Capital Adequacy Ratio and Economic Growth in Ghana

Abstract

This study is an analysis of the direct relationship between capital adequacy ratio and economic growth using gross domestic product as a proxy. Also, capital adequacy ratio and some selected macro-economic variables in Ghana. The study employs secondary data from bank of Ghana database, world development indicators and Ghana statistical service over a seventeen-year period of 2002 to 2018. The relationships calculated in this study were tested using a correlation analysis. The study finds that there is an absence of trend and a presence of seasonality based on the auto correlation correlogram (AC) results of all the variables listed but per capital income. A correlation matrix to show the relationship between the variables indicated the relationship between all the stated variables. Capital adequacy ratio showed a strong positive relationship with per capita income and a weak positive relationship with GDP growth. The absence of highly correlated paired variables indicate that the risk of multi collinearity is low. A trend of the capital adequacy ratio as well as the gross domestic product was drawn to further understand the rises and dips of these variables within the period under study. The study recommends that: the central bank and the government should desist from over burdening banks solely based on macro-economic variables and expectations of the gross domestic product of the country. The concentration should rather be geared towards helping banks consistently build and maintain a healthy capital base and not solely concentrating on banks keeping high capital adequacy ratios.