GHANA INSTITUTE OF MANAGEMENT AND PUBLIC ADMINISTRATION

(GIMPA) GREENHILL COLLEGE

TOPIC: AN ASSESSMENT OF THE PERFORMANCE, CREDIT RISK EXPOSURE,

AND BASEL III COMPLIANCE OF INDIGENOUS GHANAIAN BANKS.

PRESENTED BY
ERNEST MARFO

AISHA OSMAN

KEMY LAUREL ALZOUMA ASSAH

DUNIA EL-MAHMOUD

HANNAH ODISU

A PROJECT WORK SUBMITTED TO GREEN HILL COLLEGE, GHANA

INSTITUTE OF MANAGEMENT AND PUBLIC ADMINISTRATION
(GIMPA) IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD
OF THE DEGREE OF BACHELOR OF SCIENCE DEGREE IN FINANCE.

MAY 2020
 DECLARATION
We, the group members hereby declare that we are the authors of this Project Work and declare

that except for references to other people’s work, which we acknowledged duly, the study

presented was done by us, as undergraduate students in Bachelor of Finance at Ghana Institute of

Management and Public Administration (GIMPA) under the supervision of Dr. Kofi Afful. We

again declare that; this work has never been submitted partially or wholly to any institution for

the award of a certificate.

NAMES OF STUDENT INDEX NUMBER

ERNEST MARFO 218029136

AISHA OSMAN 217001432

KEMY LAUREL ALZOUMA ASSAH 217030033

DUNIA EL- MAHMOUD 217029353

HANNAH ODISU 217001408

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 DEDICATION

This research work is dedicated to God Almighty, our Guider, and Protector, who has been our

strength throughout this course. To the members of this group for their immense contribution and

support and our loved ones also for their support. Not forgetting our undisputable support from

our supervisor, Dr. Kofi Afful.

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 Acknowledgment

We are forever grateful to the Almighty God, the Alter, and Finisher of our faith. It is His

Grace that has brought us this far. This Project would not be complete without his goodness upon

our lives.

We are forever indebted to our supervisor, Dr. Kofi Afful and we express our profound

gratitude to him for his assistance. We are also grateful to all lectures and Heads of Department

for the varied ways they have contributed to our intellectual capacity.

Our profound gratitude to our team leader, Ernest Marfo, who is a genius, his consistency

and patient cannot be forgotten. Without his guidance and persistent help, this dissertation would

not have been possible.

Finally, to the group members: Aisha Osman, Kemy Laurel Alzouma Assah, Dunia El-

Mahmoud, and Hannah Odisu whose contribution and cooperation was remarkable. Ultimately,

we are most grateful to each other for our cooperation.

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Table of Contents
DECLARATION ..................................................................................................................................................................... 2
DEDICATION ......................................................................................................................................................................... 3
Acknowledgment ................................................................................................................................................................ 4
Abstract: ................................................................................................................................................................................. 7
Chapter 1. Introduction .................................................................................................................................. 8
1.0 Background of the Study .......................................................................................................................................... 8
1.2 Research Problem ....................................................................................................................................................... 8
1.3 General Objective ........................................................................................................................................................ 9
1.3.1 Specific Objectives ................................................................................................................................................... 9
1.3.2 Research Questions................................................................................................................................................. 9
1.4 Significance of the Research ................................................................................................................................. 10
1.5 Research Limitations ............................................................................................................................................... 12
1.6 Organization ................................................................................................................................................................ 12
Chapter 2. Literature Review ..................................................................................................................... 13
2.0 Introduction................................................................................................................................................................. 13
2.1 Theoretical Review ................................................................................................................................................... 13
2.1.1.0 Credit Risk............................................................................................................................................................. 13
2.1.1.1 Types of Credit Risk .......................................................................................................................................... 15
2.1.1.2 Causes of Credit Risk ........................................................................................................................................ 15
2.1.1.3 Mitigation of Credit Risk ................................................................................................................................. 16
2.1.2.0 Liquidity Risk ....................................................................................................................................................... 17
2.1.2.1 What is Liquidity Risk? .................................................................................................................................... 17
2.1.3.0 Financial Ratio Analysis .................................................................................................................................. 18
2.1.3.1 Categories of Financial Ratios....................................................................................................................... 19
2.1.3.2 Uses of Financial Ratio Analysis................................................................................................................... 21
2.1.3.3 Limitations of Ratio Analysis ........................................................................................................................ 22
2.1.4.0 Basel III Accords ................................................................................................................................................. 22
2.1.4.1 Basel III Pillars .................................................................................................................................................... 23
2.1.4.2 Capital Requirements ....................................................................................................................................... 24
2.1.4.3 Liquidity Requirements................................................................................................................................... 25
2.2 Empirical Review ...................................................................................................................................................... 27
2.2.2. Liquidity Risk Empirical Review .................................................................................................................... 29
2.2.3 Financial Ratios Empirical Review ................................................................................................................. 32

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Chapter 3. Methodology ............................................................................................................................... 35
3.1 Introduction................................................................................................................................................................. 35
3.2 Research Design......................................................................................................................................................... 35
3.2.1 Performance Ratios .............................................................................................................................................. 36
Credit Risk Ratios ............................................................................................................................................................. 37
3.2.3 Basel III Capital and Liquidity Requirements ............................................................................................ 37
3.3 Limitations of Quantitative Research Method............................................................................................... 38
3.4 Unit of Analysis .......................................................................................................................................................... 39
3.5 Research Strategy...................................................................................................................................................... 40
3.6 Data Collection............................................................................................................................................................ 41
3.7 Data Analysis ............................................................................................................................................................... 41
Chapter 4: Data Analysis .............................................................................................................................. 42
4.1. Performance Ratio Analysis ................................................................................................................................. 42
4.2. Credit Risk Analysis................................................................................................................................................. 73
4.3 Basel III Compliance................................................................................................................................................. 84
Chapter 5. Conclusion ................................................................................................................................... 90
5.1 Introduction................................................................................................................................................................. 90
5.2 Summary ....................................................................................................................................................................... 90
5.3 Conclusion .................................................................................................................................................................... 92
5.4 Implications and Recommendations................................................................................................................. 94
5.4.1 Implications to Practice ...................................................................................................................................... 94
5.4.2 Implications to Policy........................................................................................................................................... 94
5.4.3. Implications to Research ................................................................................................................................... 95
5.4.4. Recommendations................................................................................................................................................ 95
References ........................................................................................................................................................ 96

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Abstract:
The main objective of the study was to assess the performance and the credit risk

management practices of indigenous financial institutions in Ghana that are not listed on the

Ghana Stock Exchange (GSE) while concurrently assessing the progress made towards

compliance with the capital and liquidity requirements of the Basel Accords. Fidelity Bank

Limited, First Atlantic Bank, Prudential Bank Limited, ARP Apex Bank, and Universal

Merchant Bank were examined longitudinally over the years 2015 -2018 using ratio analysis.

The study revealed that the banks had generally low performance due to their inefficient

use of their assets to generate profit, the banks had generally low credit risk exposure when

compared to their foreign counterparts and the industry averages, and the banks were compliant

with the capital requirements of the Basel III Accords. The selected banks should be more

diligent in their credit check to reduce the Non-Performing Loan ratio and avoid high credit risk

exposure while increasing their liquidity to maintain a high Loan Loss Provision ratio.

Further research is needed over a longer duration to establish a more conclusive

performance trend. Additional research should address the other pillars of the Basel Accords to

truly assess whether banks in Ghana are following international standards. Finally, studies should

be undertaken to evaluate the credit risk management policies of the indigenous banks in Ghana.

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 Chapter 1. Introduction
1.0 Background of the Study

For banks to operate efficiently, consumers must have confidence in the institutions in

which they choose to deposit their money. The financial sector reforms that resulted in the

consolidation of five banks in Ghana and the revocation of licenses of numerous other financial

institutions have bolstered the public’s confidence in the country’s banking system. According to

the Head of Banking Supervision at the Bank of Ghana, Mr. Osei Gyasi, there has been

improved confidence in the remaining banks’ ability to manage their funds and this has

translated to a significant increase in bank deposits over the last few months (Bank Deposits

Picking up Strongly—Bank of Ghana—Ghana Investment Promotion Centre (GIPC), 2019). The

reforms were aimed at introducing policies that will strengthen the financial sector to spur

economic growth.

The efficient operation of a bank requires the proper understanding and management of

risk. There are several risks that banks must manage properly if they are to remain viable (Major

Risks for Banks—Overview, Regulations, and Examples, n.d.). These include credit risk,

operational risk, market risk, and liquidity risk with credit risk being the most significant. Credit

risk refers to the probability of loss due to a borrower’s failure to make payments on any type of

debt. Credit risk management is the practice of mitigating losses by understanding the adequacy

of a bank’s capital and loan loss reserves at any given time (Credit Risk Management, n.d.).

1.2 Research Problem

Previous research has focused on the assessment of credit risk among financial intuitions

that are listed on the GSE and found that their credit risk management practices were in line with

sound practices (Apanga, Appiah, & Arthur, 2016). However, listed companies benefit from

improved efficiency due to greater public scrutiny, hence the desire for the Bank of Ghana to get
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all banks listed on the GSE (Otoo, 2018). Closer inspection needs to be made on those

institutions that serve a significant portion of the public and yet are still privately held.

The Bank of Ghana’s endeavor to clean up the financial sector has concluded and

theoretically, the financial institutions that remain should show improvement in their books.

Research has been written regarding the potential impact of the new capital requirements

required by the BOG. However, now that the institutions have been recapitalized, there needs to

be research conducted to assess the performance impact of the recapitalization.

Research on compliance with the current Basel Accords framework in Ghana is critically

sparse. The international banking community has established standards termed the Basel Accords

which are designed to protect depositors at banks. The accords help to make sure that financial

institutions across the world are equipped with enough capital to absorb unexpected losses.

1.3 General Objective

The purpose of this study is to assess the performance and credit risk management of

indigenous financial institutions in Ghana that are not listed in the Ghana Stock Exchange (GSE)

while simultaneously assessing the progress made towards compliance with the Basel Accords.

1.3.1 Specific Objectives

The specific objectives of this research include:

- Determine the relative change in the strength of the banks.

- Determine the selected banks’ exposure to credit risk.

- Determine the banks level of compliance with the capital and liquidity

requirements of Basel III

1.3.2 Research Questions

Aligning with the objectives stated above, the following questions are posed:
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 I. Has there been a change in bank strength as a result of the cleanup in Ghana’s financial

sector?

II. Are banks keeping their credit risk exposure to manageable levels?

III. Are banks more compliant with the capital and liquidity Basel requirements?

1.4 Significance of the Research

This study aims to add to academic research by focusing on the credit risk and liquidity

risk management of those banks that are not listed and do not benefit from the increased

transparency and scrutiny that publicly traded financial intuitions benefit from. The significance

of this research cannot be understated given the recent turbulence in the Ghanaian banking

sector. The central bank of Ghana, Bank of Ghana, identified that the financial sector was at risk

and thus embarked on an exercise to clean up the sector of institutions that were mismanaged,

undercapitalized, and underperforming to instill consumer confidence in the sector. The exercise

started with the consolidation of five universal banks into the Consolidated Bank Ghana. One of

the five consolidated banks, The Royal Bank, can directly attribute its collapse to poor risk

management. According to the Bank of Ghana (2018), The Royal Bank's non-performing loans

ratio (NPL) constituted 78.8 percent of total loans granted, owing to poor credit risk and liquidity

risk management controls.

By conducting this research, the banks within the scope of analysis will be able to

compare their performance with those of their peers. This will help the banks assess themselves

concerning their competition. If the research reveals underperformance, then the appropriate

steps can then be taken to ensure that future bank performance is up to standard. Increasing

compliance with the international Basel Accords will give the banks additional credibility while

improving their solvency position. This will enhance the banks’ ability to compete on an

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international scale.

For policymakers, the research is significant because it allows them to assess whether the

financial sector is improving as anticipated. The trend analysis of the research will give

regulators the information needed to determine if the capital directives accomplished what it was

intended to. If not, regulators will now implement other measures that can help improve the

performance and credit risk management of financial institutions. Additionally, if the research

reveals that these indigenous banks can meet the strict capital and liquidity requirements of the

Basel III Accords then, policymakers would be more inclined to adopt the accords as a

nationwide standard.

The public and customers of the banks stand to benefit from the research as well. This

group of people are stakeholders of the individual banks and thus have a vested interest in the

performance of the banks. The bank's compliance with the capital and liquidity requirements will

help to assuage any lingering fears customers may have regarding the collapse of the banks.

