Role of Capital Adequacy on Bank Lending and Performance in Ghana

Abstract

Banks play important roles in national economies and their continuous stability is regarded highly. One of the measures of financial soundness is capital adequacy, which is the ratio of a bank’s primary capital to its risk weighted assets. This study set out to examine how capital adequacy is related to bank performance and lending. The analysis was done using both primary data from questionnaires issued to key bank staff as well as data from the annual financial reports of banks. Fourteen banks, with data from 2008 to 2018 were included in the sample. The study relied on Pearson Correlation coefficient and other bivariate descriptive to report results. The findings show that Capital adequacy had a positive relationship with profitability and lending, but the result was only significant for profitability and not lending. In spite of the high capital adequacy ratio of banks, there is still caution on lending based on increasing non-performing loan ratio in the industry. However, capital adequacy encourages customer confidence, which leads to cheap deposits for banks and ultimately increased profits. There is need to improve customer identity and addressing system as well as bank credit assessment process to enhance asset quality