The effect of capital structure on asset quality of banks

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Asset quality of banks has a key influence on the profitability and performance of banks. Poor asset quality does not only affect the performance of bank but may lead to the collapse of banks in the long run. Considering the critical role of banks in various societies, the collapse of banks does not only affect the banks but the economy of a country as a whole. As a result, various studies have been undertaken to identify the determinants banks asset quality. However, most of these studies have focused on the macroeconomic determinants of asset quality. Only a few studies have examined bank specific determinants of asset quality. This study is therefore undertaken to address this gap in literature. Specifically, this study examines the effect of capital structure on banks asset quality. Secondary data for a period of 9 years spanning from 2009-2018 were used for the study. Data for the study were quantitatively retrieved from the annual reports and accounts of the 11 universal banks operating in Ghana. Descriptive statistics, correlation and OLS Robust regression were used to describe and analyze the data. This study employed the Harris-Travalis unit root test to investigate the stationarity property of the data series. First the study found that the composition of the capital structure of the banks is made up of more debt as compared to equity. Further, the results from the trend analysis of asset quality of the banks shows an increasing trend for the periods 2009 to 2018. In addition, the study found the capital structure has a negative and significant impact on asset quality. Owing to the fact that the non-performing loans of the banks have been increasing over period understudied, this study recommends that the various policy makers and regulatory bodies such as bank of Ghana must put measures in place reverse the trend.
A thesis submitted to the Department of Accounting and Finance, Kwame Nkrumah University of Science and Technology, School of Business in partial fulfillment of the requirements for the degree of Master of Business Administration (Finance).