This research is significant for the economy due to the vital role the financial sector

plays. The universal banks were not the only institutions affected by the sector cleanup. The

savings & loans, microfinance, and other financial institutions changed under the new

regulations. After the cleanup of the universal banks operating in the country, BOG turned their

attention towards the savings & loans (S&L), microfinance, and other financial institutions as

part of the larger financial sector clean-up. About 38% of the existing S&L’s(15 of the 40

institutions in operation) fell victim to the cleanup and had their licenses revoked due to their

insolvency and subsequent failure to recapitalize to return to solvency (Future is bright,

2019). Microfinance establishments are designed with the concept of financial inclusion in mind.

They provide the unbanked or oppressed family units access to financial services to improve

their financial prosperity by serving as channels for them to save or take small loans for trading.
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The traditional banks consider the cost of reaching underprivileged households very high and

unprofitable; thus, microfinance businesses operate in that space. The Bank of Ghana found it

prudent to include these institutions in the financial sector cleanup that commenced in 2017. As

of February 2020, 347 microfinance institutions have had their licenses revoked for various

reasons including poor corporate governance, poor lending practices, high non-performing loans,

and large capital deficits (Anumu, 2019).

In total, the financial clean up exercise resulted in the collapse of nine universal banks,

347 microfinance companies, 39 microcredit companies or money lenders, 15 savings and loan

companies, 8 finance house companies, and 2 non-bank financial institutions (Larnyoh, 2020).

1.5 Research Limitations

The scope of the research will be limited to five indigenous banks that are not listed on

the Ghana Stock Exchange (GSE): Prudential Bank Ltd., ARB Apex Bank, Universal Merchant

Bank, Fidelity Bank, and First Atlantic Bank Limited. The financial statements from the years

2015-2018 were used in this study except for ARB Apex Bank which did not publish their 2018

financial statements online. These are some of the remaining indigenous banks that are not

publicly traded on the GSE and were not made defunct or consolidated in the financial sector

clean-up. This scope covers the fiscal years before, during, and after the financial sector reform.

The averages of five foreign banks listed on the GSE was used as a benchmark for comparison to

the individual banks chosen for analysis. Those foreign banks were Ecobank Ghana Ltd.,

Standard Chartered Ghana, HFC Bank, Société General, and Access Bank.

1.6 Organization
The rest of the paper is organized into five sections: literature review; methodology;

discussion of empirical results; summary, conclusions, and recommendations; and references.

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 Chapter 2. Literature Review

2.0 Introduction
This section of the report will review past research in the field of credit and liquidity risk

management, financial ratios, and their use in analyzing bank performance, and the Basel III

Accords. The theoretical review is where key concepts are defined and explained. The empirical

review is where past literature will be reviewed to provide significant insights that can help form

the basis of the pending analysis.

2.1 Theoretical Review

2.1.1.0 Credit Risk

While financial institutions have faced difficulties over the years for a multitude of

reasons, the major cause of serious banking problems continues to be directly connected to slack

credit standards for borrowers and counterparties, poor portfolio risk management, and a lack of

attention to changes in economic or other circumstances that can lead to a deterioration in the

credit standing of a bank's counterparties. Kiseľáková and Kiseľák (2013) concluded that the

management of credit risk of credit portfolios is consequently one the most essential tasks for the

financial liquidity and stability of banking sector in connection with increased sensitivity of

banks to the credit risks and changes in the development of prices of financial instruments. In

banking, credit refers to the loans and advances made by the bank to its customers or borrowers.

Credit is the trust which allows one party to provide resources to another where that second party

does not reimburse the first party immediately (thereby generating a debt) but instead arranges

either to repay or return those resources (or other material of equal value) later (o Sullivan,

Arthur; Sheffrin, 2003).

Risk means exposure to a chance of loss or damage. Risk is the element of uncertainty or

13
possibility of loss that exist in any business transaction. There are diverse types of risks faced in

banks however credit risk is very dominant. In banking terms, credit risk is most simply defined

as the potential that a bank borrower or counterparty will fail to meet its obligations per agreed

terms. Credit risk is the possibility that the actual return on an investment or loan extended will

deviate from that, which was expected (Conford, 2000). Coyle (2000) defines credit risk as

losses from the refusal or inability of credit customers to pay what is owed in full and on time.

The goal of credit risk management is to maximize a bank's risk-adjusted rate of profit by

maintaining credit risk experience within tolerable constraints. Banks need to manage the credit

risk essential in the entire portfolio as well as the risk in individual credits or transactions. Banks

should also study the relationships between credit risk and other risks. The actual management of

credit risk is a critical component of a complete approach to risk management and crucial to the

long-term success of any banking organization.

There are numerous causes of credit risk among which are: limited institutional capacity,

inappropriate credit policies, volatile interest rates, poor management, low capital and liquidity

levels, poor loan underwriting, reckless lending, and poor credit assessment. To minimize these

risks, the financial system must have; well-capitalized banks, service to a wide range of

customers, sharing of information about borrowers, stabilization of interest rates, reduction in

non-performing loans, increased bank deposits, and increased credit extended to borrowers. Loan

defaults and non-performing loans need to be reduced (Basel Committee on Banking

Supervision, 2006).

The credit risk of a bank's portfolio relies upon both external and internal variables. The

outer elements are the condition of the economy, wide swings in item/value costs, remote trade

rates and financing costs, exchange limitations, monetary approvals, government arrangements,

etc. The inward factors are lacks in advance arrangements/organization, nonattendance of

14
prudential credit focus limits insufficiently characterized loaning limits for loan officers/credit

committees, inadequacies in the evaluation of borrowers' budgetary position, over the top

reliance on insurances and insufficient risk evaluating, nonappearance of advance audit

instruments and post-sanction surveillance, etc. ("The Credit Risk and its Measurement, Hedging

and Monitoring", 2020).

2.1.1.1 Types of Credit Risk

1. Credit Default Risk. It is the risk in which the borrower is most unlikely to repay the

full amount or when the borrower for some reason is more than 90 days late to repay the loan.

This results in a credit default risk. This type of risk is checked by banks before the approval or

confirmation of any credit cards or loans.

2. Concentration Risk. This is a risk in which there's a loss in the value of a portfolio

investment when an individual or a group of exposures move together in an unfavorable

direction. The impact of concentration risk is that it generates such a significant or important

loss that recovery is unlikely. This will lead to the portfolio being liquidated or the financial

institution facing bankruptcy.

3. Country Risk. This is a type of credit risk that emerges from a sovereign state when it

decides to freeze the payments for foreign currency suddenly defaults or its rights. Country risk

is entirely related to the performance of macroeconomics of a country as well as sharply related

to the country’s political stability.

2.1.1.2 Causes of Credit Risk

Even though credit risk is a result of lending, different kinds of procedures can be used to

15
ensure that the risk is belittled. Indigent lending activities or practices may lead to higher credit

risk and associated losses. Some banking operations or practices which result in higher credit

risk for banks are credit contraction, credit issuing process, and cyclical performance. Credit

concentration is where most of the banks lending is concentrated on a particular borrower or

borrowers or a particular sector. The kinds of credit concentration involve lending to single

borrowers, a class of connected borrowers, and a specific sector or industry. The credit issuing

process involves the bank’s disfigurement in the credit granting and monitoring process. Even

though credit risk is deep-seated in lending, it can be minimized with robust credit practices.

Cyclical performance, on the other hand, is practically when all organizations or industries go

through phases of abjection and a successful period. In a successful period, the evaluations might

result in good creditworthiness. The cyclical achievement of the organization or industry,

however, should also be considered to conclude at the result of credit evaluations and more

accuracy.

2.1.1.3 Mitigation of Credit Risk

Recognizing risk is a significant initial step, however, it is not adequate. Finding a

method or mechanism to reduce or control risk is a better option. Mitigating risk involves the

employment of various methods to minimize the risks that lenders, banks, and other businesses

that offer credit face. Considering the issues in the economy, issues in the securities exchange,

issues related to the absence of customer certainty, and the expansion in the number of business

liquidations being recorded - credit directors should be significantly increasingly cautious about

controlling credit risk. Some ways to mitigate credit risk include:

1. Thoroughly checking a new customer’s credit record to ensure that the customer can repay

the loan or not.

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2. Establishing credit limits using tools such as Credit-agency reports.

3. The use of audited financial statements which provides a good view of the business’s

liquidity, profitability, and cash flow and can be used to establish credit limits.

4. The usage of credit insurance to help prevent extreme losses.

5. Reducing the amount of credit given to higher risk applicants.

6. Adjusting the amount of credit according to the credit strength of the borrower

2.1.2.0 Liquidity Risk

Firms, particularly financial institutions, require access to borrowed funds to carry out

their operations, from paying their short-term obligations to making long-term strategic

investments. An inability to acquire such funding within a reasonable timeframe could place a

firm at risk.

Liquidity is commonly defined as the capacity of a financial firm to meet its short term

obligations. Liquidity describes the extent to which a security or an asset can rapidly be

purchased or sold in the market at a price reflecting its intrinsic value. It is the ease of converting

assets to cash.

2.1.2.1 What is Liquidity Risk?

Liquidity risk is the risk that an organization will be unable to meet its short term

monetary commitments when due. As it were, liquidity risk is the risk that an organization won't

have the option to settle its present outstanding bills. Liquidity risk is a significant worry for

periodic organizations whereby working incomes and liability commitment due dates seldom

coordinate superbly. For instance, an organization may encounter a period of solid execution

followed by a period of poor performance. During the time of log jam, the organization might be

faced with liquidity risk if the commitments due during that time are higher than the working

17
incomes created.

Liquidity risk alludes to the capacity of organizations to fund liabilities as they fall due

without bringing about losses through being compelled to sell less-liquid assets rapidly. These

assets are not accessible in the case where the money is needed to take care of an obligation or

pay off a debt, make a significant purchase, or undertake a new investment opportunity rapidly.

The time delay in selling certain assets can be an issue if the worth or value falls, thus leading to

a reduction in the amount realized from the transaction.

Due to this notable risk, financial firms build and maintain liquidity management systems

to evaluate their imminent financing needs and guarantee that the funds are accessible at

appropriate times. A key component of these systems is checking, monitoring, and assessing the

institution's present and future debt obligations and getting ready for any unforeseen financing

needs, whether or not they emerge from firm-explicit elements.

Factors that contribute to liquidity risk include:

● Regular changes in income creation

● Business interruptions

● Impromptu capital expenses

● Expanded operational expenses

● The scanty working capital administration

● Scanty coordination of asset maturity to debt maturity

● Restricted financing competence

● Scanty cash flow administration

2.1.3.0 Financial Ratio Analysis

Financial ratios are useful performance indicators for the firm and mostly use numerical

18
values taken from the financial statements to gain meaningful information about a firm. Most

ratios can be calculated from financial statement information. Financial ratios are also used to

assess the pattern and to equate the financials of the company with those of other firms.

Examination of the ratios will predict future bankruptcy, however. Luckily, financial ratios are

easy to calculate, but then again there are so many of them, they are also described in a long list

that seems to require first memorization and then interpretation.

2.1.3.1 Categories of Financial Ratios

1. Liquidity Ratios: liquidity measures help to determine whether or not the company can

meet its short-term obligations. Short-term commitments in the sense that short-term

loans can be repaid within one year (that is a period of operations). The organization must

take into account all the liquidity ratios such as current ratio, acid-test ratio and cash ratio

to know if it has enough cash for the business to operate for at least one operating year.

● Current Ratio: This is the most used type of liquidity ratio. It is current assets

divided by current liabilities, which shows the ability of the firm to cover its
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
current liabilities with its current asset. That is; .
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑠

● Acid-Test/Quick Ratio: Measures the ability of a company to use its near cash or

quick assets to remove its current liabilities. It is defined as the ratio between

quickly available or liquid assets and current liabilities. That is;

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
.
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

● Cash Ratio: compares a company’s most liquid asset to its current liabilities, to

mainly determine whether the company has sufficient liquidity to grow the

business. The cash ratio considers cash and marketable securities only.

19
2. Financial Leverage/Debt Ratios: These ratios look at the capital structure of a company.

The leverage ratio category is important because companies rely on equity and debt to

finance their operations. Knowing the amount of debt held by a company is useful in

evaluating whether it can pay off its debts when they are due. The three main leverage

ratios are;

● Debt-to-Equity Ratio: This ratio helps determine the extent to which the firm is

using borrowed money. It is computed by simply dividing the total debt of the
𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
firm by its shareholder’s equity; 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 .

● Debt-to-Total-Assets-Ratio: This ratio is computed by dividing a firm’s total debt

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
by its total assets; 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

● Debt-to-Total-Assets-Ratio: This ratio is computed by dividing a firm’s total debt

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
by its total assets; 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 .

