi. The total number of major banks as at 2007 stood at 23. All of these banks were in compliance with the minimum capital requirements of GHC 7 million for universal banking business under class 1Banking license. All but one bank complied with the minimum capital adequacy ratio of 10.00 percent, with an industry ratio of 14.8 per cent (BoG, 2007).
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Bank of Ghana with financial statements from within the stated period. In all 24 banks qualified to be included in the sample. Since the study was purposely on the banking sector, commercial banks being licensed by the central bank were all forms part of the study population.
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i,t
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TDA i,t is total debt divided by net total assets for bank i in time t; SDROE is used to measure bank risk. SDROE i,t is standard deviation of the ROE for bank i in time t from the average ROE of bank i for the study period;
SIZEA i,t is the log of the total assets for bank i in firm t. It is used as a measure of bank size;
LOINL i,t is the log of the total value of loan and investment for bank i in time t; AGE i,t is a measure for bank loyalty. It is calculated as the log of the AGE for bank i in time t;
HERFG i,t is a deposit market concentration using Herfindahl index for bank i in time t; and
Finally, equation 4 was used to ascertain the relationship between ROE and total debt.
Long-term debt to Net Total Assets (LDA) LDA measures the relationship between long-term debt (all debts of a bank with a lifespan of more than 1 year) and net total assets. It shows the value per cedi of net total assets contributed
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by long-term loans. This relationship enables the researcher to test the impact of long-term loans on bank efficiency.
Short-term debt to Net Total Assets (SDA) SDA is used to measure the relationship between short-term debt (all Owings by a bank which fall due within a year) and net total assets. It is used to ascertain the portion of net total assets financed by short-term debt. It shows the stake that short-term debt holders have in the business and it is used to assess their impact on bank efficiency.
Capital Ratio (CAP) CAP is the standard measure of leverage in banking research (Pratomo and Ismail, 2006). It allows the researcher to ascertain the portion of net total assets contributed by equity holders. This is then used as proxy to assess the impact of equity capital on bank profitability.
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AGE Age is calculated as the log of the number of years of existence for a bank since incorporation (or since commencement of business, where the date for incorporation cannot be ascertained with a degree of precision). Age is chosen as one of the control variables because, all other things being equal, the length of time that a bank has been in existence will not only enable the bank to gain experience in banking in Ghana but also improve its reputation and enhance customer loyalty. These are expected to translate to bank efficiency if the bank can use its experience to gain competitive advantage. This is not measured by the other variables, hence its inclusion in the model.
Standard deviation of Return on Equity (SDROE) SDROE is used to measure the uncertainty of returns to the true owners of the banks. It is a standard measure for risk in investments. In investment, as the risk of an investment increases, return is also expected to be high enough to cover the additional risk being taken by the investors. In other words, as banks engage in risky adventures, the volatility of the earnings should be compensated by higher rewards. Consequently, it is expected that the relationship between SDROE and ROE would be positive.
Total Loans and Investment (LOINL) LOINL is considered as a control variable because banks get a lot of operating income from loans and investments. The granting of loans and credit is the principal activity of banks. It is
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calculated as the total of all loans and advances irrespective of their life spans. Banks major source of revenue comes from this source. Consequently the relationship between loans and ROE is expected to be positive. Another operating activity of banks is the undertaking of investments. Banks earn operating income from this source in the form of discounts, dividend etc and they can have significant impact on the profitability of a bank. It is expected that the higher the amount of a banks investment the higher its return. Therefore it is expected that total loans and investments would have a positive impact on bank profitability. Herfindahl Index (HERFG) HERFG is the square of the deposit market share for a bank for a particular year. The resultant figure is then multiplied by 10,000. Deposit is selected as the basis for calculating HERFG because it is expected that a customers loyalty to a particular bank can be best reflected in the amount he/she is willing to deposit with that bank. Deposits therefore give a justifiable indication of the proportion of the entire market controlled by a bank. Thus banks with larger market share are expected to have higher ROEs signaling a positive association between HERFG and ROE.
