University of Ghana http://ugspace.ug.edu.gh UNIVERSITY OF GHANA COLLEGE OF HUMANITIES CAPITAL ADEQUACY RATIO AND ECONOMIC GROWTH IN GHANA BY SAKINATU ASOBER SEIDU (10285104) THIS LONG ESSAY IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER OF SCIENCE DEGREE IN DEVELOPMENT FINANCE JULY, 2019 University of Ghana http://ugspace.ug.edu.gh DECLARATION I do hereby declare that this thesis is the outcome of my own study and has not been submitted by any person or group of persons for any academic award in the University of Ghana or any other tertiary institution in or outside Ghana. I duly acknowledge all references used in this study. I solely bear responsibility for any shortcomings. .……………………………… .……………………………… SAKINATU ASOBER SEIDU DATE (10285104) i University of Ghana http://ugspace.ug.edu.gh CERTIFICATION This is to certify that this thesis has been supervised in accordance with the prescribed procedures of the University of Ghana. .………………………….…………… .………………………….…………… PROF. ANTHONY Q. Q. ABOAGYE DATE (SUPERVISOR) ii University of Ghana http://ugspace.ug.edu.gh DEDICATION Jesus my Saviour. This thesis is dedicated to my parents Col. & Hajia Seidu and my lovely sisters Muhibatu, Samira and Khadija whose unconditional love and prayers has seen me through this study. I humbly dedicate this work to my MBF, Francis Tetteh Padi (C.A). iii University of Ghana http://ugspace.ug.edu.gh ACKNOWLEDGEMENTS Absolute thanks goes to God Almighty and Jesus Christ for taking this walk with me till the completion of this MSc course. Prof Anthony Q. Q. Aboagye (PhD), my supervisor whose direct input chipped away the rough edges and made this dissertation the masterpiece it is. Also, I wish to express my heartfelt appreciation to Mrs. Carine Lesley Malor for all the guidance since before I began this paper till its successful close. I am not quick to forget the assistance of all those who in one way or the other contributed to the success of this work, Prince K. Oppong, Richard Atakpa, Senyo K. Adjei (SKA), MSAW and Prince Asamoah. All the lecturers and their able bodied teaching assistants in the Department of Finance have my deep gratitude for their motivation and insightful suggestions and pointers during the entire year. May Proverbs 11:25 be revealed in their lives. Again, I wish to express my profound gratitude to all my friends, course mates and colleagues whose help and encouragement fuelled my zeal throughout the studies. My sincere gratitude also goes to my mother, Hajia Washelatu for her non-stop prayers, advice, belief, encouragement and unconditional love which helped me complete this work. God richly bless you mom. All the prayers of my grandparents, Mary & Balori Kalogi and Kudoibania & Seidu Atogipe, are also not taken for granted, continue to Rest in Peace. Lastly, I wish to register my sincere thanks to all the authors whose scholarly articles I made reference to in this thesis. iv University of Ghana http://ugspace.ug.edu.gh 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. v University of Ghana http://ugspace.ug.edu.gh TABLE OF CONTENTS DECLARATION ........................................................................................................................ i CERTIFICATION ..................................................................................................................... ii DEDICATION ......................................................................................................................... iii ACKNOWLEDGEMENTS ...................................................................................................... iv ABSTRACT ............................................................................................................................... v TABLE OF CONTENTS .......................................................................................................... vi LIST OF TABLES .................................................................................................................... ix LIST OF FIGURES ................................................................................................................... x LIST OF ABBREVIATIONS ................................................................................................... xi CHAPTER ONE ........................................................................................................................ 1 INTRODUCTION ..................................................................................................................... 1 1.1 Background to Study ........................................................................................................ 1 1.2 Problem Statement ........................................................................................................... 4 1.3 Research Objective ........................................................................................................... 4 1.4 Research Questions .......................................................................................................... 6 1.5 Significance of the Study ................................................................................................. 6 1.6 Scope and Limitation ....................................................................................................... 7 1.7 Chapter Disposition .......................................................................................................... 8 CHAPTER TWO ....................................................................................................................... 9 vi University of Ghana http://ugspace.ug.edu.gh REVIEW OF LITERATURE .................................................................................................... 9 2.1 Introduction ...................................................................................................................... 9 2.2 Capital Adequacy Ratio (CAR)........................................................................................ 9 2.3 Overview of Bank Capitalization ................................................................................... 14 2.4 Measurement of Capital Adequacy and Bank Solvency ................................................ 16 2.5 Tiered Capital of banks .................................................................................................. 16 2.6 Macroeconomic Variables .............................................................................................. 18 2.6.1 Gross Domestic Product (GDP) .............................................................................. 18 2.6.2 Inflation (INFL) ....................................................................................................... 21 2.6.3 Monetary Policy Rate (MPR) .................................................................................. 23 2.6.4 Currency Depreciation (DEP) ................................................................................. 24 2.6.5 Per Capita Income (PCI) .......................................................................................... 25 2.6.6 Capital Adequacy Ratio (CAR) ............................................................................... 26 2.7 Conclusion ...................................................................................................................... 28 CHAPTER THREE ................................................................................................................. 30 METHODOLOGY .................................................................................................................. 30 3.1 Introduction .................................................................................................................... 30 3.2 Research Design ............................................................................................................. 30 3.3 Data source and description ........................................................................................... 30 3.4 Model Specification ....................................................................................................... 31 3.4.1 Trend Analysis ......................................................................................................... 32 vii University of Ghana http://ugspace.ug.edu.gh 3.4.2 Correlation Analysis ................................................................................................ 33 3.4.3 Auto-Correlation (AC) Analysis ............................................................................. 33 3.5 Conclusion ...................................................................................................................... 35 CHAPTER FOUR .................................................................................................................... 36 RESULTS AND DISCUSSION .............................................................................................. 36 4.1 Introduction .................................................................................................................... 36 4.2 Descriptive statistics ....................................................................................................... 36 4.3 Trend Analysis ............................................................................................................... 37 4.4 Correlation Analysis ....................................................................................................... 40 4.5 Auto-Correlation (AC) Analysis .................................................................................... 42 CHAPTER FIVE ..................................................................................................................... 44 SUMMARY, CONCLUSION & RECOMMENDATIONS ................................................... 44 5.1 Introduction .................................................................................................................... 44 5.2 Summary of Findings ..................................................................................................... 44 5.3 Conclusions and Limitation ........................................................................................... 45 5.4 Recommendations .......................................................................................................... 45 REFERENCES ........................................................................................................................ 48 APPENDIX .............................................................................................................................. 57 viii University of Ghana http://ugspace.ug.edu.gh LIST OF TABLES Table 2.1: Capital Adequacy Ratios of Ghanaian Banks in the Industry .............................................. 13 Table 4.2: Descriptive Statistics............................................................................................................ 37 Table 4.3: CAR and GDP Growth ........................................................................................................ 38 Table 4.4: Correlation Matrix ............................................................................................................... 40 Table 5.4: Correlogram ......................................................................................................................... 42 ix University of Ghana http://ugspace.ug.edu.gh LIST OF FIGURES Figure 2.1: Total capital ratio calculation, Source: BOG Capital Requirements Directive 2018 .................................................................................................................................................... 9 Figure 3.2 Capital adequacy ratio ............................................................................................ 12 Figure 2.3: GDP growth ........................................................................................................... 19 Figure 2.4: Inflation rate .......................................................................................................... 23 Figure 2.5: Depreciation of GHS against the USD .................................................................. 