● Interest Coverage Ratio: Shows the company’s ability to pay its interest on its
𝐸𝐵𝐼𝑇
outstanding debt. Computed simply; 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒.

3. Efficiency/Activity/Turnover Ratios: Measure how efficient and effective a firm uses its

assets (mostly the receivables and inventories). These ratios are based on the relationship

between the level of activity, represented by sales or cost of goods sold, and levels of

various assets. The important turnover ratios are inventory turnover, average collection

period, receivables turnover, fixed assets turnover, and total assets turnover.

● Inventory Turnover helps to determine how well a company can manage its

inventory and provides an overview of the company’s sales. It is computed by

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

20
 ● Average Collection Period represents the number of days’ worth of credit sales

𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
that are locked in sundry debtors. It is defined as .
𝑆𝑎𝑙𝑒𝑠 ÷365𝑑𝑎𝑦𝑠

● Fixed Assets Turnover measures the number of sales the firm generates for every
𝑆𝑎𝑙𝑒𝑠
investment in fixed assets. That is; 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 .

● Total Assets Turnover measures the number of sales the firm generates for every
𝑆𝑎𝑙𝑒𝑠
investment in total turnover. That is; 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 .

4. Profitability Ratio: Return on Equity (ROE) and Return on Asset (ROA) are key

profitability ratios and they provide an understanding of the company's ability to generate

profits. Return on assets is the total net profit divided by total assets, which indicates how

much a business receives from its assets for every dollar. Return on equity is shareholder

net income divided by shareholders’ equity and this measure tells us how well a company

uses money from its investors. Ratios such as the Gross Profit and the Net Profit Margin

help to measure the capacity of the company to convert revenue into profit.

5. Market Value Ratio: is the comparison of market value with the book value of a firm

which tells how much investors are paying against each dollar of book value in the

balance sheet. Even though the market ratio does not consider future profit growth, it is

equally important to companies with major tangible assets.

2.1.3.2 Uses of Financial Ratio Analysis

Financial ratio analysis is important for every company to analyze its financial position,

liquidity, profitability, risk, solvency, efficiency, and operations effectiveness and proper

utilization of funds which also indicates the trend or comparison of financial results that can be

helpful for decision making for investment by shareholders of the company. Some important

21
uses of these ratios are;

● Analyzing financial statements

● Simplify accounting data:

● Comparative Studies

● Develop accurate forecasts

● Gain an understanding of a firm’s risk exposure

2.1.3.3 Limitations of Ratio Analysis

Though financial ratios have several important functions, some limitations need to be

accounted for when using this analysis method. To begin with, inaccurate accounting data will

invariably lead to wrong ratios. Accounting ratios are calculated based on the data given in the

financial statement. Therefore, it only is correct if the accounting data on which they are-based is

also accurate. Additionally, firms may use varying accounting policies depending on location or

industry and this may lead to difficulty in comparison. Financial ratios are also limited in that no

single ratio can be depended upon to provide a substantial understanding of the firms’ position.

Thorough analysis requires reviewing multiple ratios. For instance, a firm's current ratio can be

quite satisfactory, while the quick ratio may be unsatisfactory. Finally, some companies resort to

window dressing, i.e., showing a better position than the one which exists. to cover up their bad

financial positions.

2.1.4.0 Basel III Accords

Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory

framework on bank capital adequacy, stress testing, and market liquidity risk ("Capital and

Liquidity Requirements," n.d.). An update to Basel II to strengthen the framework by the

introduction reforms on capital and liquidity requirements to address problems that arose during

22
the global financial crises of 2008. These problems resulted from excessive leverage and the

steadily reducing quality and quantity of capital in the banks. Basel III stipulates higher capital

ratios, increases the capital charges particularly involving counterparty risk (credit risk), and

more narrowly defines what constitutes Tier 1 (T1) and Tier (T2) capital.

Basel III was developed to help banks better manage risk, deal with financial stress, and

improve transparency all to avoid the collapse of the financial institutions. Also, the accords are

meant “… to strengthen the capital reserves [of banks] and also to promote stronger risk

management and governance practices to limit concentrations of risk in banks” (Dimitriu,

Caracota, Oprea, & Scrieciu, 2011). Basel III corrected some of the shortcomings of the Basel II

Accords listed below:

● The average level of capital required by under Basel II was inadequate and this is one of

the reasons for the recent collapse of several indigenous banks;

● The capital requirements under Basel II regulations are cyclical and therefore tend to

reinforce the business cycle fluctuations. Hence Basel III was established to counter those

cyclical changes with new capital requirements such as the countercyclical buffer.

2.1.4.1 Basel III Pillars

The Basel III Accords has three very important guidelines that focus on risk management

and the minimum capital requirements. They are:

· Pillar I - Minimum Capital Requirements

· Pillar II - Supervisory Review Process

· Pillar III - Market Discipline

The first pillar, minimum capital requirements, addresses total risks which include credit

risk, market risk, and operational risk. The second pillar addresses the adequacy of the bank’s

23
capital to support all risks associated with their businesses through proper supervision of the

banks using the Supervisory Review and Evaluation Process (SREP) and the Internal Capital

Adequacy Assessment Process (ICAAP). Simply put, the second pillar calls for the evaluation of

the internal systems of banks, assessment of risk profile, etc. using the supervisory framework of

banks mentioned above. The third pillar provides a framework for transparency to market

participants concerning the bank’s risk position. That is disclosing the scope of application, risk

management, providing detailed information on funds, etc., while not forgetting to explain how a

bank calculates its regulatory capital ratio.

2.1.4.2 Capital Requirements

The minimum capital requirements are designed to act as a buffer to absorb any

unexpected losses. The new framework seeks to improve the quality, consistency, and

transparency of a bank's capital base through an increase in the minimal Tier 1 (T1) capital to be

held, an increase in the standards of what qualifies as T1 capital, elimination of Tier 3 (T3)

capital, and a revision of appropriate capital deductions. A banks' regulatory capital is first

divided into Tier 1 and Tier 2 with each tier having their capital requirements (Staff, 2010). Tier

1 capital is the highest quality form of capital that can be used to write off losses. It consists of

core capital (mainly common stock and retained earnings) and subordinated and discretionary

debt instruments that tend to function like equity. Notable for the new accords is that the review

of deductions removes goodwill, minority interest, deferred tax assets, provisioning shortfalls,

and investments in other banks and financial institutions from the makeup of Common Equity

Tier 1 (CET1). These elements proved under Basel II to be unreliable capital to absorb

unexpected losses. The new accords have increased the CET1 base rate to 4.5%, up from the

Basel II requirement of just 2%. However, the inclusion of additional T1 capital (non-common

24
equity such as contingent convertible bonds) raises the minimum T1 capital from 4.5% to 6%.

According to Achterberg & Heintz (2012), Tier 2 capital is meant to protect depositors

against the event of insolvency of the banks. Basel III has established a minimum capital

requirement of 2% for Tier 2 capital. Under the new framework, only dated subordinated debt

remains eligible as T2 capital. Subordinated debt is debt that ranks lower than ordinary

depositors of the bank.

Also, there is a countercyclical buffer within a range of 0-2.5% of common equity, and a

conservation buffer of 2.5%. The buffer serves to restrict a bank’s ability to distribute its

earnings. The countercyclical buffer is designed to protect the banking sector from losses caused

by cyclical systemic risks and counteract excessive credit buildup. Therefore, during times of

credit growth, banks should accumulate capital to use during the down turning of the financial

cycle where losses tend to materialize ("Countercyclical capital buffer", 2020).

The following diagram provides a quick synopsis of the new capital requirements.

Diagram 1. New Capital Requirements Basel III Accords

(Asian Institute of Chartered Bankers, n.d.)

2.1.4.3 Liquidity Requirements

Basel III has introduced new liquidity requirements dubbed the Liquidity Coverage Ratio

(LCR) and the Net Stable Funding Ratio (NSFR). The LCR is designed to ensure that the bank
25
has enough high-quality assets to meet any liquidity demands during a 30-day short-term stress

scenario. High-quality assets are those that can easily be converted to cash within a short

timeframe with little to no loss in value. Banks must hold a stock of these assets to defend

against any severe liquidity stress.

Net cash outflows are the cumulative expected cash outflows minus the expected cash

inflows during the stress period. The cash outflows can be divided into 2 subcategories: deposit

run-off and the unsecured wholesale run-off. The deposit run-off consists of

● Stable deposits - deposits that are protected by insurance or a public guarantee.

● Less stable deposits - foreign currency deposits; deposits not covered by insurance, high-

value deposits from high net worth individuals, deposits that can quickly be withdrawn

Unsecured wholesale run-offs are those liabilities that arise from non-natural persons (legal

entities as opposed to real people) and do not have any specific collateral attached. These are in

the form of small business customers, operational relationships, non-financial institutions and

sovereign bodies, central banks and public sector entities, and unsecured wholesale funding

provided by other institutions.

The NSFR is designed to address liquidity mismatches. It covers the entire balance sheet

and provides incentives for banks to use stable sources of funding and limit the reliance on short-

term wholesale funding

Banks that adhere to the minimum capital requirements will be better equipped to handle

increasing credit risk. The capital requirement for credits risk is based on the standardized

approach or the framework of the Basel III. From the above discussion, Basel III focal elements

are adequate capital in the banks and risk minimization to its customers or depositors which the

idea is to make a sound financial system which not only helps the banks but the entire economy

to maintain trust and faith, as transparency is keen in business.

26
2.2 Empirical Review
Credit risk management is crucial to the overall health of banks. Credit risk management

is utilized to ensure that the effects of credit risks are reduced. Several studies noticed that there

is an indirect relationship between credit risk and bank performances. However, other studies

show that a direct relationship exists between the two.

To control risk, management needs to be able to distinguish between future bankruptcy

and the well-being of firms. Bank management's primary purpose or goal is to increase

shareholders’ wealth through bank performance, nevertheless, this improvement comes at a cost

of escalating risk levels (Tandelilin et al., 2007). With the use of regression analysis and the

fixed and random effect models, Boahene et al. (2012) recommended that there is a direct

relationship between credit risk and bank profitability after studying six commercial banks in

Ghana from 2005-2009. This means that in the Ghanaian banking industry certain banks proceed

to gain high profit leading to high bank performance despite the high level of credit risk and this

relationship can be accredited to the outrageous interest rates fees and commissions charged.

According to Zhang et al. (2013) banks that take lower-level risks accomplish better with

well-advised risk management practices. Therefore, management must be eager to subdue risk,

particularly the risk that can result in underperformance. To reduce loan losses as well as credit

risk, banks need to have productive credit risk management systems (Santomera 1997, Basel

1999). Odonkor et al. (2011) conducted a study on the effect of bank performance for the period

of 1997-2008 for 18 banks. According to the results of the study, it shows that lower risk levels

increase the performance and achievements of banks. Larger banks that engage in small risks end

up with lower performances. It was also noticed that bigger banks can shoulder more risk due to

the increase in aggressive activities leading to higher performances.

Alternatively, Harvey et al. (2014) concluded that there is an indirect or negative

27
relationship between credit risk and bank liquidity among commercial banks in the Netherlands.

The data were collected from a sample of 65 banks for five years ranging from 2008-2012. This

points out that the lower the credit risk the higher the bank liquidity and the higher the bank

liquidity the higher the profitability of the bank leading to higher bank performance and vice

versa. Muasya (2013) also highlighted a negative and important relationship after scrutinizing

the relationship between credit risk management practices and loan losses among commercial

banks in Kenya. The increase of non-performing loans (NPL) would require the bank to increase

the loan loss provision expense account to offset those losses. The expense account ties up

money that could have been used for other investments that would increase bank performance.

This implies that the lower the credit risk management practices the higher the loan losses which

leads to lower bank performance.

As a result of lopsided information between banks and borrowers, banks must have an

effective system in place to enable them to do a thorough analysis and evaluation of default risk

that is invisible to them. Credit risk management is essentially important in measuring and

enhancing a bank's profitability. Banking institutions’ deep-rooted success is dependent on

functional systems that enable reimbursement of loans by borrowers which is essential in dealing

with lopsided information issues, thus minimizing the level of loan losses (Basel, 1999).

Nawaz et al. (2012) discovered that credit risk management has a very high impact on the

profitability of Nigerian banks as well as the need for management to be vigilant and careful

when constructing credit policies so that they know how the policies affect the running of their

banks leading to higher bank profitability and performance.

Gisemba (2010) researched Saccos considering its relationship between risk management

practices and financial performance and found out that there is the need for an increase in credit

risk management practices which will lead to an increase in financial performance. The research
28
also led to the finding that Saccos acquired several approaches in examining, analyzing, and

studying risks such as loan policy procedure, risk analysis, and assessment, credit scoring

mechanism, risk identification, and diversification across union members, before granting credit

to clients to reduce loan losses. Through the reduction of loan losses, the financial institution

gains stability and profit, which directly contributes to higher performance.