(2006). As this research uses data from selected banks in Ghana, the researcher prefers Fixed Effect Model as a representative model. Moreover, to strengthen the result, the researcher analyzed the result of the estimated regression using Hausman Test. The different estimation methods were used to run the multiple regression models.
35
36
2007). Amidu (2007) reveals that more than 87% of the banks in Ghana are financed by debt and that average long-term debt represents around 8.2%. Evidently, it has also shown that the banks in the industry operate above the minimum required capital adequacy ratio of 10percent as it was found that, the mean capital ratio of banks in Ghana is 13.86 percent. The low standard deviations of 3.75 percent (equity capital) and 12.77 percent (total debt) attest to the fact that almost all the banks in Ghana sources of funding are similar and do not vary. The performance indicator (ROE) has a mean of 82.57 percent and a standard deviation of 54.65 percent, which shows that, clearly, the banking industry performed extremely well in the period under review but it is also obvious since the standard deviation is quite large it indicates that not all the banks are benefiting from this high industry performance , some are actually not doing their best. The average risk level in the industry was 0.3476 with a deviation of 38.54 percent. Which shows a fairly stable risk among banks. The mean of total assets (log) was 6.24 (standard deviation of 70.24 percent) whiles that of total loans and investments (log) was 6.59 (with a standard deviation of 63.82 percent). The extremely high level of standard deviation of firm-level deposit-herfindahl Index suggests that the banking industry is concentrated with only few banks in Ghana control the total deposits in the industry. This may offer support for the high disparity in ROE, total assets and total loans and investments. Probably these disparities are as a result of the fact that some of the banks have been in existence for far more years than others (the standard deviation of the log of age is 58.72 percent whiles the average age (log) is 2.0586).
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Table 4.1 Descriptive Statistics of Variables Variable ROE CAP SDA LDA TDA SDROE SIZEA LOINL AGE HERFG Observation 24 24 24 24 24 24 24 24 24 24 Mean Value .8256876 .1385680 .7934057 .0655987 .8167868 .3476450 6.239879 6.589452 2.058645 57.81113 Std. Dev .54659 .03752 .13363 .14036 .12774 .38549 .70236 .63821 .58724 133.271
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Table 4.2: Pearson Correlation Coefficients ROE ROE CAP SDA LDA TDA SDROE SIZEA LOINL AGE HERFG 1.0000 CAP -0.4984* 1.0000 SDA 0.3287* LDA 0.1276* TDA 0.5428* SDROE 0.3875* SIZEA 0.0397 -0.2698* 0.2404* 0.0228 0.2876* -0.2376* 1.0000 LOINL 0.0543 -0.3167* 0.2431* 0.0510 0.3015* -0.2325* 0.8502* 1.0000 AGE 0.0415 -0.1187 0.03462 0.0583 0.1033 -0.2056* 0.6238* 0.6743* 1.0000 HERFG 0.2013** -0.2246*** 0.2104* -0.1645** 0.1043 -0.2376* 0.5187* 0.5437* 0.6548* 1.0000
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Correlation Analysis
Clearly, the performance indicator (ROE) has a significantly inverse relationship with capital, a significantly positive relationship with short-term debt, long-term debt total debt, and risk and deposit herfindahl index, even though the strength of association was great, however, it shows a significance which cannot be ignored. Although ROE exhibits a positive relationship with total assets, total loans and investments and age, these relationships are not significant. Equity capital (CAP) has a significantly inverse relationship with all the control variables except for age (with which the negative relationship is not significant) however, LDA also shows insignificance of the relationship. The relationship between SDA and all the control variables is significantly positive except for age (with which the positive relationship is not significant). LDA exhibits an insignificantly positive relationship with total assets, total loans and investments and age but a significantly positive relationship with herfindahl index. On the other hand LDAs relationship with risk is inverse and insignificantly. Statistically, the relationship between Total debt and risk, total assets and total loans and investments is significantly positive but although total debt has positive relation with age and herfindahl index, the relationship is not significant. The high magnitude of the correlation coefficient of the relationship between total asset and total loans and investments indicates the presence of multicollinearity. However, a forward regression was used to analyzed the data to include the multicollinearity variables. wise regression for the inclusion of the two variables. * Denotes significant at 1 percent ** Denotes significant at 5 percent *** Denotes significant at 10 percent
