The implication of debt capital and risk on bank performance

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Funding the activities of firms in the bank industry is done through various forms. Whilst a section of these banks choses a single method which could be shareholder equity or debt financing referred to as leverage, other banks adopt a mixture of these two methods. This study assessed the Implication of Debt Capital and Risk on Bank Performance in Ghana. Hypotheses were developed and made possible by financial leverage proxies; bank credit risk, liquidity risk and bank capital. A descriptive research design was used to collect secondary data from nine (9) banks from 2011- 2017. The study used both the fixed and the random effects models aided by the Hausman Test to analyse data, and found that under the Risk Adjusted Return on Equity (RAROE), apart from liquidity risk that has a significant negative effect on bank performance, bank capital infused with leverage and credit risk both have a significant positive impact on bank performance. Interestingly enough, using the Risk Adjusted Return on Assets (RAROA), credit risk rather related negatively with bank performance while bank capital and liquidity risk have a significant positive impact on bank performance. Following these revelations, the study concludes that financial leverage is an import source of financing bank operations and therefore should be judiciously used to the benefit of banks in the industry.
A thesis submitted to the institute of distance learning, Kwame Nkrumah university of science and technology, Kumasi in partial fulfilment for the degree of master of science industrial finance and investment