25 Figure 2.6: Per capita income (PCI) ........................................................................................ 26 Figure 2.7: Capital adequacy ratio (CAR) ............................................................................... 28 Figure 4.1: Graphical presentation of CAR and GDP growth ................................................. 39 x University of Ghana http://ugspace.ug.edu.gh LIST OF ABBREVIATIONS AC Auto-Correlation BIS Bank for International Settlement BOG Bank of Ghana CAR Capital Adequacy Ratio CRD Capital Requirement Directive DEP Currency Depreciation DMB Deposit Money Bank GCB Ghana Commercial Bank GDP Gross Domestic Product GDPGR Gross Domestic Product Growth Rate GSS Ghana Statistical Service IMF International Monetary Fund INFL Inflation LCR Liquidity Coverage Ratio MAX Maximum MFI Microfinance Institution MIN Minimum MPR Monetary Policy Rate NBFI Non-Bank Financial Institution NSFR Net Stable Funding Ratio PCI Per Capita Income RCB Rural and Community Bank RWA Risk-Weighted Asset STD. DEV. Standard Deviation WACC Weighted Average Cost of Capital WDI World Development Indicators xi University of Ghana http://ugspace.ug.edu.gh CHAPTER ONE INTRODUCTION 1.1 Background to Study Financial institutions can in no means be dissociated from the key players in the economy of any nation. That is, their presence is indispensable in the growth and development of the economy of a country. Banks, in specific, play several pivotal roles in ensuring equilibrium in the financial sector. Key among them is financial intermediation, which is the reason for banks existence (Oino & Ukaegbu, 2014). Financial intermediation involves linking up surplus and deficit economic units in an efficient manner in any economy. According to Incoom (1998), economic progress is realized when there is an efficient redistribution of temporary free resources of surplus units to meet the short-term needs of deficit units in an economy. This is the essence of financial intermediation because it prevents excess resources in the economy from being redundant. In addition to its primary role of linking up surplus and deficit units, financial institutions also provide secondary services such as issuing letters of credit, providing customer finance, discounting bills, over-drafting and discounting bills. Financial institutions, however, operate under a set of underlying rules, regulations and reforms to ensure that the financial sector works efficiently and properly to protect the citizens and the overall economy. The Banking Industry in Ghana, as in the case of many African countries within the sub-region, has undergone various degrees of reforms over the years all geared towards empowering the banking sector and positioning it favourably within their economies to strengthen its intermediation role and increase customers confidence in the banking sector. Bawumia (2006) indicates that, the introduction of the universal banking act in 2004 (started in 2003) which required banks to have a minimum capital of GH¢ 7,000,000 with the year of 1 University of Ghana http://ugspace.ug.edu.gh full compliance slated for 2006. The year 2009 witnessed the introduction of new banking policy. This policy formulated and spearheaded by the Central Bank was geared towards addressing the Capital Adequacy of Universal Banks operating within Ghana. Universal banking is a corporate structure where banks, in addition to their traditional banking operations, are allowed to offer financial service such as selling insurance, underwriting securities and engaging in portfolio management, equity investments, bond trading and financial advice (Benston, 1994; Vennet, 2002). The minimum capital of banks was raised by the Central Bank from GH¢ 7,000,000 (done as a requirement for acquiring the universal banking licence implemented in 2003) to GH¢ 60 million while maintaining the capital adequacy ratio of the universal banking act still at 10% of total assets. The Central Bank in their paper to the banks, encouraged the adoption of strategies such as consolidation (mergers and acquisition) of existing banks, increasing the debt stock (increasing deposits), and raising funds through issuing of additional shares through existing shareholders or new shareholders or both or via foreign direct investment. The 2009 capital increase of GH¢ 60 million seemed to be inadequate for banks to be players in big industries such as the emergent oil and gas industry, then came the directive from the Central Bank for new entrant first-class banking to have a stated capital of GH¢ 120 million and advised the rest to increase the capital based on their risk. The Central Bank of Ghana after consultations with various stakeholders in the industry increased the minimum capital requirement for commercial Banks to GH¢ 400 million from GH¢ 120 million in 2017. The increase was estimated at 233% over the old capital level and is the biggest capital increase witnessed over the banking landscape yet. Commercial banks were then given up to December 2018 to meet the new capital requirement. This decision was taken after what was described as extensive engagement with players in the 2 University of Ghana http://ugspace.ug.edu.gh industry and also pertaining developments in the economy at the time. This meant that all commercial banks who failed to meet the new capital levels by December 2018 would lose their license to operate in the country. An efficient banking system should meet the needs of bigger investors by making available a higher amount of capital for big projects in the industrial, infrastructural and service sectors thereby enhancing economic growth. Hence the standard, efficiency and ability of the banking sector needed to be improved with the corresponding growth in the economy. Bank capitalisation and consolidation are implemented with the primary view of strengthening the banking system and increasing customer confidence that in the event of bank runs, there will be enough liquidity to settle depositors of the bank. As explained by Asediolen (2004), customers will, therefore, have more confidence in the banking system, and they will be able to perform their developmental role of enhancing economic growth. Narh (2012) also asserted that economic growth will be achieved when the intermediation role of banks is strengthened and thus will then have the financial muscle to under-take big-ticket deals. All these measures are put in place to ensure that the financial sector promotes the growth of the country and its eventual development. In the event where there are runs on a bank, composite economic problems can emanate because the ripple effect can cause a nosedive of "healthy" banks, thereby inducing loan recalls and the termination of productive investments (Diamond & Dybvig, 1983). This can be avoided where banks are adequately capitalised. This is because bank operations are grounded on public confidence enhanced by bank stability and solvency (capital adequacy). This was explained by Ogere, Zachariah, & Inyanget (2013) where they asserted that the capital adequacy ratio is an essentially significant determinant of bank soundness and safety. A bank is said to be sound and safe if it can honour its long-term financial commitments towards its stakeholders without difficulties. 3 University of Ghana http://ugspace.ug.edu.gh The capital adequacy, which is measured as the ratio of equity to total assets, is considered important for the capital strength of firms. It is expected that if the capital adequacy is high, then the need for external funding is low, leading to higher profitability. The ratio is an indicator of the ability of the bank to absorb losses and handle risk exposure with shareholders. The capital adequacy ratio is expected to have a positive relationship with profitability since well- capitalized banks face lower costs of bankruptcy and risks (Hassan & Bashir, 2003; Barathi Kamath, 2007). In other words, it is a general belief that banks that are highly capitalized face a lower expected cost of financial distress (Trujillo-Ponce, 2013). 1.2 Problem Statement According to Diamond (2007), banks are in the business of granting loans that are difficult to quickly sell at reasonable prices and offer deposit accounts that always make funds available to depositors. The result of this is a liquidity mismatch where bank liabilities are more liquid than assets. This compels banks to fire sell illiquid assets to cater for customers liquidity needs. Fire selling involves disposing of illiquid assets quickly at cheaper prices. The action is to mitigate if not completely forestall liquidity risk emanating from liquidity transformation and similar activities. Narh (2013) explained that Ghanaian banks were not deemed to be on a good footing to finance big projects because they lack the financial muscle to be players in industries that require higher funds to be able to invest in them. Adegbaju & Olokoyo (2008) and Sani & Alani (2013) also tried to find the impact of the regulatory increase in the capital on banks profitability or credit in Nigeria. They recommended that; management should show commitment to shareholders by the dividends they pay to justify their investments. Regulatory authorities should re-appraise the use of recapitalisation through mergers and acquisitions as a means of injecting efficiency 4 University of Ghana http://ugspace.ug.edu.gh gains into the sector since it is not all time that recapitalisation through mergers and acquisitions translates to good financial performance in the sector. Since the recapitalisation exercise in 2009, there has been a steady increase in GDP growth rate from 7.90% to 14.05% in 2010 and 2011 respectively. Surprisingly a sharp decrease showing 2.90% and 2.18% was experienced in 2014 and 2015 respectively, resulting from other macroeconomic instability, mainly over the period after the recapitalisation (i.e. 2012 till date). According to Novokmet & Marinović (2016), there exists a relationship between bank liquidity and capital. Most studies on bank capitalisation and performance in Ghana only looked at the relationship between capital and performance (Kumi et al., 2013) and the determinants of banks profitability as explained by Munyambonera (2013). Although the Capital Adequacy Requirement was introduced into Ghanas banking sector in the year 2003, it was set industry-wide at GH¢ 7,000,000 alongside the introduction of the universal banking act. Bank of Ghanas decision to implement GHȼ 60 million as the minimum capital requirement of banks in 2009 and the fixing of a capital base of GHȼ 120 million for new entrants in the banking industry in 2013 were all inconsistently done when considering a year on year change. Therefore, this study attempts to determine the interaction between the Capital Adequacy Ratio as against other macroeconomic variables. There has therefore been little work done to ascertain the real year on year variation of the Capital Adequacy Ratio which arises as a result of the changes experienced in the Capital Adequacy Requirement meted out by the Bank of Ghana and the macroeconomic conditions that can be observed after these changes are made. 5 University of Ghana http://ugspace.ug.edu.gh 1.3 Research Objective The purpose of this study is to ascertain the macro-economic conditions that prevail as a result of the reviews of the capital adequacy requirements of Banks feeding into their capital adequacy ratios. This paper therefore looks to achieve the under listed specific objectives;  To determine the trend of Capital Adequacy Ratio to Ghana’s Gross Domestic Product (GDP).  To ascertain the relationship between GDP Growth, Inflation, Monetary Policy Rate, Currency Depreciation, Per Capita Income and Capital Adequacy Ratio. 1.4 Research Questions  What is the trend of Capital Adequacy Ratio to Ghana’s Gross Domestic Product (GDP)?  What is the relationship between GDP Growth, Inflation, Monetary Policy Rate, Currency Depreciation, Per Capita Income and Capital Adequacy Ratio? 