Analysis of factors affecting profitability of commercial banks using the camel approach
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Date
2023
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KNUST
Abstract
The purpose of this research was to analyze the variables that determine the profitability of commercial banks in Ghana using the CAMEL methodology, as well as to differentiate the effects of different types of bank ownership. The research used a methodology that was both descriptive and explanatory. The Ghanaian commercial banking industry was selected as the target demographic for this investigation. In this particular research, a method known as purposeful sampling was used to collect data from 9 banks on GSE. The company's website had yearly reports, which allowed for the collection of secondary data. The data came from annual reports that companies had submitted during the given time period (2010-2021). The parameters that were included in the research goals were estimated using a pooled OLS model of estimation in addition to a random effect model of estimation. The empirical data reveal that the CAMEL framework, which takes into consideration all of the following factors: management effectiveness; capital strength; earnings capacity; asset quality; and liquidity, is the one that experts recommend using in order to evaluate the performance of a bank. According to the findings of this study, commercial banks have better liquidity and a stronger position in the CAMEL components than conventional banks that are not listed. This shows that commercial banks are more financially stable than conventional banks. When comparing banks based on the structure of their ownership, private banks beat their public sector counterparts in terms of capitalization, the quality of their assets, the management efficiency of their operations, and profitability. This illustrates that private banks dedicate a bigger amount of their revenue to the research and development of strategies that reduce costs. As a consequence of this, private banks are more robust than their counterparts in the public sector in terms of financial performance metrics such as the quality of their assets, the strength of their capital, the profits potential, and the management effectiveness of their organizations. The findings of the study suggest that, in order for the Ghanaian banking system to remain competitive and more resilient to economic shocks, efficiency goals should be prioritized. 3 Financial institutions should ensure that their staff has a solid grasp of the fundamentals of CAMEL and the CAMEL rating. In addition, there need to consistently be robust engagement between the regulators of banks and the institutions themselves. If Ghana's commercial banks, in particular, want to see an increase in their profitability, they will need to improve their capacities for credit risk management. This will allow them to avoid the bad performance of assets that are acquired mostly via loans and advances. Ghana commercial banks, in particular, should branch out into non-traditional areas and earn money from varied businesses other than core banking activities if they are to boost profitability and sustain expansion.
Description
Thesis submitted to the department of accounting and finance, college of humanities and social science in partial fulfilment of the requirement of award of master in science in accounting and finance