2.2.2. Liquidity Risk Empirical Review

High liquidity risk occurs in the banking industry or financial institutions as a result of

the impromptu or unreasonable withdrawal of money by customers. This negatively impacts the

bank's or financial institution's ability to perform its functions. Thus, the bank’s work diminishes

profoundly, and this brings about severe dwindling in banks’ benefit (Ejoh et al., 2014).

Marozva (2015) calls attention to the fact that there have been several studies directed

and still ongoing discussions to explore the connection between bank liquidity and bank

profitability. Marozva placed that the discoveries of these investigations resulted in diverse

outcomes, while a few researchers reason that there is a negative relationship between these two,

other authors believe otherwise. Notably, Marozva highlighted different investigations that

observed a parallel relationship between the two. The following are a few discoveries by various

research that bolster a positive relationship between bank liquidity and profitability or

performance. Bordeleau and Graham (2010) conducted a study of Canadian and USA banks

between the period of 1997 and 2009, to evaluate the orientation of banks holding liquid assets

or resources using econometric analysis. Their outcome reasoned that although banks holding

liquid assets have positive jolt on profitability, nonetheless, expanded profitability was reliant on

the quantum of liquid asset or resource and over a certain timeframe. The outcome proposes that

the profitability of banks could be expanded by holding a specific measure of liquid assets over a

29
predetermined time. Nonetheless, the examination likewise proposed that holding such assets or

resources above a stated time lessens the banks' profitability. Further observational study proves

a connection between the pairs is reliant on the bank's system and the economy when all is said

and done. A research work by Abubakar (2015), whose work analyzed the conventional

proportions of bank liquidity like cash reserve requirement and liquidity proportions, nature of

liquidity management, and financial ratio examination. His discoveries reasoned that the

quantum of a bank's liquid assets combined with appropriate administration estimates had a

positive relationship to the bank's execution or performance.

Kosmidou, Tanna, and Pasiouras (2005) found a significant positive relationship

between liquidity and bank profitability, and they also realized that the ratio of liquid assets to

the customer and short term funding is positively related to R OA and is statistically significant.

Kosmidou (2008) studied the determinants of performance of Greek banks during the period of

(1990-2002) using an unbalanced pooled time-series data set of 23 banks and found that less

liquid banks have lower ROA. This means that there is a positive relationship between liquidity

risk and bank profitability. Olagunju, David, and Samuel (2012) found out that there is a positive

significant relationship between liquidity and profitability which is also a two way or bi-

directional relationship between liquidity and profitability. This means that profitability in

commercial banks is significantly influenced by high levels of liquidity and vice-versa.

Shen et al. (2010) concluded that there is no relationship between a bank’s liquidity and

its performance. Their argument is based on the logic that since banks act as a constant and key

role of financing the financial system they are therefore not affected by liquidity risk. Abdullah

and Johan (2014) realized that there is no significant relationship between liquidity and

profitability after studying and examining the impact of liquidity on commercial banks in

Bangladesh. The study included five commercial banks over a five year period where RoA and
30
RoE were used to measure bank profitability and loan deposit ratio, deposit asset ratio, and cash

deposit ratio.

Khan and Ali (2016) used correlation and regression analysis to examine the impact of

liquidity on the profitability of commercial banks in Pakistan. The study used secondary data

over five years from 2008 to 2014 which were taken from the financial statements of some

selected banks. They deduced that there is a positive and significant relationship between

liquidity and profitability of commercial banks.

Lartey et al. (2013) considered the impact of liquidity on the profitability of listed banks

in Ghana. The examination tested seven listed banks on the Ghana Stock Exchange at the time

over a six-year term from 2005 to 2010. The examination uncovered that the liquidity and

profitability position of recorded banks in Ghana declined over the study time frame. The

analysis uncovered that there was a weak positive relationship between liquidity and profitability

of the listed banks in Ghana. Thus, between the period of 2005 to 2010 listed banks in Ghana

were increasing both their liquid and illiquid assets, even though the listed banks' liquid asset

holdings increased, their liquidity was decreasing between the period of 2005 to 2010. Also,

these listed banks were increasing their profit during that same period, however, their

profitability was in real sense declining within the same period (Lartey et al, 2013).

In summary, the majority of researchers found that the more liquidity a bank has the more

profitable it is or the better it performs which means there is a direct or positive relationship

between a bank’s profitability and its performance. However, research conducted by Abdullah

and Johan (2014) indicated that there is no significant relationship between a bank's liquidity and

its performance, while in Ghana (Lartey et al. 2013) concluded that there's an insignificant

relationship between the two.

31
2.2.3 Financial Ratios Empirical Review
Multiple financial ratios can be used to evaluate the overall financial condition of a firm.

There is a long tradition of developing and using financial ratios both in practice and in the

literature of financial statement analysis. The question of the key financial ratio used to analyze

banks’ performance has been made by many researchers all over the world in different countries.

According to research Umar Amir (2018) focused on the analysis of the financial

performance of 6 different commercial banks which includes three public sector banks (State

Bank of India, Punjab National Bank and Bank of Baroda) and three private sector banks (HDFC

Bank, ICICI Bank, and J & K Bank) for the last ten financial years (2007-08 to 2016-17). The

study has been made using the CAMEL ratio model which determines capital adequacy which

reflects the entire condition of the banks and indicates if the bank has enough capital to absorb

unexpected losses. To determine the asset quality of banks key ratios such as total investment to

total asset ratio, Net NPAs to total asset ratio, and NPA coverage ratio are useful. Also, the cost

to income ratio, asset utilization ratio, and total advanced to total employee ratio are some

important ratios to measure the management earning which is an important aspect of the

CAMEL model that measures the efficiency and the effectiveness of the management who takes

important decisions within an organization. Additionally, ROE, ROA, profit margin ratio,

interest income to total interest ratio are some important ratios used to measure profitability.

Liquidity helps to determine how much cash the banks earn. CAMEL model uses ratio such as

liquid asset to total asset, liquid asset to total deposits, and a liquid asset to demand deposit to

assess this. The study concluded that the financial performance of selected private sector banks is

relatively better than the public sector banks throughout the sample period.

Kumbirai & Robert Webb (2010) made use of financial ratio analysis to evaluate the

profitability, liquidity, and credit performance of banks in South Africa between 2005 and 2009.

32
Various financial ratio such as RoA, RoE, and cost to income ratio was used to measure

profitability; a liquid asset to deposit borrowing ratio, net loan to total asset ratio and net loans to

deposit borrowing ratio were used to determine the liquidity performances on the banks; Finally,

loan loss reserve to the gross loan was used to determine the asset credit quality of the banks.

This study resulted in the conclusion that the overall bank’s performance has improved from

2005 to 2007 and deteriorated from 2008 to 2009 as evidenced by their poor profitability.

The study of Jaradat (2016) focused on the performance and efficiency of three different

Islamic Jordanian Banks within the period of 2011-2014. The study was made through the use of

different financial ratios analysis such as profitability, liquidity, risk and insolvency, managerial,

efficiency, and management ability ratios. Jaradat (2016) quoted that “Different approaches have

been used to measure the efficiency, among them is ratios analysis. The method has been

adopted by many other researchers such as Muhamad Abduh (2013), Ajlouni (2011), Hassan

(2010). This approach has many positive aspects, the main advantage is it removes disparities.”

The results of the survey show that the Jordan Islamic Bank for finance and investment is

relatively more efficient in terms of profitability and liquidity during the period between 2011-

2014 than the other banks.

Widyanty & Dian (2019) focused their research on the prediction of bankruptcy in

several banks in Indonesia. The use of 7 financial ratios was needed to analyze the performance

of 33 banks in 2018, which follows; CAR, LDR, NPL, BOPO, ROA, ROE, and NIM.

Comparing the real status of the 33 to the prediction made with the financial ration conclusion

shows that the prediction was 94.7% accurate. Globally in addition to the financial ratios, other

methods and systems are advised to be used.

A recent study by Tekatel & Beyene (2019) made use of financial ratio analysis to

compare the financial performance of state-owned commercial banks with privately owned
33
commercial banks in Ethiopia. Financial statements of the period 2010-2017 analyzed 15 banks

in total. The study concluded that based on the profitability, capital adequacy, the liquidity, and

the efficiency of the banks; private banks are performing far better than state-owned banks.

In summary, from the above studies, several financial ratios were common to the

researchers. Profitability which measures the ability to generate optimal profit was measured

using RoE and RoA. Also, liquidity was analyzed by loan to deposit ratio and cash to deposit

ratio to determine the debtor’s ability to pay off debt obligations without raising external capital.

The ability of the banks and financial institutions in meeting their obligations using their capital

and asset was analyzed by the use of capital adequacy ratio. Furthermore, income expenses ratio

and asset utilization measured management ability and efficiency. This is evidence that these

particular ratios; profitability, liquidity, capital adequacy, efficiency, and management ability are

effective determinants of banks’ performance. They can also be used in the determination of

many factors concerning the banking industry; mostly in the measurement of the performance of

banks and financial institutions, the comparison among several banks performance, the

comparison of a particular bank during different years and the prediction of bankruptcy and other

factors that can affect a bank’s health.

34
 Chapter 3. Methodology

3.1 Introduction
This chapter will present the methods, procedures, and techniques used to obtain the data

for analysis. The chapter will begin by describing the approaches to research to be used, whether

its quantitative or qualitative approach, deductive or inductive, and the research purpose.

Following the description of the research approach will be the identification of the unit of

analysis and a discussion on the research strategy that will be implemented.

3.2 Research Design

The research approach is quantitative, as it focuses on financial ratios. Also, the

deductive approach was utilized. The research conclusion was drawn, concerning the

performance of the banks involved in the study, based on previous research on credit risk

management. The study also used a descriptive survey design in nature.

Quantitative research includes data that is involved with quantity and numbers. The

research adopts a precise strategy that depends on an experimental examination of detectable

phenomena. It utilizes factual models, computational strategies, and mathematics to create and

utilize speculations or hypotheses concerning explicit thoughts. The procedure of estimation is

vital to the accomplishment of this work (Garage, 2020).

Financial ratios are apparatuses used to evaluate and assess the quality and strength of

organizations by performing basic computations on variables on the income statements and

balance sheets. Ratios measure organizations' operational productivity, liquidity, strength, and

profitability, giving speculators more pertinent data than unprocessed monetary information (The

Advantages of Financial Ratios, 2020).

35
3.2.1 Performance Ratios
The ratios that will be used to assess the strength of the banks are liquidity ratios and

profitability ratios. Liquidity ratios are used to measure an organization's ability to meet its short-

term obligations. The liquidity ratios that will be focused on are the current ratio which is the

most common ratio and cash ratio.

The current ratio shows an organization's ability to cover its current liabilities with its current

assets (Van Horne and Wachowicz,2008).

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The cash ratio compares a company’s most liquid assets to determine whether the company has

sufficient liquidity to grow the business (Van Horne and Wachowicz,2008).

𝑐𝑎𝑠ℎ+𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Another category of ratios that will be used is the profitability ratios. This shows the

profitability concerning sales, which in the case of banks will be interest income and those

profitability concerning investment.

One of the profitability ratios that will be focused on is Return on Assets (ROA), which is

the ratio of net profit to total assets (Van Horne and Wachowicz,2008).
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠
𝑅𝑂𝐴 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

The second profitability ratio that will be used in the analysis is Return On Equity (ROE), which

measures the entire performance of the firm based on its return on equity (Van Horne and

Wachowicz,2008).

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠

𝑅𝑂𝐸 = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

The third profitability ratio that will be used in the evaluation process is the Net Interest

Margin (NIM) which measures the profit a company makes on its investing activities as a
36
percentage of total investing assets.

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑁𝐼𝑀 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠

The ratios and definitions were obtained from (C. Van Horne and M. Wachowicz, Jr.,

2008), (What's the Cash Ratio and How Does Understanding It Help Me?, 2020) and (Net

Interest Margin (NIM) Formula | Example | Calculation | Analysis, 2020).

Credit Risk Ratios

Theoretical and empirical evidence suggests that credit risk management is a predictor of

banks’ performance because one of the primary business operations of banks is the lending of

credit. The ratios that will be used to determine the selected bank’s exposure to credit risk are

Non-Performing Loan Ratio (NPLR) and Loan Loss Provision Coverage Ratio (LLPCR). NPLR,

which is an indicator for credit risk, can reduce the value of a bank as capital is tied up in loans

that are either defaulting or delinquent. Thus, one would expect an inverse relationship between

NPL and bank performance.