1.5 Significance of the Study Many developments have emerged in the financial sector with a concentration in the banking sector. This study will, however, concentrate on analysing and probing the relationship that exists between Capital Adequacy Ratio changes industry-wide and selected macro-economic variables in Ghana. The Capital Adequacy Ratio experienced a shoot up for the year 2018 attributable to the increase in the adequacy requirement as well as the enhanced Capital Requirement Directive (CRD) which imposed more stringent criteria on the industry to ensure 6 University of Ghana http://ugspace.ug.edu.gh risks are properly aligned with capital. This is an indication of the positive influence an increase in the adequacy requirement had on key sound financial indicators such as the CAR. The Minimum Capital Directive therefore being a part of regulatory measures aimed at strengthening and making the banking sector more resilient to shocks as well as to help reposition the banks to better support the growing needs of the Ghanaian economy and with the especial aim of cleaning up the banking sector and repositioning it to support the economic growth and transformation agenda of Ghana. On this premise, the study sought to find a linkage between the changes in the CAR and economic growth, using GDP growth as well as controlling for other variables to establish this. The aim is to inform the Central Bank of Ghana, regulators of Commercial Banks, on whether the changes in adequacy requirement has an effect on economic and therefore the need for further probing into the determinants of CAR and a decision to either tighten or loosen specific areas that serve a contributory factor to CAR changes. 1.6 Scope and Limitation The data used will be yearly annual data from 2002 to 2018 spanning 17 years. The study period covers these years since those were the years for which the capital requirement was introduced and therefore for which data for Capital adequacy ratio is available. This serves as too short a period for a good regression analysis result to make any tangible sense. Also, in previous years where recapitalization was initiated, it will be noted that strict adherence across all boards was not a requirement. The central bank was lax on the timelines for meeting these requirements and therefore the Adequacy ratio, giving different deadlines to domestic and foreign banks to meet various recapitalisation requirements, therefore inadvertently affecting the data used and the results attained. 7 University of Ghana http://ugspace.ug.edu.gh Future research should consider a relationship between CAR and economic growth and control for other indicators directly related to bank activities that contribute to CAR to ascertain a better reflection. 1.7 Chapter Disposition This study is organized in five chapters as explained below; Chapter one Provides an overview of the background to the study, the problem statement, the key objectives, research questions, the significance of the study as well as the scope and organization of the study. Chapter two Devoted to the review of literature. All relevant existing statements, themes, arguments and criticisms that are pertinent to this study were reviewed. Chapter three Gives the general design of the study and key methods of analysis including the target population, data collection method, analytical techniques and the study instruments. Chapter four Presents the results and discussion of the findings. Chapter five Focuses on the summary of the findings, conclusions, recommendations, and limitations to the study and recommendation for further studies. 8 University of Ghana http://ugspace.ug.edu.gh CHAPTER TWO REVIEW OF LITERATURE 2.1 Introduction This chapter gives an insight into the background of the banking industry with a focus on Capital Adequacy Ratios of Ghana. It looks at the changes which have occurred in the industry in terms of variations in Capital Adequacy Ratios. This chapter further considers some macroeconomic indicators which have an influence on the banking industry in Ghana. As the study covers the relationship between capital adequacy and selected macroeconomic indicators in the Ghanaian economy, the review of literature which forms the substance of this chapter has been purposely restricted to cover those papers which are relevant to the various facets of this study. 2.2 Capital Adequacy Ratio (CAR) The concept of Capital Adequacy and its entire relevance in the banking sector as a whole has received varying opinions. Capital Requirements are standardized regulations put in place for banks and other depository institutions that determine how much liquid capital must be held concerning a certain level of their assets. It is also known as the regulatory capital and these standards are set by regulatory agencies. The regulatory authority in charge is often the central bank of the country. In the case of Ghana, it is the Bank of Ghana (BOG). Capital requirements are often tightened after an economic recession, stock market crash, or another type of financial crisis. 𝑬𝒍𝒊𝒈𝒊𝒃𝒍𝒆 𝑻𝒐𝒕𝒂𝒍 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑻𝒐𝒕𝒂𝒍 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒓𝒂𝒕𝒊𝒐 = 𝑪𝒓𝒆𝒅𝒊𝒕 𝑹𝒊𝒔𝒌 𝑹𝑾𝑨 + 𝑴𝒂𝒓𝒌𝒆𝒕 𝑹𝒊𝒔𝒌 𝑹𝑾𝑨 + 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑹𝒊𝒔𝒌 𝑹𝑾𝑨 Figure 2.1: Total capital ratio calculation, Source: BOG Capital Requirements Directive 2018 9 University of Ghana http://ugspace.ug.edu.gh The general assertion of maintaining a high capital requirement on banks by regulators is to ensure the safety and soundness of the banks and the banking industry. Capital Adequacy Requirement is used to ensure that banks and depository institutions are not holding investments that increase the risk of default. It also ensures that banks and depository institutions have enough capital to sustain operating losses while still honouring withdrawals. A lapse in the public’s perception regarding the safety and soundness of their deposited funds can have ripple effects in the entire financial system and even beyond. Findings of Berger & Bouwman (2009) however suggest that even though the regulators may be able to realize this purpose, the benefit of the action may bring about a decline in small banks liquidity creation and an increase in same for large banks. This implies that the small banks ability to generate and retain profits to boost their capital base is at stake. However, according to Chowdhury (2015), there is no significant evidence of sufficient equity capital serving as buffer and shock absorber in the UAE banking industry. He further emphasised that the ability of a bank to meet the requirement of keeping high bank capital does not necessarily mean that better-capitalised banks are well-positioned to withstand the unfavourable impact of the financial crisis. However, considering the market in which the research was done, the outcome is understandable. According to Mayes & Stremmel (2012), banks with lower capital adequacy are more likely to fail than their counterparts with stronger CAR positions as this signals impending financial distress. Higher CAR means the bank is more solvent, stable and sound. The ratio indicates that the bank can lose up to a specified percentage of its assets without becoming bankrupt. There is always a threshold for bank capital adequacy. Below this threshold, the bank is said to be under-capitalised and susceptible to insolvency. Minimum capital adequacy ratio promotes efficiency and stability of the financial system by reducing the probability of bank insolvency (Bateni, Vakilifard & Asghari, 2014). 10 University of Ghana http://ugspace.ug.edu.gh Barrios & Blanco (2003) also hold the opinion that capital adequacy enables banks to absorb shocks on their balance sheets. This study agrees with that of Mekonnen (2015) who is of the view that capital adequacy promotes efficiency and stability of the financial system and protects depositors. These also significantly support the opinion shared by Masood & Ansari (2016) that, banks survival rests in the ability to maintain sufficient capital to act as a buffer during a liquidity crunch. Thus, per their results, holding large capital may guarantee banks survival during a crisis. However, a section of researchers also believes that the well-itemised reasons for the capital adequacy requirements are not entirely to the benefit of the banks. Blum (1999) indicates that in some cases, regulations that seek to increase capital may reduce bank profits and increase risks. This may lead to a reduction in the capital adequacy ratio. The reality is that banks generate most of their revenue through financial intermediation which includes liquidity transformation and part of this revenue may be retained as reserves to supplement capital. Goddard, Molyneux & Wilson (2004) also argue that high capital adequacy ratio may be an indication of a bank operating over-cautiously and does not take advantage of prospective profitable activities within its environment. Based on this assertion, a bank becomes risk-averse as it tries to eschew any risk associated with productive ventures by accumulating capital as required by the regulators thereby missing the avenues for growth which are often risky. Asedionlen (2004) further corroborates this view that even though recapitalization may raise liquidity in the short term, it does not guarantee a conducive macroeconomic environment required to ensure high asset quality and good profitability due to the risk-averse approach the banks follow to accumulate capital to meet the requirements put up by the regulators. By forcing banks to increase their capitalisation, long-run growth would be permanently lower and the adjustment itself would put a drag on the recovery from the Great Recession according to 11 University of Ghana http://ugspace.ug.edu.gh the World Economic Forum. During the Basel III debate, a key apprehension made was that higher capital requirements might damage economic growth. 25.00 20.00 15.00 10.00 5.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Figure 3.2 Capital Adequacy Ratio Source: Authors’ chart from Bank of Ghana data, 2019 The average capital adequacy ratio for the banking industry continuously exceeded the 10% minimum requirement specified in S.23 (1) of the Banking Act 2004 (Act 673). This could be an indication of over-cautiousness brought about by a higher capital requirement. Over the years, Ghana has recorded an average industry capital adequacy ratio of 16.17% which is 6.17% above the required 10% minimum rate. A maximum and minimum of 21.90% and 9.27% respectively were recorded over the years under study. 