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ABSTRACT

The study seeks to analyse the effect of leverage on bank financial performance and provide a comprehensive comparative analysis of foreign and domestic banks in Ghana with regards to the debt component of their capital structure over a ten year period. Secondary data was collected from the annual reports and financial statements of twenty-four (24) banks between 2006 and 2015. Parameter sensitivity analysis is carried out to test the difference between the performance of foreign and domestic banks in relation to their capital structure. The analysis revealed a statistically significant difference between the performance of foreign and domestic banks in relation to their capital structure. Random effects panel data estimation technique is used to evaluate the relationship between bank-specific variables (leverage, size, asset tangibility and sales growth) and financial performance using an unbalanced panel data. Evidence indicates that capital structure (leverage) has a negative significant effect on bank financial performance. However, it had a greater bearing on the financial performance of foreign banks because of their higher debt ratios. Evidence also suggests a positive significant relationship between financial performance and bank size. On the other hand, the results revealed a negative significant relationship between bank asset tangibility and financial performance. The result reveal that on average, the foreign banks are more profitable as compared to their domestic competitors. This can be attributed to the high risk accommodating characteristics (coefficient of variation) of the foreign banks. The study suggests that banks in Ghana heavily rely on debt as major source of financing which adversely affects their financial performance. Therefore, it is important for banks to consider debt as an indispensable component of their capital structure decisions.