𝑁𝑃𝐿 𝑇𝑜𝑡𝑎𝑙
The NPL can be calculated as: 𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐿𝑜𝑎𝑛𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑛𝑘𝑠 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜

The Loan Loss Provision is the provision set aside by banks to cover future losses. A

higher ratio ensures that the bank can better handle future losses, including unexpected losses

that go beyond covering loan loss.

𝑃𝑟𝑒𝑡𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 +𝐿𝑜𝑎𝑛 𝐿𝑜𝑠𝑠 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛

LLPC Ratio is calculated as: 𝑁𝑒𝑡 𝐶ℎ𝑎𝑟𝑔𝑒−𝑜𝑓𝑓𝑠

3.2.3 Basel III Capital and Liquidity Requirements

Capital Requirements

𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑇𝑖𝑒𝑟 2 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑑𝑒𝑞𝑢𝑎𝑐𝑦 𝑅𝑎𝑡𝑖𝑜 (𝐶𝐴𝑅) =
𝑅𝑖𝑠𝑘 − 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

37
 The Capital Adequacy Ratio (CARs), or capital to risk-weighted assets ratio, is used to

determine the strength of the bank concerning their adoption of the Basel III Accords. The CARs

are used to make sure that banks have enough cushion to absorb losses before they become

insolvent and risk losing depositors` funds (Staff, 2003). The CARs of these banks are compared

to the Basel III requirements to determine how far the bank has come in adopting Basel III.

According to Liang (n.d), Tier 1 Capital consists of:

• Common Equity Tier 1 Capital consists of:
• Common Shares
• Retained Earnings
• Other comprehensive income and other disclosed reserves
• Stock surpluses
Additional Tier 1 Capital
Tier 2 Capital consists of:
• Unaudited retained earnings
• Undisclosed reserves
• Subordinated term debt

Liquidity Requirements

𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐻𝑖𝑔ℎ 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

Liquidity Coverage Ratio (LCR): 𝐿𝐶𝑅 = 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 𝑜𝑣𝑒𝑟 𝑎 30 𝑑𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑

The LCR is designed to ensure that the bank has enough high-quality assets to meet any

liquidity demands during a 30-day short-term stress scenario. High-quality assets are those that

can easily convert to cash within a short timeframe with little to no loss in value (Liang, n.d.).

3.3 Limitations of Quantitative Research Method

The main purpose of the quantitative research analysis is to quantify a given data and

apply some form of statistical analysis. Although this method measures general results from the

views and responses of the sample population, some limitations are sometimes beyond the

38
researcher’s control (Chetty, 2020). This section outlines the limitations of the quantitative

method used in this study and how they can be resolved.

One of the first limitations faced during this research was the collection of data and

elements to calculate the different ratios selected. Each of the banks has different ways to

construct their annual report, hence collecting data to calculate certain ratios was difficult

because of the multiple choices and the various way to analyze only one ratio. The issue can be

resolved by having a better understanding of the ratios and by knowing the various ways to

calculate them, also researchers can focus on how the banks elaborate their annual report to

facilitate the recognition of the different elements needed.

Secondly, the period for this research was from 2015 to 2018 and four years are not

sufficient enough to conclude on the performance and exposure to the credit risk of the banks

and generalize the findings to the overall banking sector. Other researchers are advised to expand

the period of future studies to have more accurate findings that can be applied to the banking

sector.

The third limitation encountered in this research was the sample size. Our research was

based on five Ghanaian banks which are relatively not enough to provide sufficient information

on the health of the overall Ghanaian banking sector, futures researchers should use a greater

number of banks which will provide more conclusive results.

Finally, only seven ratios were used to analyze the performance, the credit risk exposure,

and the compliance to the Basel III model of the banks, other researchers can push the research

further by using more ratios.

3.4 Unit of Analysis

The focus of this study is on five indigenous commercial banks in Ghana that are not

39
listed on the Ghana Stock Exchange (GSE) or any other exchange. These banks are Prudential

Bank Ltd., ARB Apex Bank, Universal Merchant Bank, Fidelity Bank, and First Atlantic

Merchant Bank. The study is a longitudinal study where the annual financial statements of these

banks from the years 2015-2018 were examined. This period covers the duration of the banking

sector reform up to the most recently published financial statements.

3.5 Research Strategy

The research strategy employed was the archival research strategy which makes use of

administrative records and documents as the principal source of data. The information needed to

carry out the research was obtained from the financial statements of the banks. These are made

readily available for any person to review. The nature of the study does not require the use of any

other qualitative or quantitative research strategy or any population sampling.

The reason the quantitative approach was used is that information can be gathered

quickly when using quantitative research. Researchers can utilize the quantitative approach to

deal with certain facts that they want to study in the environment (Garage, 2020). Research that

includes complex insights and data analysis is viewed as significant and noteworthy since

numerous individuals don't comprehend the mathematics in question, also the quantitative

approach can be tried and checked. Quantitative research requires a cautious trial plan and the

capacity for anybody to duplicate both the test and the outcomes. This makes the information

you assemble increasingly dependable and less open to contention (Devault, 2019).

Financial ratios were used because it serves as industry analysis and benchmarks. It helps

identify how a company is performing concerning the industry in which it operates. Another

reason is that financial ratios help in planning and performance by checking if a company is

performing well and by identifying the sources of problems when the company is not performing

40
well. Additionally, financial ratios help in valuing stocks in terms of strengths and weaknesses

(The Advantages of Financial Ratios, 2020).

3.6 Data Collection

The data from the financial statements qualify as secondary data because it is a company

report made for public use. The statements were found through an online search for the

individual company’s annual report. The information collected from the financial statements and

used in the analysis and determination of performance were net profit, total equity, total assets,

and non-performing loans.

3.7 Data Analysis

The ratios calculated from the financial statements of the banks will be analyzed using

trend analysis to determine how the banks fared in the period surrounding the financial sector

reform.

41
 Chapter 4: Data Analysis

4.1. Performance Ratio Analysis

Performance evaluation of the financial sector is usually related to how well the banks

can use their assets, shareholder’s equity and liability, revenue, and expenses. These are all

analyzed with some key financial ratios such as return on assets, the return of equity, efficiency

ratio, and net interest margin. The analysis in this study elaborates on the performance of the five

banks over the years 2015 to 2018 using the current ratio, return on assets, return on equity, cash

ratio, and net interest margin. The ratios are being analyzed using trend analysis and comparison

to foreign average banks and the industry average. The charts and graphs below show the

increase and decrease in the strengths and performances of the various five banks over the stated

years. The data for the industry averages for the selected ratios were obtained from the Banking

Sectors Reports released by the Bank of Ghana (2015 -2018) for the respective years as well as

the 2019 Ghana Banking Survey by PricewaterhouseCoopers (Ghana) Limited (2019). All

figures are expressed in thousands of Ghana Cedis unless stated otherwise.

Table 1: Performance Ratios of Industry Benchmark

Years

2015 2016 2017 2018

Current Ratio 48.00% 25.00% 60.00% 62.00%
Cash Ratio 0.48% 0.55% 0.60% 0.62%
Return on Assets 2.90% 2.30% 2.80% 2.90%
Return on Equity 20.00% 17.30% 19.70% 17.90%
Net Interest Margin 9.80% 9.20% 9.40% 8.00%
Source: Ghana Banking Survey by PricewaterhouseCoopers (Ghana) Limited (2019)

The above information was derived from Ghana Banking Survey by

PricewaterhouseCoopers Ghana Limited 2019 concerning data about the performance ratios over

the years 2015 to 2018. The trend of the current ratio of the industry was an upward trend from

the year 2016 to 2018. The cash ratio, on the other hand, had an upward trend throughout the

42
stated four years. Considering the return on assets, the industry had an upward trend from the

year 2016 to 2018. The industry’s return on equity and net interest margin had a wave-like trend

throughout the stated years.

Table 2: Performance Ratios of Foreign Benchmark

Years
2015 2016 2017 2018
Current Ratio 50.63% 61.38% 66.30% 64.77%
Cash Ratio 37.33% 38.34% 40.02% 36.57%
Return on Assets 2.00% 3.09% 2.93% 2.26%
Return on Equity 22.04% 23.98% 19.07% 12.66%
Net Interest Margin 11.51% 10.58% 10.37% 9.42%
Source: Financial Statement of the Five Foreign Banks (2015-2018)

The table above shows a summary of the performance ratios of the averages of five foreign

banks listed on the Ghana Stock Exchange. The trend is mostly wave-like for the various ratios,

over the years. Current Ratio, ROE, ROA, NIM all had a wave-like trend, while Cash Ratio had

an upward-trend.

43
4.1.1. Fidelity Bank

Table 3: Fidelity Bank Performance Ratios

Years
2015 2016 2017 2018
Current Ratio 71.20% 73.40% 87.89% 84.79%
Cash Ratio 29.57% 26.94% 33.37% 28.37%
Return on Assets 3.59% 0.35% 1.68% 2.33%
Return on Equity 29.32% 2.98% 16.93% 23.67%
Net interest Margin 10.81% 9.06% 9.02% 8.50%
Source: Financial Statement for Fidelity Bank (2015-2018).

Figure 1. Comparison of Fidelity Bank’s Current Ratio with Foreign and Industry Averages.

Fidelity Bank vs Foreign Average vs Industry Average

Fidelity CR Foreign Banks CR Indusrty Average CR

100.00%
90.00%
80.00%
70.00%
Current Ratio

60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00% Years
2015 2016 2017 2018

Source: Financial Statement for Fidelity Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey
(2015-2018).

Fidelity Bank had a steady upward trend from 2015 to 2017 but decreased slightly in

2018, compared to the foreign banks average which had a wave-like trend for the stated years.

However, the industry experienced an upward trend from the year 2016 to 2018. The current

ratio for Fidelity Bank increased from 2015 to 2017 by an average of 8.35% due to investment

securities which contributed majorly to that increment. In 2018 current ratio of Fidelity Bank

decreased from 87.89% to 84.79% in 2018 by 3.1% and this decrement was due to an increase in

44
a variable in the current liability which was the borrowings, which increased from Ghc683,797 to

Ghc1,731,390.

Comparing Fidelity Bank’s current ratio to the foreign and industry average for the

period 2015 to 2018, Fidelity Bank’s current ratio was stronger than that of the average foreign

banks and industry average due to a large number of current assets mainly because of its

investment securities. The bank performed better than both benchmarks which indicate how well

the bank can cover its liabilities with its current asset mainly by using its investments for the

stated period.

Figure 2. Comparison of Fidelity Bank’s Return on Asset ratio with the Foreign and Industry
Averages.

Fidelity Bank vs Foreign Average vs Industry Average

Fidelity ROA Foreign Benchmark ROA Industry Average ROA
4.00%
3.50%
3.00%
Return on Asset

2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2015 2016 2017 2018
Years
Source: Financial Statement for Fidelity Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey
(2015-2018).

The trend for Fidelity Bank’s ROA over the years 2016 to 2018 is an upward trend,

however, the ROA for the foreign average banks had a downward sloping trend from 2016 to

2018 while the industry had an upward sloping trend for the years 2016 to 2018. Concerning

return on assets, the bank’s ROA decreased from 3.59% in 2015 to 0.35% in 2016 by 3.24%, due

to a major decrease in net profit after tax from Ghc147,734 to Ghc14,711 by Ghc133,023 for the

stated year. This can be attributed to other operating income which decreased from Ghc113,758

45
to Ghc35,781 respectively, also considering the major loss of impairment loss on financial assets,

the bank made a loss of Ghc116,678 even though they increased their investment in the same

year. From the year 2016 to 2018 ROA steadily increased, even though there was a major

increment in total assets over the stated years, the main contribution to the increment in ROA

was due to a high increase in net profit over the stated years.

Since Fidelity Bank’s ROA was 3.59%, it performed better than the average of the

foreign banks which was 2%, this means that Fidelity Bank was able to gain more returns on its

assets than the average foreign banks. In 2016, the average foreign banks with a ROA of 3.09%

performed better than Fidelity Bank with a ROA of 0.35%. Even though the ROA of the average

foreign banks decreased from 2016 to 2018 it still performed better than Fidelity Bank from

2016 to 2018. The bank also performed better than the industry average in 2015. However, from

the year 2016 to 2018 the ROA of the industry average was stronger than that of Fidelity Bank

throughout the years.

Figure 3. Comparison of Fidelity Bank’s Return on Equity with the Foreign and Industry Averages.

Fidelity vs Foreign Average vs Industry Average

Fidelity ROE Foreign Benchmark ROE Industry Average ROE
35.00%

30.00%
Return on Equity

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2015 2016 Years 2017 2018
Source: Financial Statement for Fidelity Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey
(2015-2018).