12 University of Ghana http://ugspace.ug.edu.gh Table 2.1: Capital Adequacy Ratios of Ghanaian Banks in the Industry YEAR CAPITAL ADEQUACY RATIO VARIANCE (IN EXCESS OF 10) 2002 13.42 3.42 2003 9.27 -0.73 2004 13.94 3.94 2005 16.22 6.22 2006 15.80 5.80 2007 10.00 0.00 2008 13.80 3.80 2009 18.20 8.20 2010 19.10 9.10 2011 17.40 7.40 2012 18.60 8.60 2013 18.50 8.50 2014 17.90 7.90 2015 17.80 7.80 2016 18.00 8.00 2017 15.00 5.60 2018 21.90 11.00 Source: Bank of Ghana data, 2002 - 2018 and authors’ calculations 13 University of Ghana http://ugspace.ug.edu.gh 2.3 Overview of Bank Capitalization Minimum capital regulations play a central role in banking regulation. Regulators require banks to maintain capital above a certain level to correct incentives to make excessively risky loans and investments. It acts as a type of check and balance to ensure the objective of the Central Bank of Ghana to protect citizens from institutional negligence. Modigliani & Miller (1958) are considered pioneers in the field of the capital structure since they illustrated that the optimum capital structure of the financial sector has no relevance to the level of capital requirements. The Traditional Theory of Capital Structure states that when the Weighted Average Cost of Capital (WACC) is minimized, and the market value of assets is maximized, an optimal structure of capital exists. This is achieved by utilizing a mix of both equity and debt capital. The Traditional Theory of Capital Structure says that a firm's value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease if there is too much borrowing. This decrease in value after the debt tipping point happens because of overleveraging. A blend of equity and debt financing can lead to a firm's optimal capital structure. This theory can be contrasted with the Modigliani and Miller (MM) theory, which argues that other forces will indicate the optimal capital structure of a firm, such as corporate tax rates. Hahn (1966) is also considered a pioneer of research concerning capital adequacy. His work involved the analysis of the determinants of capital adequacy in the United States for the period 1962 – 1963. Kalifa & Bektaş (2017) found that the size of a bank’s asset is closely linked to the capital adequacy of that bank. They further postulated that; large banks enjoy economies of scale that result in increased profitability. Teixeira, Silva, Fernandes & Alves (2014), wrote a paper that showed that regulatory capital requirements play an important role in determining banks’ equity capital. They further estimated that, equity capital regressions using panel data 14 University of Ghana http://ugspace.ug.edu.gh of a sample of 560 banks for 2004 – 2010. Their results suggest that regulatory capital requirements are not first-order determinants of banks’ capital structure. The banking industry of every economy can be confidently described as one of the prime driving forces of the growth of that economy. The reallocation of surplus funds within the economy makes funds readily available to units who need the funds. Developing countries, especially as a result of the bank-based nature of their economies, require the efficient operation of the banking industry to enhance their growth. Ghana has undergone a myriad of modifications and is still undergoing these changes since the Bank of the Gold Coast (now the GCB Bank) and the Bank of Ghana was established in 1953. Some of the changes witnessed include the initial enactment of the Banking law of 1989 (PNDCL 225) which was later repealed by Section 91 of the Banking Act 2004 (Act 673). The adoption of the Policy Rate in 2002 in place of the Bank of Ghana Prime Rate was as a result of these changes. The setting of the banks’ minimum operational capital at GHȼ 7 million upon the issuing of Universal Banking License to banks in 2003, the phasing out of the 15% banks’ secondary reserve requirement in 2006, the cedi redenomination in 2007, BoG’s implementation of the GHȼ 60 million as minimum capital requirement of banks in 2009 and the fixing of a capital base of GHȼ 120 million for new entrants in the banking industry in 2013 represents a timeline of the changes that were made since 2003. However domestic banks had up to December 2012 to meet this GHȼ 60 million requirements. As of December 2015, there were 29 Deposit Money Banks (DMBs), 62 Non-Bank Financial Institutions (NBFIs), 139 Rural and Community Banks (RCBs) and 546 Microfinance Institutions (MFIs) as well as 3 credit reference bureaux (XDS Data Ghana, Hudson Price Data Solutions, and Dan & Bradstreet) operating in Ghana. The DMBs comprised 12 Ghanaian and 17 foreign-controlled banks. All these institutions belonging to the financial sector adhered to 15 University of Ghana http://ugspace.ug.edu.gh rules set by the Central Bank of Ghana and were therefore under their purview and had significant roles they played in the financial spectrum and therefore its contribution to the growth of the economy. 2.4 Measurement of Capital Adequacy and Bank Solvency Capital adequacy is the statutory minimum reserves of capital which a bank or other financial institution must have the available per requirement of its financial regulator. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Usually expressed as capital adequacy ratio of equity as a percentage of risk-weighted assets. There are varying approaches to ascertaining capital adequacy. Novokmet & Marinović (2016) explained that this concept is measured by equity to total assets ratio, Polat & Al-khalaf (2014) also measured it as the ratio of shareholder equity to risk-weighted assets (RWA). The Basel III accord further proposed the ratio of eligible capital to total risk-weighted assets as the appropriate measure of capital adequacy (BIS 2010; Masood & Ansari, 2016). The Basel III measure is considered as more appropriate because it is geared towards providing more protection for banks than the other proposed measures. This was deduced following the 2007/2008 financial crisis. The eligible capital comprises Tier 1 capital and Tier 2 capital while the total risk-weighted assets (RWAs) is composed of credit RWAs, market RWAs, and operational RWAs. 2.5 Tiered Capital of Banks It is important to appreciate how much higher the new international capital standards are in recent times. Basel III is more rigorous than its predecessor Basel II in three fundamental ways: 16 University of Ghana http://ugspace.ug.edu.gh the definition of what constitutes capital is tighter, the coverage of what counts as an asset is broader, and the required ratio of the two is higher. The Basel III is made up of 2 tiers of capital adequacy. Tier 1 capital comprises mainly of equity capital, permanent preference shares (irredeemable non-cumulative preferred stock), loan loss reserves and disclosed reserves. Tier 1 capital has to represent at least 50% of the total eligible capital (BIS, 2006). As opposed to the Tier 1 Capital, Tier 2 capital has the following elements: subordinated term debt, hybrid capital, revaluation reserves and undisclosed reserves. The former measures banks’ ability to absorb losses while in operation. Hence, it is for this reason that the ‘core capital’ ratio, as it is commonly known, seems to be providing more protection for depositors than the ‘secondary’ or Tier 2 capital. Banks usually cater for losses with earnings first, and beyond earnings, the reserves in Tier 1 capital. The Tier 2 capital takes a more temporary look relative to the Tier 1 capital which has a permanence to it. This further explains that depositors are not affected at this stage (Tier 2) as their deposits remain intact. Tier 2 capital seeks to absorb losses only when the bank is winding up and thus serving as a ‘last resort cushion’. In the event of losses extending beyond Tier 1 capital, the bank has to wind up. In that case, Tier 2 capital comes in to mop the excess losses incurred. However, to specify how much risk-covering capital banks require in sustaining their operations in difficult times, bank regulators express the capital base as a percentage of the total risk-weighted assets. The risk-weighting of assets varies according to each asset’s default prospect and the likely associated losses in the event of default. For instance, an unsecured commercial loan is considered riskier than a mortgage secured with the property. Thus, the former attracts a higher multiplier than the latter considering its riskiness. 17 University of Ghana http://ugspace.ug.edu.gh If the capital adequacy ratio is high, it means the banks are capable of absorbing losses resulting from their operations. The reverse is the case where the ratio is low. The benchmark for determining whether the ratio is low or high is the minimum capital adequacy ratios set by the central banks of every country as a policy requirement. Countries, such as Ghana, which have subscribed to the Basel Accords have set their Capital Adequacy ratio at 10%. The 10% implies that a bank can lose up to 10% of its assets without becoming insolvent. As indicated earlier, bank losses are catered for with earnings. However, where there are larger unexpected losses beyond earnings, they are absorbed with capital (Olalekan & Adeyinka, 2013). This implies that losses from bank operations affect capital in two ways. One is the case where banks make large advances out of capital and they go bad. The other occurs when normal earnings are insufficient to cover large losses incurred by the bank. Therefore, to cushion themselves against losses, banks sometimes maintain more capital than what regulation imposes on them so that they can be more resilient during crises if they cannot avoid the crises in the first place. Banks do not only keep Capital Adequacy above the minimum due to risk averseness but for other reasons. As postulated by Berger, DeYoung, Flannery, Lee & Öztekin (2008), banks do so to avoid the high transaction cost of raising new equity on short notice. 2.6 Macroeconomic Variables 2.6.1 Gross Domestic Product (GDP) Ghana’s economic performance affects financial institutions operations. During economic booms, banks’ lending increases with high net interest margins and relatively lower non- performing loans and vice versa. However, the influence of economic booms and depressions may call for adjustments of bank solvency levels. Economic growth is not necessarily a good 18 University of Ghana http://ugspace.ug.edu.gh omen because banks may be inundated with demands from customers for loans without a corresponding increase in deposits. 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP growth 4.50 5.20 5.60 5.90 6.40 4.35 9.15 4.84 7.90 14.05 9.29 7.31 2.90 2.18 3.45 8.14 6.26 Figure 2.3: GDP Growth Source: data.worldbank.org From Figure 2.3, it is observed that the Ghanaian economy performed relatively well over 17 years except for the initial dip in the year 2005 through to 2007 when it started recovering. Afterwards, the next drop was experienced from the year 2014 to 2016 which saw a decline in growth. This was attributed to the high cost of business operations resulting from the intensive energy crises at that time. However, it was still one of the highest in West Africa and exceeded growth in the global economy (PwC & GAB, 2015). Ghana is the first African country in sub-Sahara Africa to gain independence. After independence, there have been a huge number of national developmental plans designed to ensure sustainable and accelerated economic growth. At independence, Ghana was regarded as one of the better-placed developing countries and its level of economic development was comparable to Thailand and South Korea. Average incomes were higher than Nigeria, Egypt and India. There was also an absence of balance of payments deficits, a sound budgetary 19 University of Ghana http://ugspace.ug.edu.gh situation and a well-functioning public administrative system (Fosu, 2003 and Akoena, et al. 2007). Figures from the Ghana Statistical Service (GSS) in 2016 indicate that the services sector grew well continuously and remained a major contributor to Ghana’s Gross Domestic Product (GDP). Its share in GDP increased from 51.9% in 2014 to 54.4% in 2015. From the World Bank figures in the appended table, it can be observed that inflation remained a nuisance over the years but declined a little in 2011 and 2012. It, however, worsened in 2015. The upsurge in inflation was said to have reflected the sharp depreciation of the Cedi and the effects of utility and fuel price adjustments (PwC & GAB, 2016). Oxford Economics (2013) in their paper stated that there are factors that can push up the impact on GDP. The first of these is if the timescale for regulatory changes (or the market pressure to meet minimum capital and liquidity requirements) is shortened. This leads to bigger upfront losses in GDP and there is also less scope for monetary policy to offset the rise in loan rates. A short timescale would also raise the risk of the cost of bank financing rising steeply in response to attempts by banks to raise large amounts of capital. Also, another factor highlighted was if banks choose to cut RWA rather than raising lending rates to meet new required capital ratios. Estimates show that adjustment by cutting RWA has a much bigger impact on GDP than via raising loan rates. These considerations pointed clearly to the need for any regulatory programme to be carefully structured to avoid unnecessary damage to economic growth. Additionally, an approach based on cutting RWA would risk having more negative impacts on GDP than an approach based on raising lending rates, because the scale of the required cut in RWA could be very large as per studies such as Roger & Vlcek (2011). 