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Residual| 107.888177
-------------+-------------------------------------------------CAP |-4.51978 .5440752 -2.16 0.020 -5.1285967 -3.0246395 SDROE |.3076805 .212417 -3.43 0.042 .0148144 .5005465 SIZEA |.3655441 .213041 AGE |-.065441 .353041 1.86 0.000 2.89 0.160 1.60 0.060 1.34 0.123 .0468094 -.468094 -.0018094 -3.47101 .6778976 .1778976 .0008976 5.01403
-------------+--------------------------------------------------
41
Table 4.3B: Regression Result for Model One, with Loans and Investments Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0035 R-squared = 0.94915 Adj R-squared = 0.8364 Root MSE = 1.19814
Residual| 231.12307
-------------+-------------------------------------------------CAP |-4.3951 .812706 -4.40 0.000 -5.34875 -3.055732 SDROE |.309346 .147549 -3.23 0.003 .09432 .524407 LOINL |.482370 AGE |-.16345 .134103 .1156307 .000562 1.47 -2.09 -1.63 -1.34 0.000 0.240 0.081 0.003 .02543 -.36737 -.00286 -3.7010 .6759970 .1505689 .0000874 -.0103664
HERFG |-.00074
-------------+--------------------------------------------------
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4.3.1 Discussions from Model One on Bank Performance, Bank Capital and the Control Variables
Table 4.3A gives the results of the first model which aims at testing the relationship between bank performance, bank capital and the control variables, as indicated in the table, the anova tables shows a significant differences in the averages of the bank capital and the control variables and hence has R-square of 0.97132, which indicates that, the capital and the control variables accounts for 97.132 percent in the changes of the performance variable (ROE). The results of the constants in the coefficient table in table 4.3A indicates that that equity has a significantly an inverse relationship with firm performance (ROE). These results interprets to mean that banks with high amount of capital are unfavorably affecting its performance and that increasing a banks capital does not increase its profitability. The low level of debt in high equity capital structures reduces bank responsibility towards debt holders, in terms of interest and principal payments. This also declines the threat of insolvency. As a result, management would not be under pressure to increase profit in order to meet the banks periodic debt repayments. These findings are in agreement with the agency costs hypothesis higher leverage or lower equity capital ratio is associated with profit efficiency, all else equal. Moreover, total asset, total loans and investments all have a significantly positive relationship with performance. These are found to be in consistent with the usual known paradigm larger banks are better diversified and can thus hold less capital to buffer against losses. Thhis also confirms the general knowledge that businesses generate economic benefits from the assets it acquires.if and only if they are managed efficiently. Also loans and advances given out and investments undertaken enable banks to increase their profitability by increasing their interest income, interest received, dividend income and other investment income. Risk has the expected
43
impact of positively affecting performance. Also high risk investments and adventures undertaken by banks are normally associated with higher returns because of the extra rewards demanded for taken on additional risk, thus increasing bank performance. Unexpectedly, Age and Deposit herfindahl index give inverse relationship with bank erformance even though these relationships are not statistically significant since P> 0.05 both in table 4.3A, B . The age factor may be an indication of the fact depositors and/ borrowers do not consider the duration of a banks existence when selecting a bank to deal with. However, the negative sign of deposit herfindahl index is a carefulness to banks on how efficiently they are managing the proportion of deposits that they control. It clearly shows that the larger the volume of deposits controlled by a bank, the lesser its performance; even though this is not significant when total assets are use in the model thus table 4.3A. But the significantly inverse relationship between herfindahl index and bank performance when total loans and investments are used in the equation thus table 4.3B makes it much more worrying. It appears that, some banks are not managing their deposits well, therefore leading to affecting its performance.
