The Impact of Energy Sector Debt on Banks’ Total Liabilities to Total Asset Ratio in Ghana

Abstract

The energy sector has experienced tremendous growth in the past year in line with rapid population growth in the country. The increase in demand sometimes leads to the inability of the State Owned Enterprises (SOEs) to meet the user's needs and therefore increases its operational cost. They, therefore, borrow from both internal and external sources to finance its operations. Unfortunately, there are less empirical studies that show the impact of energy sector debts on the balance sheet of commercial banks. This study sought to address these challenges by examining if borrowings from these energy sector SOEs contribute significantly to the challenges being faced by the banks. In addition, the study investigates the factors that increase the liability ratio of banks and the relationship between energy sector loans from commercial banks and the liability ratio of the banks. The researcher used secondary data from annual financial reports of twelve (12) commercial banks. The study also gathered energy sector borrowings from the SOEs using their annual reports. The paper used Panel Data Regression analysis to determine the impact of energy sector debt on banks’ liability ratio and other factors that affected it. The major findings attained from the regression analysis indicate that energy sector loans do not have any significant effect on solvency ratio whereas the capital adequacy ratio had a positive effect on the solvency ratio of banks. Moreover, the empirical analysis further suggest that the size of banks was found to substantially affect the solvency ratio positively despite the fact that non-performing loans were found not to significantly affect the solvency rati