20 University of Ghana http://ugspace.ug.edu.gh 2.6.2 Inflation (INFL) Inflationary periods are characterized by a limited supply of products and availability of funds coupled with an increase in the credit creation function of banks with a resultant increase in bank capitalization. In support of this, Ogere et al. (2013) and Čihák & Schaeck (2007) found a positive association between inflation and bank capital. Studies which support the positive relationship between inflation and capital adequacy argue that the value of bank capital declines during inflationary periods. Thus, to remain stable, banks have to consistently upgrade their capital base. This means higher inflation calls for a higher capital base. However, Aktas, Acikalin, Bakin, & Celik (2015) have both shown that inflation and bank capital are negatively correlated. Linking inflation to growth, Barro (1995) explored the inflation–economic growth nexus using annual data covering more than 100 countries from 1960 to 1990. They concluded after using a system of regression equations and holding a certain number of the country characteristics constant, that there is a statistically significant negative relationship between inflation and economic growth only when high inflation experiences are included in the model. Bruno & Easterly (1995) also used annual data series of 26 countries that had high inflation crises at some point in time over the period 1961 to 1992. The data series were used to specifically assess the performance of the country before, during and after the high inflation crisis. After controlling factors such as shocks including political crises, war and terms of trade, they validated the findings of Barro (1995) that high inflation negatively affects growth. However, Bruno and Easterly (1995) found that the impact of low to moderate inflation on growth is ambiguous. Thus, their findings are consistent with the view that the costs of inflation only become significant at relatively high rates of inflation. 21 University of Ghana http://ugspace.ug.edu.gh Furthermore, Sarel (1995) examined the effects of inflation on growth from 87 countries between 1970 and 1990 with the conclusion that there is enough evidence that the function that relates inflation to growth may have a structural break which only occurs when the rate of inflation is 8% below which inflation does not have any meaning impact on economic growth. However, when the rate of inflation is above 8%, the estimated effect on inflation on growth is negative and significant. Kosmidou, et al. (2005) and Naceur & Omran (2011) found a positive relationship between the customer price index and bank profitability originating from the recapitalization of banks. Sufian & Chong (2008) rather found a negative coefficient for inflation for their study in the Philippines which opposes that of the positive results. Ghosh & Philips (1998) also used a panel data of 145 countries spanning from 1960 to 1996, to look at the relationship between inflation and growth. Employing a panel regression together with a linear treatment of the inflation-growth linkage they discovered that at very low rates of inflation, inflation and growth are positively correlated. They further find that the relationship is convex. Taking into consideration the nonlinearity, they discover that the negative relationship between inflation and growth is apparent in both the time and cross-section dimensions of the data. For the case of Ghana, before attaining independence, inflation was very low in the then Gold Coast. According to Sowa & Mckay (2000), the average rate of inflation was below 1%. However, after independence, Nkrumah government pursued rapid modernization and development of import substitution industries and infrastructure which started building inflationary pressures in the economy (Aryeetey & Fosu, 2005). 22 University of Ghana http://ugspace.ug.edu.gh 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Inflation 14.82 26.68 12.63 15.12 10.92 10.73 16.52 19.25 10.71 8.73 7.13 11.67 15.49 17.15 17.46 12.37 9.84 Figure 2.4: Inflation Rate Source: Authors computation with data from The World Development Indicators / World Bank (WDI 2018) 2.6.3 Monetary Policy Rate (MPR) Monetary policy in 2006 remained focused on reducing inflation to low and stable levels. To this end, the Bank maintained a tight monetary policy stance throughout the year. Open market operations were intensified to mop up excess liquidity while the minimum primary reserve requirements for the deposit money banks was maintained at 9 per cent throughout the year, stated in Bank of Ghana Annual Report (2006). Price stability is defined by the government’s inflation target. This target is revised annually and spelt out clearly in the budget statement for each fiscal year. The objective recognizes the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. Cecchetti & Kohler (2012) explained that, seeking to head off a cyclical downturn, policymakers lower policy rates and, in so doing, improve the state of balance sheets of both financial institutions and borrowers in general. Similarly, central bankers increase policy rates 23 University of Ghana http://ugspace.ug.edu.gh to moderate an upturn, slowing credit growth and leaning against asset-price booms. And through their interest rate targeting procedures, central banks work to keep financial-sector shocks from affecting the real economy. Put another way, by reducing cyclical fluctuations in the real economy, countercyclical fiscal and monetary policies naturally (and intentionally) reduce the procyclicality of financial institutions’ capital. They are macroprudential. Macroprudential regulation is a broader approach to safeguard the financial system as a whole (IMF). 2.6.4 Currency Depreciation (DEP) Exchange rate refers to how much foreign currencies can be acquired concerning the home currency. Exchange rate implies how much an individual receiving one unit of international currency with respect to domestic currency and vice versa. Mustafa & Ali (2018) confirms the negative association between exchange rate and economic growth in Pakistan. Also, Chen (2012) affirms that there is a direct impact of real exchange rate on economic growth in China. China, however, practices the fixed exchange rate policy which is not applied in Ghana. The real exchange rate depreciated over the period under review 2002 – 2018 with the highest rate experienced in the year 2014 at a rate of 32.40%. High depreciation rates were recorded in 2008 and 2012 at 20.8% and 15.9% respectively. The lowest depreciation rates are recorded in 2005 and 2010 at 0.64% and 1.32% respectively. 24 University of Ghana http://ugspace.ug.edu.gh 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 DEP -13.1 -5.15 -2.48 -0.64 -1.33 -4.05 -20.8 -15.3 -1.32 -8.26 -15.9 -12.8 -32.4 -15.6 -9.65 -4.88 -8.39 Figure 2.5: Depreciation of GHS against the USD Source: Authors computation with data from Bank of Ghana 2.6.5 Per Capita Income (PCI) Per capita income generally measures the amount of money earned per person in a nation or geographic region. Per capita income for a nation is calculated by dividing the country's national income by its population. Per capita income can be used to determine the average per- person income for an area. It is the most common approach used to evaluate the standard of living and quality of life of the population. Ghana’s per capita income has experienced a gradual growth throughout the years under review with its peak in the year 2013 at USD2,378.16. This peak was later followed by a fall from approximately USD1,968 in 2014 to USD1,766 in 2015. Since 2015, the PCI has been increasing at a steady growth pace. 25 University of Ghana http://ugspace.ug.edu.gh 2500.00 2000.00 1500.00 1000.00 500.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 PCI ($) 304.56 367.82 417.51 491.95 912.00 1078.1 1210.6 1074.7 1298.4 1558.4 1613.2 2378.1 1968.8 1766.0 1931.3 2025.8 2202.3 Figure 2.6: Per capita income (PCI) Source: Authors computation with data from The World Development Indicators / World Bank (WDI 2018) 2.6.6 Capital Adequacy Ratio (CAR) The performance of every economy can be tied in one way or the other to the performance of its macroeconomic indicators. Prevailing macroeconomic conditions of a country can be explained by the inflation rate, the Gross Domestic Product Growth Rate (GDPGR), Interest Rate and Money Supply. Gross Domestic Product is an important measure of the economic condition of a country or countries. The GDPGR is used as a proxy of business cycles in which banks operate, and controls for variances in profitability due to differences in business conditions which impact the demand and supply of loans and deposits. Obamuyi (2013) underwent a study to ascertain the relationship that exists between recapitalization, bank profitability and economic growth. A cross-sectional analysis of Albania was employed for the period 2010 to 2013. The results showed that higher recapitalization leads to improved business opportunities within the economy by increasing the banking industry ability to finance high profile economic projects with higher returns which ultimately leads to higher 26 University of Ghana http://ugspace.ug.edu.gh GDP growth. This is consistent with other findings such as that of Sufian & Chong (2008); Dietrich & Wanzenried (2011); Naceur & Omran (2011); among other studies. An assumption raised in a paper by Oxford Economics (2013) indicated that, if banks are faced with the need to raise their ratios of regulatory capital to risk-weighted assets, they can either take measures that impact the numerator or the denominator of this ratio (or indeed both). To decrease its denominator, a bank would need to reduce the size of its RWA, either by reducing the whole of the asset side of its balance sheet or by shifting its composition from riskier assets towards lower-risk assets. Such a move would imply a quantitative restriction on bank credit which would be likely to impact the economy negatively through weaker consumption and investment. Over the period under review, except for the year 2003 which showed an industry-wide drop in CAR below the 10.00% mark the first time Capital Adequacy Requirement was introduced into the Ghanaian scene. Banks have met the limit since then till date with the highest marker at 21.90% in the year 2018 which can be related to the regulatory increase in Capital Adequacy Requirement. The CAR figure below also shows an increase in the CAR and then a steady rise in all the years for which increments in Capital Adequacy Requirements were expected (2008, 2012 and 2018). From 2007 the CAR increased sharply until 2009 when it continued to grow at a steady rate. In fell in 2011 and increased gradually in 2012 and experienced a gradual fall until 2017 when it reached a trough of about 15%. Following that 2018 saw the highest capital adequacy ratio of 21.90% which may be attributed to the stringent policy put in place by the BOG. 27 University of Ghana http://ugspace.ug.edu.gh 23.00 21.00 19.00 17.00 15.00 13.00 11.00 9.00 7.