46
 The trend for Fidelity Bank’s ROE is a wave-like trend through the years 2015 to 2018

meanwhile, the foreign average banks had a downward sloping trend from 2016 to 2018 and the

industry average had a wave-like trend for the stated years. ROE of Fidelity Bank decreased

drastically from 29.32% in 2015 to 2.98% in 2016 due to a decrease in net profit as well as total

equity. The total equity decreased from Ghc503,943 to Ghc493,347 by Ghc10,596. This means

shareholders lost about 26.34% of the return they received from the equity in 2015. ROE

increased from 2016 to 2018 from 2.98% to 23.67%, and this was as a result of an increase in the

net profit from Ghc14,711 to Ghc163,717 as well as an increment in the equity throughout the

stated years from Ghc493,347 to Ghc691,605.

Fidelity Bank performed better in 2015 with an ROE of 29.32% than the average foreign

banks with an ROE of 22.04%. The average foreign banks performed better than Fidelity Bank

in both 2016 and 2017 with the average foreign banks having an ROE of 23.98% and 19.07%

respectively. However, in 2018 Fidelity Bank performed tremendously well with an ROE of

23.67% as compared to the average of the foreign banks which was 12.66%. Fidelity Bank also

performed than the industry average in 2015. Similarly, in 2016 and 2017 the industry performed

better than Fidelity Bank with an ROE of 17.30% and 19.70 respectively. Nevertheless, in 2018,

the bank outperformed the industry with an ROE of 23.67%.

47
Figure 4. Comparison of Fidelity Bank’s Cash Ratio with the Foreign and Industry Averages
Fidelity Bank vs Foreign Average vs Industry Average

Fidelity Cash ratio Foreign Benchmark Cash ratio

45.00%
40.00%
35.00%
Cash Ratio

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2015 2016 YEARS 2017 2018

Source: Financial Statement for Fidelity Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey
(2015-2018).

The cash ratio for Fidelity Bank decreased from 29.57% in 2015 to 26.94% in 2016 by

2.63% due to a reduction in its cash and cash equivalent from Ghc1,067,469 in 2015 to

Ghc961,024 in 2016 and the rise in its current liabilities. This is because the increase or decrease

in cash ratio is dependent on the cash and cash equivalent realized. The amount of cash and cash

equivalent would inform the bank if it can pay off its debt. In 2017, the cash ratio for the bank

increased by 6.43% because of the huge amount realized for cash and cash equivalent. But then

again, the cash ratio for the bank decreased to 28.37% in 2018 from 33.37% in 2017 due to an

increase in current liabilities. Comparing Fidelity Bank's cash ratio to the averages of the foreign

banks, the foreign bank's average yielded a good cash ratio. Even though there is no ideal figure

for a good cash ratio, it is assumed that a ratio between 0.5 to 1 is usually preferred but the

higher the cash ratio, the more acceptable the cash ratio is, which means the bank can pay off its

debt. From the graph above, it can be concluded that there was a wavelike trend in the cash ratio

48
of Fidelity Bank while the foreign bank's averages had a steady upward trend and a slight

downward trend over the years.

Figure 5. Comparison of Fidelity Bank’s NIM with the Foreign and Industry Benchmark.
Fidelity Bank vs Foreign Average vs Industry Average
Fidelity NIM Foreign benchmark NIM Industry Average NIM

14.00%
12.00%
Net Interest Margin

10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2015 2016 2017 2018
Years

Source: Financial Statement for Fidelity Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana
Banking Survey (2015-2018).

From the graph above, it can be concluded that there was a downward trend in NIM for

both Fidelity Bank and the foreign banks average while the industry average had a wave-like

trend. Fidelity Bank experienced a decline in its NIM over the four years used in this study.

There was a decrease from 10.81% in 2015 to 9.06% in 2016 by 1.74% due to a decrease in

demand for loans and advances to customers and relatively high-interest rates set by Bank of

Ghana (BoG), (Ghana Interest Rate - Ghana Economy Forecast & Outlook, 2020). From the year

2016 to 2018, the bank’s NIM decreased from 9.06% to 9.02% to 8.50%, this decrease was as a

result of a decrease in interest earned leading to a decrease in the lender’s profitability at the end

of 2018. Fidelity Bank performed poorly over the four years as compared to the average foreign

banks with the NIM ratios of 11.51%, 10.58%, 10.37%, and 9.42% for the year 2015-2016

respectively. Compared to the industry average, Fidelity Bank outperformed the industry average

49
in the year 2015 and 2018 with a NIM ratio of 10.81% and 8.05% respectively, while in 2016

and 2017 the industry performed better than the bank with a NIM ratio of 9.20% and 9.40%.

Based on the analysis of the performance ratios for Fidelity Bank, the results indicated that the

bank performed moderately.

50
4.1.2 Universal Merchant Bank

Table 4: UMB Performance Ratios

Years
2015 2016 2017 2018
Current Ratio 55.28% 71,43% 66.13% 48.97%
Cash Ratio 25.90% 30.87% 32.11% 32.10%
Return on Asset -0.41% 0.73% 1.60% 1.19%
Return on Equity -3,95% 12.42% 22.44% 12.18%
Net Interest Margin 14.00% 7.50% 8.02% 10.35%

Figure 6. Comparison of UMB’s Current Ratio with Foreign and Industry Averages.

UMB vs Foreign Average vs Industry Average

UMB CR Foreign Benchmark CR Industry Average CR
80.00%

70.00%

60.00%

50.00%
Current ratio

40.00%

30.00%

20.00%

10.00%

0.00%
2015 2016 2017 2018
Years

Source: Financial Statement for UMB (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-
2018).

Universal Merchant Bank (UMB) had a downward trend in its current ratio from 2016 to

2018. The current ratio for UMB increased from 52.28% in 2015 to 71.43% in 2016 by 16.15%

due to an enormous increase in cash and investment securities, the bank was liquid within this

period as it was able to cover its current liabilities with its current assets. From the year 2016 to

2018, the bank’s current ratio decreased from 71.43% to 48.97%, this decrease was as a result of

51
an increase in customer deposit in 2017 and a reduction in investment securities and a high

increase in deferred tax in 2018.

From 2015 to 2017, Universal Merchant Bank (UMB) performed relatively well as

compared to the average foreign banks, however in 2018, the average foreign banks performed

better than UMB with a current ratio of 64.77% and 48.97% respectively. As compared to the

industry average, UMB also outperformed the industry average from the year 2015 to 2017,

meanwhile in 2018 the industry performed better than the bank with a current ratio of 62.00%.

Figure 7. Comparison of UMB’s Return on Asset with the Foreign and Industry Averages.
UMB vs Foreign Average vs Industry Average
UMB ROA Foreign Benchmark ROA Indusry Average ROA
3.50%
3.00%
2.50%
2.00%
1.50%
ROA

1.00%
0.50%
0.00%
-0.50%
-1.00%
Years

Source: Financial Statement for UMB (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-
2018).

Universal Merchant Bank (UMB) had an upward sloping trend for its ROA from the

years 2015 to 2017, however, UMB’s ROA decreased in 2018. The bank’s ROA increased from

-0.41% in 2015 to 0.73% in 2016 by 1.14% and this was a result of a massive increase in the

bank’s total assets and an increase in their net profit after tax. UMB had a high operating income

which indicates that the bank had enough money to run its operations as compared to 2015.

ROA also increased from 0.73% in 2016 to 1.6% in 2017 and this can be attributed to the high

52
increase in net profit as well as a moderate increase in total assets. In 2018, the bank’s ROA

decreased from 1.6% to 1.19% by 0.41% because of a decrease in both total assets and net profit.

From the years 2015 to 2018 the average of the foreign banks and the industry average

outperformed UMB concerning ROA.

Figure 8. Comparison of UMB’s Return on Equity with Foreign and Industry Averages.
UMB vs Foreign Average vs Industry Average
UMB ROE Foreign Benchmark ROE Industry Average ROE

0.3

0.25

0.2
Return on Equity

0.15

0.1

0.05

-0.05

-0.1
Years
Source: Financial Statement for UMB (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-
2018).

Universal Merchant Bank (UMB) had a steady upward trend in its ROE from the years

2015 to 2017, meanwhile, the bank’s ROE decreased in 2018. The average foreign bank, on the

other hand, had a downward trend from the year 2016 to 2018 and the industry average

experienced a wave-like trend. The bank’s ROE increased from -3.97% in 2015 to 22.44% in

2017 due to an increase in net profit and shareholder's equity, this means shareholders moved

from making a loss to profit. In 2018, there was a decrease in ROE from 22.44% to 12.18% by

10.26% and this was due to a decrease in the bank’s net profit.

53
 In 2015 and 2016, the average foreign banks outperformed UMB with an ROE of 22.04%

and 23.98% respectively, however in 2017 UMB performed better than the average foreign

banks with an ROE of 22.44% and 19.07% respectively. As compared to the average foreign

banks, the foreign banks performed slightly better than UMB with an ROE of 12.66% and

12.18% respectively. Comparing to the industry average, UMB underperformed from 2015 to

2016 with an ROE of -3.97% and 12.42% as compared to the industry average of 20.00% and

17.30%, even though UMB underperformed as compared to the industry average in the stated

years, it still managed to improve its performance over the years. In 2017 UMB performed better

than the industry average with an ROE of 22.44% and 19.70% respectively. Nevertheless, in

2018 the industry performed better than UMB with an ROE of 17.90% and 12.18% respectively.

Figure 9. Comparison of UMB’s Cash Ratio to the Foreign and Industry Benchmark

UMB vs Foreign Average vs Industry

Average
UMB Cash ratio Foreign Benchmark Cash ratio

45.00%
40.00%
Cash Ratio

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2015 2016 2017 2018
Years
Source: Financial Statement for UMB (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-
2018).

The cash ratio for UMB increased from 25.90% in 2015 to 32.11% in 2017 due to rising

figures in cash and cash equivalent in that period. However, there was a slight decline in 2018

54
with a cash ratio of 0.01%, this was because of a slight increase in current liabilities in that

period. The foreign bank's averages had a good cash ratio in comparison to UMB since foreign

bank's averages had a higher cash ratio. There was an upward and downward trend for both

UMB, and the foreign bank's averages as seen in the graph above.

Figure 10. Comparison of UMB’s NIM with the Foreign and Industry Averages

UMB vs Foreign Average vs Industry Average

UMB NIM Foreign benchmark NIM Industry Average NIM

16.00%

14.00%

12.00%
Net Interest Margin

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2015 2016 2017 2018
Years

Source: Financial Statement for UMB (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-
2018).

The NIM for UMB experienced stable growth from the years 2016 to 2018, nevertheless

the bank’s NIM decreased from 2015 to 2016. The NIM for UMB experienced a significant

decline from 14% to 7.50% by 6.5% in 2016. This was as a result of loan default and

government falling interest rates from 26% in 2015 to 25.5% in 2016, (Ghana Interest rate –

Ghana Economy Forecast & Outlook, 2020), even though interest income increased by 18%.

After the gross decline, UMB had steady growth from 6.55% in 2016 to 10.35% in 2018. This

steady growth was a result of the continuous increase in demand for customer loans and

advances. In contrast, UMB outperformed the foreign bank's average in 2015 and 2018 by 2.49%

55
and a 0.93% increment in the respective years. The foreign bank's averages, however, performed

better than UMB in 2016 and 2017 by a NIM of 10.58% and 10.37% respectively. Comparing

UMB’s performance to that of the industry, UMB performed better than the industry with a NIM

of 14% while the industry realized a NIM of 9.8% in 2015 and also in 2018 by an increase of

2.53%. The industry outperformed UMB in 2016 and 2017 with a NIM of 9.20% and 9.40%

respectively, leading to a total increment of 3.08%. Considering the analysis of the performance

ratio, UMB performed poorly since there hasn’t been an improvement in many aspects of the

bank.

56
4.1.3 Prudential Bank Limited

Table 5: Prudential Bank Performance Ratios

Year
2015 2016 2017 2018
Current Ratio 35.77% 41.53% 55.28% 52.52%
Cash Ratio 18.00% 15.57% 45.77% 28.45%
Return on Assets 0.70% 0.53% -1.23% 0.49%
Return on Equity 6.80% 5.65% -11.14% 3.30%
Net interest Margin 9.00% 8.39% 8.87% 7.27%
Source: Financial Statement for Prudential Bank (2015-2018)

Figure 11. Comparison of Prudential Bank’s Current Ratio with Foreign and Industry Averages.