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Table 4.4A: Regression Result for Model Two, with Total Assets Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0136 R-squared = 0.94802 Adj R-squared= 0.87745 Root MSE = 1.36006
Residual| 297.810707
-------------+-------------------------------------------------SDA |1.256439 .464824 2.59 0.000 0.534287 3.0003434 SDROE | .458206 .128346 SIZEA | .630286 AGE .137704 3.77 -1.25 -1.88 -1.38 -4.34 0.014 0.033 0.067 0.028 0.023 .277032 .365201 -.462012 -.0020934 -7.482001 .7322765 1.0036724 .0270046 .0006655 -2.5234013
|-.274305 .153030
-------------+--------------------------------------------------
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Table 4.4B: Regression Result for Model Two, with Loans and Investments Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0010 R-squared = 0.96375 Adj R-squared = 0.9251 Root MSE = 0.83707
Residual| 112.81377
-------------+-------------------------------------------------CAP |1.259804 .407153 2.68 0.010 2.996548 2.02635773 SDROE |.5076577 .202107 3.44 0.024 .2180841 .7405445 LOINL |.6350412 .130466 AGE |-.276451 .123030 5.06 0.003 -2.14 0.000 -2.06 0.037 5.39 0.003 .4064504 -.448007 -.002007 -7.50131 .9628960 -.0789655 .0000726 -3.349093
-------------+--------------------------------------------------
46
4.3.2 Discussions on Model Two on Bank Performance, Short term Debt and Control Variables
On the other hand short term debt, was noted to have a direct positive relationship with performance which also depicts to be a significantly positive relationship with ROE. This confirms the fact that, the more short-term debt a bank holds on its capital structure the higher its performance. The lower cost and risk of short term debt financing could be the main reason for its direct positive relationship with performance. As a result banks benefit greatly when they use more short-term debt. Both table 4.4A and 4B shows that the predictor variables , thus SDA and the other control variables accounts for much of the variation in the performance indicator (ROE) from the various banks. Age and deposit herfindahl index show a significantly inverse relationship with performance while risk, total asset, total loans and investments show a statistically positive relationship with performance, moreover significant. These suggest that banks which have been in existence for relatively long have not been successful in cashing in on first-mover advantages. It could also be as a result of their inability to manage some of their assets well. Furthermore it is also probable that long-term- existent-banks have not been relatively successful in the management of their reputation as compared to banks which are new in the industry. It can be conclude that, these results are unfavorable to banks in the industry that have existed for longer years in the industry.
