Capital Structure and Profitability in Ghanaian Banks

Abstract

We studied capital structure and profitability in Ghanaian banks using panel data methodology was employed. Capital structure theories have been utilised to provide the theoretical basis for the work. The study covered 14 banks over the period 1997-2006. it was observed that 87% of the total capital of banks in Ghana is made up of debt. Of this, 65% constitute short-term debts while 22% is made up of long-term debts. This has re-emphasised the fact that banks are highly levered institutions and also highlights the importance of short-term debts over long-term debts in bank financing in Ghana. This finding agrees with previous studies such as Abor (2005) and Amidu (2007) in stressing the importance of short-term debt in firm financing in Ghana. This significant negative relationship between bank size and profitability suggests that larger banks tend to exhibit lower margins and is consistent with models that emphasize the negative role of size from scale inefficiencies.

Keywords: Capital Structure, Panel Data, Return on Equity and Bank Size