Prudential Bank vs Foreign Average vs Industry Average

Prudential Bank CR Foreign Benchmark CR Industry Average CR

70.00%

60.00%

50.00%
Current Ratio

40.00%

30.00%

20.00%

10.00%

0.00%
2015 2016 2017 2018
Years

Source: Financial Statement for Prudential Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018).

Prudential Bank had an upward sloping trend from the years 2015 to 2017, meanwhile, in

2018 the bank experienced a decline in its current ratio. Current ratio increased from 35.77% in

2015 to 41.53% in 2016 by 5.56% and from 41.53% in 2016 to 55.28% in 2017 by 13.75%. The

increment for the period 2015 and 2016 as a result of an increase in investment securities and the

increment for 2016 to 2017 was due to an increase in investment securities and cash. The current

57
ratio decreased from 55.28% in 2017 to 52.52% in 2018 by 2.76% as a result of an increase in

deposit from customers, deferred tax, and other liabilities. The bank's tax on their transactions

increased immensely, the current assets of the bank were not able to cover its liabilities for the

stated period.

The average foreign banks outperformed Prudential Bank for the period 2015 to 2018. In

comparison to the industry average, the industry performed better than Prudential Bank with a

current ratio of 48% in 2015. However, in 2016, Prudential Bank performed better than the

industry average with a current ratio of 41.53%. For the period 2017 to 2018 the industry

outperformed Prudential Bank with a current ratio of 60% and 62% respectively.

Figure 12. Comparison of Prudential Bank’s Return on Asset with Foreign and Industry Averages.

Prudential Bank vs Foreign Average vs Industry Average

Prudential Bank ROA Foreign Benchmark ROA Industry Average ROA
3.50%
3.00%
2.50%
2.00%
Return on Asset

1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
-1.50%
Years

Source: Financial Statement for Prudential Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018).

The bank’s ROA was a wave-like trend for the stated four years. The bank’s ROA

decreased from 0.70% in 2015 to 0.53 in 2016 by 0.17% and decreased from 0.53% in 2016 to -

1.23% in 2017 by 1.76%, this was as a result of a decrease in the bank’s net profit for the stated

58
years and the bank even made a loss in 2017 which indicates that the bank wasn’t able to make a

return on their assets even though the bank’s assets increased. In 2018, the bank’s ROA

increased from -1.23% to 0.49% by 1.72%, this was mainly as a result of an increase in net profit

which immerge from a loss of Ghc26,816 to a gain of Ghc11,591 and also an increase in total

assets.

In comparison to the average foreign banks, the average foreign banks outperformed

Prudential Bank for the period 2015 to 2018. Comparing to the industry average, the industry

performed better than Prudential Bank for the stated four years.

Figure 13. Comparison of Prudential Bank’s Return on Equity with the Foreign and Industry Averages.

Prudential Bank vs Foreign Average vs Industry Average

Prudential Bank ROE Foreign Benchmark ROE Industry Average ROE
30.00%

25.00%

20.00%
Return on Equity

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%
Years

Source: Financial Statement for Prudential Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

The bank’s ROE had a continuous downward slope from the years 2015 to 2017 and an

increase in ROE in the year 2018. The bank’s ROE decreased from 6.8% in 2015 to 5.65% in

2016 by 1.15%, this was as a result of a decrease in net profit. ROE then decreased from 5.65%

in 2016 to -11.14% in 2017 by 16.79% due to a loss the bank made in 2017 even though

shareholder’s equity increased. The bank’s ROE increased from -11.14% in 2017 to 3.30% in

59
2018 by 14.44% as a result of an increase in net profit and shareholder’s equity. Comparing

Prudential Bank’s ROE to the average foreign banks and industry average, both outperformed

Prudential Bank for the stated four years. In closing, the current ratio for the bank decreased in

2018 which means the reform did not aid in the bank’s strength. Concerning ROA and ROE in

2018, both increased and this indicates that the cleanup of banks aided in the performance of

Prudential Bank.

Figure 14.Comparison of Prudential Bank’s Cash Ratio with the Foreign and Industry Average
Prudential Bank vs Foreign Average vs Industry Average
Prudential Bank Cash ratio Foreign Benchmark Cash ratio
60.00%

50.00%
Cash Ratio

40.00%

30.00%

20.00%

10.00%

0.00%
2015 2016 2017 2018
Years

Source: Financial Statement for Prudential Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018).

The cash ratio of Prudential Bank decreased from 18% in 2015 to 15.57% in 2016 and

increased by 30.20% in 2017 and decreased again to 28.45% in 2018. This increase and decrease

can be attributed to the fact that the cash and cash equivalent increased at a point and an increase

of a variable in current liabilities which is deposits from customers. Comparing the performance

of Prudential Bank to that of the foreign bank's averages, the foreign bank's averages had a good

cash ratio except for 2017. Prudential Bank, on the other hand, had a better cash ratio of 45.77%

60
than the foreign bank's averages in 2017 with a cash ratio of 40.02%. Generally, Prudential Bank

had a wave-like trend and an upward trend for the average foreign banks.

Figure 15.Comparison of Prudential Bank’s NIM with the Foreign and Industry Averages.
Prudential Bank vs Foreign Average vs Industry Average
Prudential Bank NIM Foreign Benchmark NIM Industry Average NIM

0.14
0.12
Net Interest Margin

0.1
0.08
0.06
0.04
0.02
0
2015 2016 2017 2018
Years

Source: Financial Statement for Prudential Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018).

Both Prudential Bank and the industry benchmark had a wave-like trend while the average

foreign banks had a downward trend. Prudential Bank had a decline in NIM from 9.01% in 2015

to 8.39% in 2016 by 0.62%, this was as a result of an increase in interest expenses since the

demand for savings increased for that period. During the year 2017, Bank of Ghana dropped the

Monetary Policy Rate (MPR) from 20% to 17% at the end of 2018 (Ghana Interest rate – Ghana

Economy Forecast & Outlook, 2020), which led to a decline in the interest rate from 19.3% in

2017 to 16.1% at the end of 2018, hence the decline in the bank’s NIM from 8.87% in 2017 to

7.27% in 2018. The average of the foreign banks outperformed the bank for the entire four-year

period. Similarly, the industry performed better than Prudential Bank for the stated four years.

The strength of the bank was weak after the clear up of banks based on the analysis of the

performance ratio.

61
4.1.4 ARP APEX Bank

Table 6: ARB Apex Bank Performance Ratios.

Year
2015 2016 2017 2018
Current Ratio 102.85% 91.08% 88.89% n/a
Cash Ratio 64..51% 73.56% 64.63% n/a
Return on Assets 0.38% -4.88% 1.37% n/a
Return on Equity 2.77% -53.86% 15.26% n/a
Net interest Margin 15.15% 15.92% 15.30% n/a
Source: Financial Statement for ARB Apex Bank (2015-2018).

Figure 16. Comparison of ARB Apex Bank’s Current Ratio with the Foreign and Industry Averages.
ARB Apex Bank vs Foreign Average vs Industry Average
ARB Apex Bank CR Foreign Benchmark CR Indsutry Average CR
120.00%

100.00%

80.00%
Current Ratio

60.00%

40.00%

20.00%

0.00%
2015 2016 2017
Years
Source: Financial Statement for ARB Apex Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

There was a downward trend in Apex Bank's current ratio for the years 2015 to 2017, the

current ratio for Apex Bank decreased from 102.85% in 2015 to 91.08% in 2016 by 11.77% and

from 91.08% in 2016 to 88.89% in 2017 by 2.19%, this was as a result of a decrease in

investment securities and an increase in deposit from banks in 2016. The reason for the reduction

in 2017 was because of an increase in total liabilities, there was an enormous increase in deposit

from customers and a steady increase in other liabilities as well. Comparing Apex Bank to the

average foreign banks and industry average, Apex Bank outperformed both the average foreign

banks and the industry for the stated years.

Figure 17. Comparison of ARP Apex Bank’s Return on Asset with the Foreign and Industry Averages.
62
 ARB Apex Bank vs Foreign Average vs Industry Average
ARB Apex Bank ROA Foreign Benchmark ROA Industry Average ROA
4.00%
3.00%
2.00%
Return on Asset

1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
Years
-6.00%
…
Source: Financial Statement for ARB Apex Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

Apex Bank had a wave-like trend in ROA for the years 2015 to 2017, ROA decreased

from 0.38% in 2015 to -4.88% in 2016 by 5.26%, this was due to a massive loss the bank made

in 2016 which was Ghc13,316,195. This indicates that the bank wasn’t able to generate any

profit from its assets, and also the loss was due to a decrease in total assets. Even though Apex

Bank had a lot of current assets to cover its liabilities, the assets were not generating any returns

for the bank, it seemed it was mainly focusing on it using its assets to cover its liabilities. In 2017

ROA increased from -4.88% to 1.37% in 2017 by 6.25%, this was as a result of an increase in

net profit of Ghc4,459,650 and an increment in total assets by about Ghc53,000,000. Comparing

Apex Bank to the average foreign banks and industry average, both performed better than Apex

Bank for the stated years.

63
Figure 18. Comparison of ARP Apex Bank’s Return on Equity with Foreign and Industry Averages
ARB Apex Bank ROE vs Foreign Average vs Industry Average
ARB Apex Bank ROE Foreign Benchmark ROE Industry Average ROE
30.00%
20.00%
10.00%
Return on Equity

0.00%
-10.00%
-20.00%
-30.00%
-40.00%
-50.00%
-60.00% Years

Source: Financial Statement for ARB Apex Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

Apex Bank’s trend for ROE is a wave-like trend from the year 2015 to 2017, ROE

decreased from 2.77% in 2015 to -53.86% in 2016 by 56.63%, this was due to a high loss the

bank made in 2016. In 2017, ROE increased from -53.86% in 2016 to 16.26% in 2017 by

69.22%, this was as a result of an increase in net profit and shareholder’s equity. Comparing

Apex Bank to the average foreign banks and the industry average, both outperformed Apex Bank

for the stated period.

Figure 19. Comparison of Apex Bank’s Cash Ratio with the Foreign Average

ARB Apex Bank vs Foreign Average

ARB Apex Cash ratio Foreign benchmark Cash ratio

0.8
Cash Ratio

0.6
0.4
0.2
0
2015 2016 2017
Years

Source: Financial Statement for ARB Apex Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

64
 Apex Bank had an increase in cash ratio from 64.51% in 2015 to 73.56% in 2016 by

9.05% due to a rise in the cash and cash equivalent figure. The cash ratio for the bank decreased

again to 64.63% by 8.93% in 2017 due to high deposit from customers. Comparing the foreign

bank's averages to Apex Bank, the bank realized a good cash ratio. From the graph, the trend was

a wave-like trend for Apex Bank and an upward trend in the foreign bank’s averages

Figure 20.Comparison of Apex Bank’s NIM with the Foreign and Industry Averages

ARB Apex Bank vs Foreign Average vs Industry Average

ARB Apex NIM Foreign Benchmark NIM Industry Average NIM

0.2
Net Interest Margin

0.15

0.1

0.05

0
2015 2016 2017
Years

Source: Financial Statement for ARB Apex Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking Survey (2015-2018).

From the graph, there was an upward trend for Apex Bank while a downward trend in the

foreign bank's averages, on the other hand, the industry average had a wave-like trend. NIM

increased from 15.15% at the end of 2015 to 15.92% at the end of 2016 by 0.77%, this was due

to a slight increase in interest income. During the year 2016, the Bank grew its loans and

advances by 8.73%. This increased the loans and advances by Ghc531,011 from Ghc2,538,519

in 2015 to GHS3,069,530 in 2016. Again, NIM for the bank decreased slightly by 0.62% from

15.92% in 2016 to 15.30% in 2017, this was because of about 19.8% growth in deposits.

Comparing the bank’s NIM to the averages of the foreign banks and the industry average, Apex

Bank outperformed both for the four years. The performance of the bank was moderate based on

the analysis of the performance ratio.

65
 4.1.5. First Atlantic Bank Limited

Table 7: First Atlantic Bank Performance Ratios

Years
2015 2016 2017 2018
Current Ratio 70.07% 79.43% 78.55% 57.34%
Cash Ratio 42.17% 24.39% 40.45% 44.12%
Return on Assets 1.27% 1.10% 1.16% 1.03%
Return on Equity 10.15% 7.66% 8.60% 5.54%
Net Interest Margin 7.57% 12.66% 20.24% 10.13%
Source: Financial Statement for First Atlantic Bank (2015-2018)

Figure 21. Comparison of First Atlantic Bank’s Current Ratio with the Foreign and Industry
Averages.
First Atlantic Bank vs Foreign Average vs Industry Average
Frist Atlantic Merchant bank CR Foreign Benchmark CR Industry Average CR

100.00%

80.00%
Current ratio

60.00%

40.00%

20.00%

0.00%
2015 2016 2017 2018
Years
Source: Financial Statement for First Atlantic Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

The bank’s current ratio had a downward trend from the years 2016 to 2018. The current

ratio of First Atlantic Bank increased from 70.07% in 2015 to 79.43% in 2016 by 9.36%, and

this increment can be attributed to a major increase in pledged trading assets by about

Ghc65,000,000 as well as a decrease in borrowings by about Ghc73,000,000. The current ratio

decreased from 79.43% in 2016 to 78.55% in 2017 by 0.88% and from 78.55% in 2017 to

57.34% in 2018 by 22.09%, this was due to an increase in deferred tax in 2016 to 2017 and an

increase in current tax liabilities and deposit from banks in 2018. This means the bank was not

able to cover its current liabilities with its current assets from 2016 to 2018.

