The Impact of Capital Structure on the Financial Performance of Financial Institutions in Ghana

Abstract

The study aimed to discover how capital structures (capitalization ratios and debt-to-EBITDA ratios) affect the financial performance of Ghanaian financial institutions. The study selected 15 financial institutions in Ghana using a purposive sampling strategy. Ten (10) financial organizations are listed on the Ghana Stock Exchange, while the remaining five (5) are not. The data was gathered from their audited annual report. The Stata software analyzed the data into fixed and random effects. The Hausman specification test was used to determine the appropriate method to present the study results. The random effect was considered the appropriate method to present the study's findings. We discovered that the capitalization ratio has a negative effect on the net interest margin, loan-to-asset ratio, and return on assets. The debt-to-EBITDA ratio was discovered to have a negative effect on net interest margin and return on an asset but a positive effect on the loan-to-asset ratio. The debt-to-EBITDA ratio was discovered to have a statistically significant effect on net interest margin and return on assets. We also found that financial institutions that are listed on Ghana's stock exchange have a statistically significant effect on net interest margin. In contrast, financial institutions that are not listed do not. The use of debt financing was found to have a statistically significant impact on the performance of financial institutions compared to equity financing. The use of debt financing gives managers a chance to take advantage of the tax shield by lowering the amount of tax they have to pay to the government. The use of debt financing helps maximize the wealth of shareholders.