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAR (%) 13.42 9.27 13.94 16.22 15.80 10.00 13.80 18.20 19.10 17.40 18.60 18.50 17.90 17.80 18.00 15.00 21.90 Figure 2.7: Capital Adequacy Ratio (CAR) Source: Authors computation with data from Bank of Ghana 2.7 Conclusion The role of the banking industry in every economy cannot be overemphasised. The great recession of 2007/2008 had a nosedive of the financial sector as one of its causative agents. In Ghana and many other developing countries, banks serve as a way of bridging the gap in efficient fund allocation by matching surplus to deficit units. Banks are prevalent in developing countries because the capital markets in such countries are not developed enough to mop up excess liquidity on its own as done in other developed economies. Studying various literature on the subject matter suggests that the effects of bank regulations on bank lending rates and economic growth make it clear that the calculation of costs, as well as potential benefits of regulations, has “many moving parts”. This allows there to be considerable scope for results to vary based on different assumptions. The results are especially sensitive to a few key assumptions such as: how the cost of equity and debt funding behaves in response to banks’ efforts to raise more capital; what is defined as the starting point from which the effects of regulation on bank capital raising are calculated; the size of assumed capital 28 University of Ghana http://ugspace.ug.edu.gh buffers that banks hold above the regulatory minimum; the size of extra liquidity requirements and the scope for banks to reduce other costs to offset potentially increased costs of funding. However, this paper looks at moving parts that are directly linked to the economy a financial institution operates in. The concentration would be on macro-economic factors such as Gross Domestic Product, Inflation, Monetary Policy Rate, Currency Depreciation, Per Capita Income as well as Capital Adequacy ratio over 17 years to understand the trends and relationships that are therein. New requirements demand that banks undertake some measures which may include a combination of an increase in the length of their liabilities, a shortening of the maturity of their assets and a switch to higher-quality assets, such that their Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) ratios are greater than or equal to 100%. The threshold or requirement varies across nations. In Ghana, it is 10% and it is strictly enforced by the Central Bank of Ghana under S.23 (1&2) of the Banking Act 2004 (Act 673). The 10% is a common requirement for bank regulators who conform to the Basel Accord. Banks may also meet these requirements by raising capital (which tends to have long or perpetual maturity) to replace short-term liabilities, which highlights the interplay between the capital and liquidity regulations. 29 University of Ghana http://ugspace.ug.edu.gh CHAPTER THREE METHODOLOGY 3.1 Introduction The section specifies the research method applied in collecting, analysing and presenting the results of the research questions asked. The section focuses on the research design, data source and description, model specification, estimation methods, an estimation of variables used in the model, diagnostic test and a description of how the data is analysed. 3.2 Research Design The first research question will be answered by undertaking trend analysis to determine the trend of Capital Adequacy Ratio (CAR) to Ghana’s Gross Domestic Product (GDP). A correlation model is employed to establish the relationship between GDP Growth rate (GDP), Inflation rate (INFL), Monetary Policy Rate (MPR), Currency Depreciation (DEP) and Capital Adequacy Ratio (CAR). GDP Growth rate (GDP), Inflation rate (INFL), Monetary Policy Rate (MPR), Currency Depreciation (DEP) are proxies for macro-economic variables. 3.3 Data Source and Description The study uses year on year data from the Bank of Ghana regarding the ratio of banks capital to its RWA. The data will be of a time series of nature and will cover 17 years. The basis for analysing a time series may be classified as prediction, description and control. Time series analysis mainly decomposes the variations in a series into the various components of the trend, periodic and stochastic. However, a relationship between the variables will be the concentration of the analysis instead of its impact. 30 University of Ghana http://ugspace.ug.edu.gh Data on GDP Growth rate (GDP), Inflation rate (INFL) and Monetary Policy Rate (MPR) were obtained from the World Bank database, 2019 and that of Currency Depreciation obtained from the Central Bank of Ghana website. All variables are annual data sets with each having 17 observations. 3.4 Model Specification To determine the trend of Capital Adequacy Ratio to Ghana’s Gross Domestic Product (GDP), a year on year assessment of the available data spanning the year under review is done, as seen in Kempen (2016). Simple tracking of the highs and lows known as movements would be looked at for the establishment of this trend. A step further using auto-correlation analysis would be employed. This correlogram is an image of correlation statistics, it may be known as autocorrelation and partial autocorrelation plot which is a plot of the sample autocorrelations used to find the type and also the order of my mean model. The correlogram is a commonly used tool for checking randomness in a data set. This randomness is ascertained by computing autocorrelations for data values at varying time lags as seen in Ribeiro & Teixeira (2001). The variables of the analysis are explained below: GDP – Gross Domestic Product growth rate (GDP) is a measure of economic growth. It represents the annual rate of change in the total output of all economic activities of a country. This variable is included in the model to control for the effect of economic growth on bank capital adequacy. INFL – denotes the yearly inflation rate as reported by the World Bank database. Inflation (INFL) is added to the model to show how bank stability is threatened or strengthened by an increase in the money supply without a corresponding increase in output. 31 University of Ghana http://ugspace.ug.edu.gh MPR – represents the average monetary policy rate as issued by the central bank for a given year. The Bank’s monetary policy objective is to ensure price stability – low inflation – and subject to that, to support the Government’s economic objectives including those for growth and employment. DEP – represents the depreciation of the cedi against the US dollars over the period. This is necessary since the GDP is stated in USD and the value of the cedi in the economy is pegged against the USD. PCI – denotes the annual per capita income as computed by the author from data extracted from the World Bank database for the years under review. CAR – represents the Capital Adequacy Ratio as given by the Central bank of Ghana for the period spanning 2002 - 2018. CAR measures how solvent a bank is. 3.4.1 Trend Analysis Trend and seasonality are very important to time series analysis. Seasonality in time series comes about due to fluctuations in data that are based on seasons (annually, quarterly, economic landscape or weather) and may be the result of many different factors. Trend, however, indicates the long-run movement (upward or downward) of a data set over a while. It may be of a linear, exponential or mixed nature. The direction of a trend may change depending on the season. However, not every long-run movement is considered a trend. It may just be a seasonal change; hence, further investigation is required. Trends can be seen by studying the plot or graph of the variable over a period although there are other methods of detecting trend in a dataset. 32 University of Ghana http://ugspace.ug.edu.gh 3.4.2 Correlation Analysis A correlation analysis will be undertaken to establish the relationship between all the variables mainly looking at the relationship between CAR and Economic Growth (GDP). Correlation analysis helps determine the strength of the relationship between two variables which are measured numerically. This is done to determine if there is an existing relationship between any two variables and to what extent do they relate to each other. Correlation is normally used when a specific response variable has not been selected. The correlation coefficient could fall within the range of -1 and 1. Numbers closer to 1 or -1 indicate strong association whilst those closer to zero indicate a reduction in the degree/strength of association. And a correlation of zero indicates that there is no relationship between the paired variables. 3.4.3 Auto-Correlation (AC) Analysis Extraction of more information from the available data would be done to better understand the trend and seasonality. This will be done by studying gradual movements in a dataset. It can provide information that may be lost when using curve-fitting/regression analysis. A visual analysis of the correlograms (See Appendix) would be an indication of seasonality or trend. Seasonality is said to be present if the graphical autocorrelation presentation if the variable does not move in one direction but varies or fluctuates across the years. However, the trend is established when the AC is declining with each additional lag. Successive values of time series are often dependent on their lags. Time series are correlated with one another, hence, autocorrelation measures the dependence of a variable at one time to another. Behaviours which are unique to time series data such as trend, cyclical, seasonal and irregular components can be described using correlograms. The correlogram uses graphical and numerical information in an autocorrelation function (ACF). The plot of the ACF can be used 33 University of Ghana http://ugspace.ug.edu.gh to test the randomness of a dataset. The ACF is also used as a measure of stationarity. For a given sample N, the correlation coefficient at lag k is given by; ∑𝑁−𝑘𝑡=1 (𝑥𝑡 − ?̅?)(𝑥𝑡+𝑘 − ?̅?) 𝑟𝑘 = ∑𝑁−𝑘 𝑡=1 (𝑥𝑡 − ?̅?) 2 1 Where ?̅? given by; ?̅? = ∑𝑁𝑡=1 𝑥𝑡 represents the overall mean. 𝑁 As the correlogram provides a summary of the characteristics of a time series such as trend, randomness and oscillation. Chatfield (1996) provides the following as a key for interpreting correlogram results.  Random series - If a time series is completely random, then for large N, 𝑟𝑘 = 0 for all non-zero values of k.  Short term correlation - Stationary time series exhibit short term correlations, characterized by a fairly large value of 𝑟𝑘 followed by two or three more coefficients, which while statistically significant tend to become successively smaller. Values of 𝑟𝑘 tend to approximate zero for large k.  Alternating series - If successive observations of a time series tend to alternate on different sides of the overall mean, the correlogram would also tend to oscillate.  Non-stationary time series - If a time series has a trend, then the values of 𝑟𝑘 would not decrease to zero, except for large values of k. However, it would be desirable to de- trend the series, otherwise its characteristics would be swamped by the trend.  Seasonal fluctuations - If a time series is characterized by seasonal fluctuations, then the correlogram would also exhibit oscillations at the same frequency. 34 University of Ghana http://ugspace.ug.edu.gh 3.5 Conclusion This chapter has presented the methodology adopted in the study. It is composed of the design, data source, estimation procedure and description of variables. It describes how the analysis will be carried out in the next chapter. Time series data on selected macroeconomic variables and Capital Adequacy Ratio (CAR) from various data sources were used to achieve the study objectives of determining the trend of Banking Sector contribution to Ghana’s Gross Domestic Product (GDP) as well as ascertaining the relationship between GDP Growth rate (GDP), Inflation rate (INFL), Monetary Policy Rate (MPR), Currency Depreciation (DEP), Per Capita Income rate (PCI) and Capital Adequacy Ratio (CAR) industry-wide. 35 University of Ghana http://ugspace.ug.edu.gh CHAPTER FOUR RESULTS AND DISCUSSION 4.1 Introduction This chapter comprises of the findings, analysis and interpretations resulting outcomes. It highlights the descriptive statistics of the selected variables, the trend analysis and then the correlation matrix. 4.2 Descriptive Statistics Table 4.2 presents a summary of the descriptive statistics of the variables captured in the correlation analysis. These statistics were generated to give an overall description of the data used in the model and enable the researcher to screen the data before further use. The key descriptive measures are the mean, standard deviation, the minimum and the maximum values of the variables over the period under consideration. Each variable has its number of observations to be 17 which indicates that there are no missing observations in the data set. As displayed in Table 4.2, CAR has recorded the maximum value of 21.9% with a corresponding minimum value of about 9.3% over the period. The highest and lowest values were recorded in 2018 and 2003 respectively. The average CAR kept by the banks was approximately 16.2% with a standard deviation of about 3.3% which indicates that the difference between the year with the highest and lowest CAR is not much. The mean CAR lying above the 10% threshold indicates that financial institutions over the study period have maintained the requirement for most of the years under study. 