Capital Adequacy and the Performance of Ghanaian Banks

Abstract

The purpose of this paper is to examine the relationship between capital adequacy (CAR) and the performance of Ghanaian banks. The study used a panel data methodology constructed from the financial statements of 21 commercial banks out of the 25 banks in Ghana covering the periods of 2000-2010. The financial statements were obtained from the Banking Supervision department of the Bank of Ghana. Statistical package, E-VIEWS, was used for the analysis. From the results, the study indicated a negative and insignificant relationship between capital adequacy ratio (CAR) bank performance (Return on Assets (ROA)) but observed a negative but significant relationship between capital adequacy ratio (CAR) and performance (Return on Equity ( ROE)). The negative relationship implies that, as more capital is set aside as a buffer for banks safety; it affects the performance of Ghanaian banks. The implication of the study, lies in the fact that the negative relationship between capital adequacy and performance emphasizes the fact that various efforts by the regulators to review often times the capital base of the banking sector is not borne out of the aim to improve the profitability of the banks. Rather to maintain stability, protection against depositors and confidence in the banking industry. The paper amongst others recommends that, other factors such as risk, size and macro-economic variables in addition to capital adequacy be monitored, since these vectors also impact more on performance of banks.

Key Words: Capital Adequacy, Bank Performance, Ownership