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Table 4.5A: Regression Result for Model Three, with Total Assets Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0001 R-squared = 0.97281 Adj R-squared = 0.9254
Residual| 99.4672
-------------+-------------------------------------------------LDA |1.03934 .44054 2.36 0.022 .124904 1.02395 SDROE |.571940 .12310 SIZEA |.565403 .130841 AGE |-.36704 .157045 3.99 4.02 -2.57 -0.44 0.002 0.000 0.100 0.840 .3114407 .3668904 -.568494 -.0014043 -5.47501 .854605 .8775926 -.0789716 .0009706 -1.51033
-3.44 0.003
-------------+--------------------------------------------------
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Table 4.5B: Regression Result for Model One, with Loans and Investments Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0121 R-squared = 0.95683 Adj R-squared = 0.9259 Root MSE = 1.0658
Residual| 182.8877
-------------+-------------------------------------------------LDA |.983478 .440520 2.23 0.021 .125673 1.924395 SDROE |.572680 .1124172 3.68 0.002 .342815 .750567 LOINL |.655440 .1521045 AGE |-.36744 .1173043 4.06 -3.19 0.49 -4.34 0.000 0.100 0.660 0.003 .396895 -.648104 -.00137 -5.9471 1.077971 -.578376 .000795 -2.019034
-------------+--------------------------------------------------
49
4.3.3 Discussions of Mode Three on Bank Performance, Long-term Debt and the Control Variables
Long term debt which forms part of financing shows a significantly positive relationship with performance indicator (ROE), Long term debt is generally scarce and expensive, which comes with terms and conditions which indirectly work for the good of the organization, such as restrictive covenants, collateral requirements, fixed repayment terms leave management with no option but to remain profitable in order to safeguard the interest of shareholders and other stakeholders. This result, is not in Abor (2005), In his paper, he found that, the relationship between long term debt and Ghanaian listed firms profitability was found to be significantly negative. The reason, which does not differ significantly from the afore mentioned studies is the fact that long-term debts are relatively more expensive, and therefore employing high proportions of them could lead to low profitability. In this particular study, it appears that the financial benefits of long-term usage far outweigh the cost, this may also be due to the short period used for the study. Ages if firms contribution shows inverse relations with performance. Nevertheless, risk, total asset, total loans and investment maintain their significantly positive relationships with bank performance. In this model deposit herfindahl index depicts an insignificantly inverse relationship with performance. Consequently it reveals that banks management of the proportion of deposits controlled is improved when they use high long term debt in financing. In effect, long term debt increases management ability in asset maximization and enables them to be scrupulous in the application of scarce bank resources.
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Table 4.6A: Regression Result for Model Four, with Total Assets Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0021 R-squared = 0.75336 Adj R-squared = 0.7198 Root MSE = 2.85011
Residual| 1307.8277
-------------+-----------------------Coefficients --------------------------------------------------------------ROE | Coef. Std. Err. t P > |t| [95% Conf. interval]
-------------+-------------------------------------------------TDA |3.00348 .444752 5.64 0.020 1.12346 4.0002432 SDROE |.376105 .102459 SIZEA |.399543 .13843 AGE |-.09856 .113005 3.11 0.000 .0146504 .1046894 -.304016 -.001704 -6.5711 .5775065 .6678760 .070871 .0002964 -3.06438
HERFG |-.000616 .000301 -1.21 0.160 _cons | -4.956 1.00481 -4.91 0.100
-------------+--------------------------------------------------
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Table 4.6B: Regression Result for Model Four, with Loans and Investments Anova Table Source | SS df MS Number of obs = 168 F(6,167) = 2.10 Prob > F = 0.0001 R-squared = 0.79702 Adj R-squared = 0.7395 Root MSE = 2.619307
Residual| 1104.5845
-------------+-------------------------------------------------TDA |2.59178 .407512 6.16 0.020 1.12597 3.524395 SDROE |.363420 .125415 3.03 0.042 .16812 .620046 LOINL |.650347 .123053 AGE |-.28555 .151645 3.89 -2.39 -1.60 -5.34 0.000 0.160 0.060 0.123 .0468094 -.468094 -.0018094 -3.47101 .767876 .007897 .000197 -3.540327
-------------+--------------------------------------------------
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4.3.3 Discussions of Model Four on Bank Performance, Total Debt and the Control Variables
Model 4 rsults, as indicated in table 6A, B indicates that, the total debt and the control variable accounts for more variations in the performance of the bank, it clearly exposes that, the relationship between total debt and performance is significantly positive. The results confirms earlier findings in this study on capital, short term debt and long term debt; leverage increases performance of banks in Ghana. This means that increasing the level of debt in the capital structure of a bank results in higher performance. This notwithstanding, banks are also advised against excessive debt which can be recipe for insolvency and financial distress. This indicates that, bank could result in debt financing within a controllable limit which wont affect its operations to put it into financial distress. The relationship between performance and risk, total assets, total loans and investments were also noted to be positive and significant. Conversely, in table 4.6B, deposit herfindahl index shows a inverse but insignificant relationship with performance. Also, age has a significantly negative relationship with performance when total loans and investments are employed in the equation but not when total assets are employed.