36 University of Ghana http://ugspace.ug.edu.gh Table 4.2: Descriptive Statistics VARIABLES MEAN STD. DEV. MIN. MAX. SUM GDP 6.3190 2.8704 2.1780 14.0470 107.4230 CAR 16.1676 3.2856 9.2700 21.9000 274.8500 INFL 13.9521 4.7034 7.1260 26.6750 237.1860 MPR 18.0882 4.4025 12.5000 26.0000 307.5000 DEP -10.1439 8.3751 -32.4526 -0.6432 -172.4459 PCI 1329.4232 673.9348 304.5646 2378.1595 22600.1943 Source: Results obtained from author’s computation using excel GDP growth was at its highest in 2011 recording approximately 14.05%. A low point was recorded in 2015 due to a growth rate of about 2.18%. On average, the economy grew by about 6.3% every year. For inflation, monetary policy rate, currency depreciation and per capita income, maximum values of approximately 26.7%, 26%, -32.5% and USD2,378.2 and minimum values of 7.1%, 12.5%, -0.64% and USD304.6 are recorded respectively. They also recorded mean values of 14%, 18.1%, -10.1% and USD 1,329.4 throughout the study (2002- 2018). 4.3 Trend Analysis Table 4.3 gives a brief overview of the capital adequacy ratio and the GDP growth rate for Ghana from 2002 to 2018. This data is further summarized in Figure 4.3 which displays a graphical representation of the data. 37 University of Ghana http://ugspace.ug.edu.gh Table 4.3: CAR and GDP Growth Year CAR GDP growth 2002 13.42 4.50 2003 9.27 5.20 2004 13.94 5.60 2005 16.22 5.90 2006 15.80 6.40 2007 10.00 4.35 2008 13.80 9.15 2009 18.20 4.84 2010 19.10 7.90 2011 17.40 14.05 2012 18.60 9.29 2013 18.50 7.31 2014 17.90 2.90 2015 17.80 2.18 2016 18.00 3.45 2017 15.00 8.14 2018 21.90 6.26 Source: Bank of Ghana data (CAR) and World Bank database (GDP growth) 38 University of Ghana http://ugspace.ug.edu.gh 25.00 20.00 15.00 10.00 5.00 0.00 2002 2004 2006 2008 2010 2012 2014 2016 2018 CAR GDP growth Figure 4.1: Graphical Presentation of CAR and GDP Growth Source: Authors calculations Further examination of the CAR and GDP growth figure shows that except for the year 2007, years with low CAR also had a corresponding peak in the growth of GDP as seen in 2003, 2011, and 2017. It is also noticed that for the years 2005, 2010, 2016 and 2018 were characterized by increments in the growth of the CAR. However, these years also recorded a drop in the growth rate of GDP which supports the studies that indicate that the more risk- averse banks are, the likely the growth of the economy may be impeded upon. The peak seen in the CAR for the year 2018 shows the banking industry’s ability to absorb losses using its capital has improved reflecting the impact of the recapitalization exercise. This is also an indication that the quality of banks’ capital has also improved with the recapitalization. Banks’ risk-weighted assets (RWA) to total assets also showed a decline from 63.4 per cent in April 2018 to 56.0 per cent in April 2019 according to the Banking sector report, May 2019. 39 University of Ghana http://ugspace.ug.edu.gh 4.4 Correlation Analysis Table 4.4 below shows the relationship between the variables. Table 4.4: Correlation Matrix Covariance Analysis (Correlation) Variables GDP INFL MPR DEP PCI CAR GDP 1 INFL -0.50497 1 MPR -0.64892 0.60668 1 DEP 0.18784 -0.15628 -0.36114 1 PCI 0.11479 -0.35689 0.03227 -0.38489 1 CAR 0.13282 -0.43189 -0.08255 -0.23591 0.65893 1 Source: Results obtained from author’s computation using E-views 9 The correlation matrix provides an analysis of the relationship existing between variables by pairing each variable to the others in the model. The results of the correlation test reveal that the relationship between GDP growth and CAR is positive and weak (0.13282). This result may be indicative of the absence of a significant impact of one on the other. This is a direct contradiction to the central bank's reason for encouraging a CAR higher than the 10% expected. CAR is negatively correlated with inflation (-0.43189), monetary policy rate (-0.08255) and depreciation of the cedi (-0.23591) whilst it has a moderately positive relationship with per capita income (0.65893). The negative relationship between INFL and CAR is supported by 40 University of Ghana http://ugspace.ug.edu.gh Williams (2011) who have argued that inflation is negatively related to capital adequacy since capital gets eroded during inflationary periods. In the case of the growth of the GDP, it has a positively weak relationship with CAR (0.13282), PCI (0.11479) and DEP (0.18784). There is however a moderately negative relationship between GDP and the MPR (-0.64892) and INFL (-0.50497). Inflationary rates are known to have an impeding effect on the economy especially when they are uncontrollable and increase the cost of production. High-interest rates may have a negative relationship with GDP growth due to its stifling effect on investment and innovation in the economy. The positive relationship between CAR and GDP may be due to the BOG changing the capital requirement by looking at the growth of the economy. This is in line with findings of Ochei (2013) in the Nigerian banking industry that “Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation rate, stable exchange rate, low-interest rate and output growth will boost credit expansion. The government should provide an enabling environment and also control interest rate on credit in the short term to enable customers such as corporate bodies, manufacturers, and industrialists obtain loans to stimulate economic growth. Overall growth in GDP may be an indicator of the BOG that the economy will be able to handle bigger and riskier investment in the future. They, therefore, have to adjust the requirement so that the financial sector also evolves and grows along with the economy. The only other strongly related paired variables include (MPR & INFL) with a coefficient of 0.60668. The MPR is known to take inflation into account and since the MPR is the nominal interest rate, it is no shock that these two variables are correlated. This implies that an increase in inflation or expected inflation has a positive effect impact on the MPR value. 41 University of Ghana http://ugspace.ug.edu.gh 4.5 Auto-Correlation (AC) Analysis Table 5.4 below summarizes the results of the correlogram test. All variables except per capita income all showed the absence of trend and the presence of seasonality. These conclusions are verified by studying the respective plots of the study variables. Table 5.4: Correlogram Test Results Variables Trend Seasonality GDP No Yes CAR No Yes INFL No Yes MPR No Yes DEP No Yes PCI Yes No Source: Results obtained from author’s computation using E-views 9 The variables of the study, INFL, MPR and DEP are characterized by the fluctuations in the graphical plot of the AC. The trend is absent because the AC values are not declining in lags but are a mixture of increasing and decreasing AC values. The PCI is said to have a trend over the entire period but displays seasonality in certain periods. As seen from the AC results of the PCI, there is an upward moving trend from 2002 to 2007 but is hindered by a trough encountered in 2008. The upward moving trend picks up from 2010 until 2014. PCI is characterized by a long-run upward movement with occasional seasonality’s which have a dampening/positive effect on its movement. 42 University of Ghana http://ugspace.ug.edu.gh Like the CAR, GDP growth has features of seasonality and no trend. Per the results of the correlogram test, the AC values do not decrease with more lags but display varying AC results with a mixture of decreasing and increasing values. The plot of the AC also further indicates that there is no trend as it does not move in one direction. Figure 4.3 further supports the results obtained from the correlogram test. It can be seen clearly that the graphs of CAR and GDP growth do not move in one direction but are characterized by troughs and peaks. The variables except for PCI are indicative of a random series since 𝑟𝑘 = 0 for all non-zero values. 43 University of Ghana http://ugspace.ug.edu.gh CHAPTER FIVE SUMMARY, CONCLUSION & RECOMMENDATIONS 5.1 Introduction This chapter presents a summary of the findings on the relationship between capital adequacy ratio and economic growth. The conclusion of the study, as well as recommendations made for future research, is captured in this chapter. The summary gives a recap of the study, highlighting key issues discussed in the research. The conclusion presents inferences drawn from the empirical results. Based on the conclusion, recommendations are made for further studies and application by the regulator, practitioners and players in the banking fraternity. 5.2 Summary of Findings The study employs trend, correlation and regression analysis. The trend analysis highlighted the absence of a trend in the variables except for the per capita income. This conclusion was reached by studying the correlogram autocorrelation results and linear graphs of the variables individually. Per capita income is characterized by trend due to the long-run upward movement of the variables. However, the other variables including inflation, monetary policy rate, GDP growth rate, cedi depreciation and inflationary rates do not exhibit long-run movement but rather show seasonality across the study period characterized by troughs and peaks. The results indicate that the macroeconomic variables are sensitive and vary with time. Seasonality may be attributed to the time effect but may also be sensitive to other variables in the economy. The relationship existing between all the selected macro-economic variables and the capital adequacy ratio indicates that PCI is the only variable with a moderately significant positive 44 University of Ghana http://ugspace.ug.edu.gh coefficient. This indicates that PCI has a positive effect on the CAR. Although GDP also has a positive correlation with the CAR it is not significant as it has a small coefficient. Monetary policy rate, inflationary rate and the depreciation of the cedi have a negative relationship with the CAR. However, inflation has a weak positive relationship with the CAR with a coefficient of 0.43189. Some of the main studies covering recapitalization include (Adegbaju & Olokoyo, 2008; Martynova, 2015; Baer & McElravey, 1992); capital resilience (Baer & McElravey, 1993; Shaddady & Moore, 2015); capital requirement changes and their effects (De Marco & Wieladek, 2015; Cecchetti & Li, 2008; Majnoni et al, 2000; D'Erasmo, 2018; Carey, 2002); capital and economic growth (Economics, 2013; Schanz et al, 2011; Burns, 2004; Cecchetti & Kohler, 2010; Gusarova, 2009); and lastly capital and bank determinants (Wachiuri, 2012; Sani & Alani, 2013; Ametei, 2014; Ikpefan, 2013; Sakunasingha et al, 2018) 5.3 Conclusions and Limitation The main goal of this study was to ascertain the trend and relationship among the variables in the study. This is because the Central bank of Ghana considers the prevailing macroeconomic conditions when making capital adequacy requirement policies and changes. In an attempt to achieve this objective, trend, correlation and regression analysis were employed. Trend analysis of CAR and GDP growth showed an absence of trend and a presence of seasonality based on the autocorrelation correlogram (AC) results. Following this, a correlation matrix to show the relationship between variables indicated a general weak relationship between stated variables. CAR showed a strong positive relationship with PCI. GDP growth also showed a strong negative relationship with MPR and INFL. The absence of highly correlated paired variables indicates that the risk of multicollinearity is low. 45 University of Ghana http://ugspace.ug.edu.gh A limitation encountered during this study was discrepancies observed in the data across sources such as Bank of Ghana database, World development indicators and Ghana statistical service. GDP services as a data point were replaced with GDP growth due to difficulty in accessing the data. This may have influenced the predictive ability of the model. 