Effect Of Capital Requirement On Profitability And Lending Behaviour Of Banks In Ghana

ABSTRACT

Minimum capital requirement is significant in improving banks’ performance and minimizing the lending behaviour, thus it is vitally important to regulate financial institutions such as bank in order for them not take on excess leverage and become insolvent. The objective of this study is to assess the effect of minimum capital requirement on profitability and lending behavior of banks in Ghana. The study employs pooled panel data analysis with quantitative research approach, as well as purposive sampling method to sample 12 banks in Ghana. The study used financial statements of twelve banks comprising of 6 listed and 6 unlisted banks in Ghana during the period 2011 to 2017, and the data collected was coded and entered into STATA version 15 and analysed using Pearson correlation and panel data analysis. The study found that fixed effect model was preferred over the random effects model for the determination of variation in the profitability and lending behavior of banks in Ghana due to the minimum capital requirement using the Hausman Test.

The study found a positive effect of capital requirement on profitability of banks in Ghana. Also, the study found a negative effect of capital requirement on the lending behavior of banks in Ghana.

The study recommends that bank managers should intensify their effort of enhancing the banks’ profitability by ensuring that there is enough capital to prevent liquidation. Banks should put in some policies and systems to manage their lending behaviours. Banks managers should separate honest customers facing short term loan payment problems from habitual defaulters.