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The study confirms that, debt or leverage in any form tends to increase the entire profitability of bank and hence leads to higher performance, unexpectedly, and contrary to some existing literatures, long-term debt was also found to affects bank profitability positively, even though they account for a minimal percentage of bank capital, whereas that of short term tends to have a significant impact on the profitability of banks in Ghana. Nevertheless, the use of equity reduces bank profitability, as it also was found to have an inverse relationship with the performance indicator (ROE).
Additionally, Banks risk was found to be associated with high performance, nevertheless age of banks and deposit herfindahl index was found to have an inverse relationship with bank performance. Clearly it was also found that, bank assets (bank size) held also increases bank profitability as well as total loans and investments also increase bank profitability. Besides, since both the short-term and long term leverage have a positive impact on the profitability on the bank, it was generally, find that, the total debt of the bank contributes to its performance, however, the performance increases if the short term debt accounts for more of the debt due to its low risk and high interest. Specifically, the descriptive statistics indicates and brings to bear that, Banks in Ghana are highly leveraged. Accounts for 81.68 percent of bank assets are provided by debt thus either in any form of leverage which were found to have a positive impact on performance. Furthermore, most banks in Ghana use more short-term debt 79.34 percent as against long-term debt which accounts for 6.56 percent. Evidently, the banks were found to operate above the required minimum capital adequacy ratio of 10%. The results give must to be believed that, the average capital of banks in Ghana is about 13.86 percent.
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Findings on Hypothesis Clearly as indicated in all the Anova tables for all the models indicates that, there is a relationship between the profitability and capital structure since all the p < 0.05, therefore we fail to accept the null hypothesis that there is no relationship between the profitability and capital structure.
5.2 Conclusions
The findings discovered were consistent with existing literature on firms and performance with insignificant difference. The results clearly indicates that, banks in Ghana do well when they apply more debt both short-term debt and long-term debt in the financing of their activities. As a result, increase in bank capital structure is discouraged and should be done with much care, increase in bank debt - especially short-term debt - is encouraged. Nevertheless, banks are advised against excessive debt levels because of the inverse consequences associated with high debt usage. Which tends to agree with the agency cost hypothesis, under which high leverage corporate tends to reduce agency costs? It is imperative therefore, that banks in Ghana strategies their capital structure.
5.3 Recommendations
Based on the findings observed earlier, the following recommendations are suggested
From the analysis, debt was found to be highly associated with high performance. Banks with high debt have high return, irrespective of the nature of debt used, however, short term debt is
56
the preference. Therefore it is recommended that, banks are encourage to increase their level of debt, however careful measures should be taken not to drive the bank into insolvency.
Moreover, due to the effects of the capital structure on the various performance of a firm, it will be recommended that, banks should only increase their capital when they are operating below the required minimum capital adequacy ratio to provide protection for its depositors Banks are rather encourage to create innovations in their products to bring in more of their clients to save more, since banks could finance their debt or use its leverage to effectively manage the short term and the long term debt. savers amount could be used to service these debts and will shield the bank from borrowing from the central bank to increase profitability and hence performance. What is more, most banks use short term debt and most of these short term debt are in the form of customer deposits such as fixed, savings accounts, current accounts and other time deposits. Banks in Ghana should therefore find more ways of attracting while discouraging withdrawals. Again more efficient deposit-withdrawal management can give banks virtually free capital which also has the potential to increase their performance. Furthermore, it appears that banks in Ghana do not benefit from the proportion of customer deposits they control. Likewise on the academic front, it is recommended that, capital structure and firms performance relationship could be analyzed by using data set from a hybrid of financial institutions such as insurance firms, and other financial institutions licensed by the central bank.
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