5.4 Recommendations The following are recommendations made based on the findings and conclusions of the study. Since the capital adequacy ratio is insignificantly associated with increases and positive changes in banks solvency, it is recommended that rigorous and detailed research is done concerning these factors and variables. This would help the central bank and the government from overburdening banks solely based on macro-economic variables and expectations of the gross domestic product of the country. The concentration should rather be on helping banks consistently build and maintain a healthy capital base and not necessarily keeping high capital adequacy ratios which is an indication of banks being overly cautious. Further studies could consider the influence of capital adequacy ratios (thus the detail of how banks meet their capital requirements against the type of assets that banks invest) on economic growth, using GDP, services – financial contribution to ascertain whether there would be a relationship. Also, a sector-wide consideration thus looking at the solvency of more of the financial institutions in the country such as NBFIs such as Savings and Loans companies, microfinance institutions, mortgage companies, and insurance companies to get a better and bigger picture. Also, this study showed a lack of a direct relationship between the selected macro-economic variables and capital adequacy ratio. Hence, further studies should attempt to determine the components within the economy which are used as indicators by the central bank to make 46 University of Ghana http://ugspace.ug.edu.gh increases in the capital requirements before those directives are published and implemented. An extended environment such as West Africa should be tested to broaden the horizon of knowledge and understanding of the concepts of adequacy ratios of banks and gross domestic product. 47 University of Ghana http://ugspace.ug.edu.gh REFERENCES Adegbaju, A. A., & Olokoyo, F. O. (2008). Recapitalization and banks’ performance: A case study of Nigerian banks. African Economic and business review, 6(1). Aktas, R., Acikalin, S., Bakin, B., & Celik, G. (2015). The Determinants of Banks' Capital Adequacy Ratio: Some Evidence from South Eastern European Countries. Journal of Economics and Behavioral Studies, 7(1), 79. Ametei, C. T. (2014). Impact of Bank Recapitalisation on the Profitability of Banks in Ghana (Doctoral dissertation, University of Ghana). Appiah, K. O., Chizema, A., & Arthur, J. (2015). Predicting corporate failure: a systematic literature review of methodological issues. International Journal of Law and Management, 57(5), 461-485. Aryeetey, E., & Fosu, A. K. (2003). 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(2015, May). Determinants of capital adequacy ratio in oil exporting countries: Evidence from GCC commercial banks. In Second Middle East 55 University of Ghana http://ugspace.ug.edu.gh Conference on Global Business, Economics, Finance and Banking (ME15Dubai Conference) (pp. 1-24). Sowa, N. K. (2002). An assessment of poverty reducing policies and programmes in Ghana. Centre for Policy Analysis. Sufian, F., & Chong, R. R. (2008). Determinants of bank profitability in a developing economy: empirical evidence from the Philippines. Asian Academy of Management Journal of Accounting & Finance, 4(2). Teixeira, J., Silva, F., Fernandes, A., & Alves, A. (2014). Banks' Capital, Regulation and the Financial Crisis. North American Journal of Economics and Finance, 28, 33-58. Trujillo‐ Ponce, A. (2013). What determines the profitability of banks? Evidence from Spain. Accounting & Finance, 53(2), 561-586. Twerefou, D. K., Akoena, S. K., Agyire-Tettey, F. K., & Mawutor, G. (2007). Energy consumption and economic growth: evidence from Ghana. Vennet, R. V. (2002). Cost and profit efficiency of financial conglomerates and universal banks in Europe. Journal of Money, Credit and Banking, 254-282. Wachiuri, M. W. (2012). The effect of capital adequacy requirements on credit creation by commercial banks in Kenya (Doctoral dissertation). Williams, H. T. (2011). Determinants of capital adequacy in the Banking Sub-Sector of the Nigeria Economy: Efficacy of Camels.(A Model Specification with Co-Integration Analysis). International Journal of Academic Research in Business and Social Sciences, 1(3), 233. 56 University of Ghana http://ugspace.ug.edu.gh APPENDICES A. BANKING AMENDMENT ACT 2007 (ACT 7358) Section 23 of Act 673 amended 16. Section 23 of the principal enactment is amended by the substitution for that section of Capital adequacy 23. (1) A bank holding a General Banking Licence shall at all times while in operation, maintain a minimum capital adequacy ratio of ten per cent computed in the manner that the Bank of Ghana may determine. (2) A bank holding a Class I Banking Licence shall at all times while in operation maintain a capital adequacy ratio of ten per cent. (3) A bank holding a Class II Banking Licence shall at all times while in operation maintain a capital adequacy ratio of the percentage that the Bank may determine. (4) The percentage mentioned in subsection (3) shall be determined by the Bank of Ghana from time to time, after discussions with the bank, and shall not necessarily be the same for all banks or all banks of that class. (5) In determining the percentage mentioned in subsection (3), the Bank shall in each case have regard to (a) other financial resources available to the bank in question; (b) the nature, scale and risks of the bank’s operations; and (c) the amount and nature of net own funds required, in the Bank’s judgement, to protect the interests of depositors and potential depositors and the public. 57 University of Ghana http://ugspace.ug.edu.gh (6) The Bank of Ghana may by directive prescribe a higher capital adequacy ratio with respect to a particular bank or all banks for the period that the Bank may prescribe. (7) The capital adequacy ratio shall be measured as a percentage of the adjusted capital base of the bank to its adjusted asset base in accordance with Regulations made by the Bank of Ghana. Pre-requisites for a license 5C. A licence shall not be granted by the Bank, unless it is satisfied with (a) the technical knowledge, experience, financial conditions and history of the applicant; (b) the adequacy of the capital structure of the applicant; (c) the character of the business and its management; (d) the adequacy of the applicants accounting control systems and records; (e) in the case of an applicant incorporated outside Ghana, that the applicant is a branch or related company of a foreign bank of established international reputation; and (f) the ability and willingness of the applicant to comply with the other conditions that the Bank may impose. Section 6 of Act 673 amended 6. The principal enactment is amended by the substitution for section 6 of Provisional approval 6. (1) The Bank of Ghana may issue a provisional approval for a specified license to the applicant on the terms and conditions that it considers appropriate, if it is satisfied that 58 University of Ghana http://ugspace.ug.edu.gh (a) the applicant will carry on banking business with integrity, prudence and the required professional competence; (b) the applicant has and will maintain paid up capital as set out in the First Schedule and hold a license of the specified type as required; and (c) where the bank is an external bank, it shall have and maintain in Ghana the required capital in the form of funds transferred from abroad together with other funds that may be determined by the Bank. (2) The Bank of Ghana may by notice published in the Gazette, alter the capital requirements as well as any other pre-licensing requirements.” 59 University of Ghana http://ugspace.ug.edu.gh B. PLOT OF VARIABLES CAR GDP growth 24 16 14 20 12 10 16 8 6 12 4 8 2 2002 2004 2006 2008 2010 2012 2014 2016 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018 dpn Inflation 0 30 25 -10 20 -20 15 -30 10 -40 5 2002 2004 2006 2008 2010 2012 2014 2016 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018 MPR - BOG PCI 28 2,500 2,000 24 1,500 20 1,000 16 500 12 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018 60 University of Ghana http://ugspace.ug.edu.gh C. CORRELOGRAM RESULTS CORRELOGRAM OF CAR Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |***. | . |***. | 1 0.379 0.379 2.9040 0.088 . |* . | . | . | 2 0.116 -0.033 3.1914 0.203 . |* . | . |* . | 3 0.138 0.123 3.6277 0.305 . |** . | . |** . | 4 0.336 0.290 6.4285 0.169 . |* . | . *| . | 5 0.168 -0.072 7.1884 0.207 . *| . | . *| . | 6 -0.070 -0.163 7.3341 0.291 . **| . | . **| . | 7 -0.211 -0.221 8.7742 0.269 . *| . | . *| . | 8 -0.130 -0.114 9.3811 0.311 . *| . | . *| . | 9 -0.132 -0.101 10.082 0.344 . *| . | . | . | 10 -0.194 -0.042 11.827 0.297 . **| . | . *| . | 11 -0.329 -0.126 17.653 0.090 . *| . | . |* . | 12 -0.129 0.168 18.727 0.095 CORRELOGRAM GDP GROWTH Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |** . | . |** . | 1 0.351 0.351 2.4907 0.115 . | . | . *| . | 2 -0.006 -0.147 2.4913 0.288 . **| . | . **| . | 3 -0.234 -0.210 3.7536 0.289 .***| . | . **| . | 4 -0.390 -0.280 7.5374 0.110 . *| . | . | . | 5 -0.151 0.067 8.1522 0.148 . | . | . *| . | 6 -0.029 -0.074 8.1762 0.225 . | . | . *| . | 7 -0.031 -0.165 8.2077 0.315 . *| . | . **| . | 8 -0.130 -0.271 8.8130 0.358 . | . | . | . | 9 -0.046 0.028 8.8998 0.447 . | . | . *| . | 10 -0.048 -0.145 9.0055 0.532 . | . | . | . | 11 0.049 -0.063 9.1349 0.609 . |* . | . *| . | 12 0.092 -0.138 9.6834 0.644 CORRELOGRAM PCI Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |******| . |******| 1 0.790 0.790 12.612 0.000 . |**** | . | . | 2 0.616 -0.024 20.778 0.000 . |***. | . *| . | 3 0.454 -0.068 25.532 0.000 . |** . | . *| . | 4 0.301 -0.084 27.779 0.000 . |* . | . | . | 5 0.194 0.012 28.796 0.000 . | . | . **| . | 6 0.003 -0.310 28.796 0.000 . *| . | . | . | 7 -0.107 0.034 29.170 0.000 . **| . | . **| . | 8 -0.272 -0.290 31.829 0.000 .***| . | . | . | 9 -0.363 0.030 37.150 0.000 .***| . | . | . | 10 -0.382 -0.007 43.894 0.000 .***| . | . *| . | 11 -0.427 -0.087 53.702 0.000 .***| . | . |* . | 12 -0.354 0.138 61.793 0.000 61 University of Ghana http://ugspace.ug.edu.gh CORRELOGRAM OF INFLATION Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |* . | . |* . | 1 0.194 0.194 0.7618 0.383 . *| . | . *| . | 2 -0.126 -0.171 1.1055 0.575 .***| . | . **| . | 3 -0.372 -0.331 4.2905 0.232 . **| . | . *| . | 4 -0.260 -0.174 5.9729 0.201 . |* . | . |* . | 5 0.143 0.157 6.5256 0.258 . |***. | . |** . | 6 0.400 0.258 11.234 0.081 . | . | . *| . | 7 0.050 -0.195 11.314 0.125 . *| . | . *| . | 8 -0.181 -0.136 12.485 0.131 .***| . | . *| . | 9 -0.377 -0.144 18.221 0.033 . *| . | . | . | 10 -0.139 0.021 19.119 0.039 . |* . | . *| . | 11 0.100 -0.091 19.660 0.050 . |* . | . **| . | 12 0.136 -0.208 20.848 0.053 CORRELOGRAM OF MPR Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |***** | . |***** | 1 0.661 0.661 8.8081 0.003 . |* . | ****| . | 2 0.143 -0.520 9.2479 0.010 . *| . | . | . | 3 -0.182 0.044 10.013 0.018 . **| . | . *| . | 4 -0.272 -0.082 11.858 0.018 . *| . | . | . | 5 -0.178 0.068 12.712 0.026 . | . | . | . | 6 -0.042 -0.045 12.764 0.047 . *| . | . **| . | 7 -0.078 -0.288 12.960 0.073 . **| . | .***| . | 8 -0.323 -0.374 16.704 0.033 .***| . | . |* . | 9 -0.435 0.092 24.351 0.004 . **| . | . | . | 10 -0.307 -0.062 28.701 0.001 . *| . | . *| . | 11 -0.081 -0.084 29.053 0.002 . |* . | . | . | 12 0.161 0.060 30.722 0.002 CORRELOGRAM OF DEPRECIATION Autocor relation Partial Co rrelation AC PAC Q-Stat Prob . |** . | . |** . | 1 0.349 0.349 2.4571 0.117 . | . | . *| . | 2 -0.029 -0.172 2.4752 0.290 . *| . | . *| . | 3 -0.164 -0.108 3.0946 0.377 . *| . | . *| . | 4 -0.201 -0.122 4.0996 0.393 . | . | . |* . | 5 0.014 0.129 4.1047 0.534 . |** . | . |** . | 6 0.265 0.215 6.1595 0.406 . | . | . **| . | 7 -0.030 -0.294 6.1889 0.518 . **| . | . **| . | 8 -0.298 -0.250 9.3784 0.311 . **| . | . *| . | 9 -0.337 -0.120 13.974 0.123 . *| . | . | . | 10 -0.180 0.053 15.469 0.116 . *| . | . *| . | 11 -0.075 -0.192 15.771 0.150 . |* . | . *| . | 12 0.096 -0.077 16.372 0.175 62