66
 Comparing First Atlantic Bank to the average foreign banks, First Atlantic bank

performed better than the average foreign banks for the period 2015 to 2017. However, in 2018

the average foreign banks outperformed First Atlantic Bank with a current ratio of 64.77% and

57.34% respectively. In comparison to the industry average, First Atlantic Bank outperformed

the industry from the years 2015 to 2017, meanwhile in 2018, the industry performed better than

First Atlantic Bank with a current ratio of 62% and 57.34% respectively.

Figure 22. Comparison of First Atlantic Bank’s Return on Asset with the Foreign and
Industry Averages.
First Atlantic Bank vs Foreign Average vs Industry Average
First Atlantci Merchant ROA Foreign Benchmark ROA Industry Average ROA
3.50%

3.00%

2.50%
Return on Asset

2.00%

1.50%

1.00%

0.50%

0.00%
2015 2016 2017 2018
Years
Source: Financial Statement for First Atlantic Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

The trend for First Atlantic Bank’s ROA was a wave-like trend for the stated four years.

ROA for the bank decreased from 1.27% in 2015 to 1.10% in 2016 by 0.17%, even though the

total assets and net profit for the period 2015 to 2016 increased, the bank was not able to

generate returns on its total assets. ROA increased from 1.10% in 2016 to 1.16% in 2017 and this

was a result of an increase in total assets and net profit for the stated year. The bank’s ROA in

2018 decreased from 1.16% to 1.03% in 2018, this was due to a decrease in net profit for the

67
year. Comparing First Atlantic Bank to the average foreign banks and industry average, both

outperformed First Atlantic Bank for the stated year.

Figure 23. Comparison of First Atlantic Bank’s Return on Equity with the Foreign and Industry
Averages.

First Atlantic Bank vs Foreign Average vs Industry Average

First Atlantic Merchant ROE Foreign Benchmark ROE Industry Average ROE

30.00%

25.00%
Return on Equity

20.00%

15.00%

10.00%

5.00%

0.00%
2015 2016 2017 2018
Years
Source: Financial Statement for First Atlantic Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

First Atlantic Bank experienced a wave-like trend in its ROE for the years 2015 to 2018.

ROE for the bank decreased from 10.05% in 2015 to 7.66% in 2016 by 2.39%, even though there

was an increase in net profit and equity, the bank didn’t generate as much profit as the previous

years. From the year 2016 to 2017, ROE increased from 7.66% in 2016 to 8.60% in 2017 by

0.94% as a result of an increase in net profit and shareholder’s equity for the said period. ROE,

however, decreased from 8.60% in 2017 to 5.54% in 2018 by 3.06% and this was due to a

decrease in the bank’s net profit for the year. Comparing First Atlantic Bank to the average

foreign banks and industry average, both outperformed First Atlantic Bank for the stated four

years. In conclusion, the reform of the clearing up of banks did not improve the strength of First

Atlantic Bank because CR, ROA, and ROE decreased in the year 2018.

68
Figure 24. Comparison of First Atlantic Bank’s Cash Ratio with the Foreign and Industry Averages

First Atlantic Bank vs Foreign Average vs Industry Average

First Atlantic Merchant Cash ratio Foreign Benchmark Cash ratio

0.5
0.45
0.4
0.35
0.3
Cash Ratio

0.25
0.2
0.15
0.1
0.05
0
2015 2016 2017 2018
Years

Source: Financial Statement for First Atlantic Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) & Ghana Banking
Survey (2015-2018)

In 2015, the cash ratio for First Atlantic Bank decreased from 42.17% to 24.39% in 2016

by 17.78% because of the rise in current liabilities. The cash ratio again increased in 2017 by

16.06% and 2018 by 3.67%, this rise was due to the significant amount realized for cash and

cash equivalent. Comparing First Atlantic Bank’s cash ratio to the foreign bank's averages, the

bank had a good cash ratio of 42.17% in 2015, 40.45% in 2016, and 44.12% in 2018 as

compared to the foreign bank's cash ratio. But in 2016, the foreign bank's averages realized a

good cash ratio. Similarly, the bank had an upward trend with a one-year decline in 2016.

69
Figure 25. Comparison of First Atlantic Bank’s NIM with the Foreign and Industry Averages.
First Atlantic Bank vs Foreign Average vs Industry Average
First Atlantic Merchant NIM Foreign Benchmark NIM Industry Averages NIM

0.25

0.2
Net Interest Margin

0.15

0.1

0.05

0
2015 2016 2017 2018
Years

Source: Financial Statement for First Atlantic Bank (2015-2018), Banking Sector Reports, BoG (2015-2018) &
Ghana Banking Survey (2015-2018).

There was an upward and a downward trend for First Atlantic Bank. First Atlantic Bank

had a steady growth in its NIM from 2015 to 2017 by an average of 12.67% increment. This

steady growth can be attributed to an increase in loans and advances to customers due to a

decline in interest rates from 26% in 2015 to 20% in 2017 by BoG leading to an increase in

interest income, (Ghana Interest Rate - Ghana Economy Forecast & Outlook, 2020). However,

there was a decline from 20.24% in 2017 to 10.13% in 2018 by 10.11%, this was because the

demand for savings in that year grew. The bank outperformed the averages of the foreign banks

from 2016 to 2018 while the average of the foreign banks performed better than the bank in

2015. Similarly, First Atlantic Bank outperformed the industry from 2016 to 2018, the industry,

on the other hand, performed better than the bank in 2015.

The various banks used in this study have derived considerable profit from their

investments in government securities. The performance of the indigenous banks generally, was

found to be below that of the foreign bank's averages in terms of their NIM, even though UMB

outperformed the foreign bank’s average in 2018 by 0.93%, ARP Apex Bank also outperformed

the foreign bank’s average in 2017 by 4.93% and First Atlantic Bank outperformed the foreign
70
bank’s average in both 2017 and 2018 due to rising demand for customer savings than loans and

advances granted. The high lending rates were the factors hindering loan repayment after the

banking sector reforms. Banks used this opportunity to invest heavily in government securities.

The reform did not aid in an improvement in First Atlantic Bank’s strength based on the

performance ratio even though the bank was liquid.

The Net Interest Margin (NIM) of banks are mainly affected by demand and supply.

Therefore, if there is a large demand for savings compared to loans, NIM decreases, as the bank

is required to pay out more interest than it receives. Alternatively, if there is a higher demand for

loans compared to savings (where more customers are borrowing instead of saving), the bank’s

NIM can increase. Monetary and fiscal policy set by the central bank can also influence a bank’s

NIM as the direction of interest rates dictate whether customers should borrow or save. When

interest rates are low, customers are more likely to borrow than to save, this increases the NIM.

However, if interest rates rise, customers are more likely to save than to borrow, hence

decreasing NIM.

Before the banking sector reform in Ghana, there was a likelihood of severe impairment.

Certain banks were heavily defaulting in capital and liquidity and their continuous operation

would have greatly affected the financial system and may put depositor's funds at risk. Recently,

the banking sector has undergone a massive transformation which has resulted in some banks

acquiring others while others also consolidated. This reform was done to check the performance

of the various banks and put them right on track. Ever since there has been gross competition

amongst the banks as they are all finding ways to raise and meet the capital requirement. The

performance of the banks used in this study had shown on the average, the banks are doing all

that they can not to default. The development in the banking sector had shown strong growth of

assets and profitability in the banks used in this study, even though this development has its
71
effects on the economy, customers, and shareholders. Similarly, the bank’s capital position has

been strengthened to absorb any adverse shock. The ROA and ROE which measures how the

banks are using their assets and investments to generate more income tend to be averagely high

and well above the threshold (the foreign bank average and the industry benchmark). The current

ratio and Cash ratio which measures the bank’s ability to pay off its short-term obligations

remains well above the threshold even after the reform.

Despite some gains from the reform (development), it has not yet had a major impact on

the banking sector. There have been occasional setbacks that have affected customers,

shareholders, and the economy however, the development has generally helped strengthen the

bank's performances.

72
4.2. Credit Risk Analysis
The non-performing loan is a loan that is several months late or in arrears. It is a sign that

a debtor is unable to pay the debt and loan loss provision is the number of funds put aside to

assess unperformed loans. Hence, the nonperforming loan and loan loss provision ratios help to

measure the credit risk and the asset quality of the banks or financial institutions.

The Bank of Ghana is the regulatory supervisor of the banking industry in Ghana. The

banking sector in Ghana has faced different challenges over the past four years. With a

nonperforming loan of 14.9% and a loan loss provision ratio of 7.9%, the main challenges in the

sector were the decline in profitability due to rising operating costs. According to Terence Darko,

board chairman of Ecobank Ghana (Report, 2017), the year 2016 was a challenging one for the

banking industry due to the difficult macro-economic environment, characterized by declining

yields on financial instruments, high levels of non-performing loans and increased competition

for deposits as a result of the implementation of the Treasury Single Account (TSA) policy by

the government with an NPL of 17.3% and an LLPR of 8.6%. Also, the energy sector legacy

debt affected the entire industry. In 2017, after the cleanup made by Bank of Ghana, and

revocation of the license of certain banks, the banking industry suffered from the loss of

approximately eleven banks which made suffered the overall economy with a high NPL ratio of

21.6% and an LLP ratio of 10.7%. Measures put in place in 2017 helped to reduce the

nonperforming loans to 18.9% and loan loss provision ratio to 9.8% as stated by the Ghana

Banking Survey of 2019 which is partly attributable to the revocation of licenses of banks.

Moreover, due to the perceived high credit risk in the market, most banks slowed down with the

granting of new facilities and rather intensified recoveries for the year 2018. Meanwhile, the

governor of Bank of Ghana (Addison, 2019), stated that the recent clean up carried out in the

banking industry, the sector credit risk exposure remains high.

73
 The following analysis is focused on the non-performing loan and loan loss provision

ratios of five local banks which are Fidelity Bank, UMB Bank, Prudential Bank, ARB Apex

Bank and First Atlantic Bank and the comparison of these banks ratios with the industry ratio

and the foreign bank's average ratio (Ecobank, Access Bank, Standard Chartered Bank, HFC

Bank, and Societe Generale). Table 8 and Table 9 are the summary of the non-performing loan

ratio and loan loss provision ratio of the Ghanaian banking industry and an average of five

selected foreign banks in Ghana. Data were collected from the Ghana surveys and the different

financial reports from 2015 to 2018.

Table 8. Non-Performing Loan Ratio of the Industry and the Foreign Benchmark

Years 2015 2016 2017 2018

Industry NPL 14.9% 17.3% 21.6% 18.9%
in%
Foreign Banks 20.39% 24.25% 25.16% 20.86%
Average NPL
in%
Source: Financial Statement of five foreign banks stated above, Ghana Survey annual report & Bank of Ghana annual from 2015
to 2018.

Table 9. Loan Loss Provision Ratio of the Industry and the Foreign Banks

Years 2015 2016 2017 2018

Industry LLP in% 7.90% 8.6% 10.7% 9.8%
Foreign Banks Average LLP in% 9.34% 10.72% 11.47% 9.89%

Source: Financial Statement of five foreign banks stated above, Ghana Survey annual report & Bank of Ghana annual from 2015
to 2018.

74
4.2.1. Fidelity Bank

Figure 26. Comparison of Fidelity Bank’s NPL with the Foreign and Industry Averages

Fidelity Bank NPL vs Foreign Average vs Industry Average

Fidelity NPL in % Industry NPL in % Foreign Average NPL in%

30
NONPERFORMING LOAN

25
20
15
10
5
0
2015 2016 2017 2018
YEAR

Data Source from the financial report of Fidelity Bank, Ghana Banking Survey, and BoG annual report during the period
2015 to 2018.

Figure 27. Comparison of Fidelity Bank’s LLP with the Foreign and Industry Averages

Fidelity Bank LLP vs Foreign Average vs Industry

Average
Fidelity LLP % Industry LLP in % Foreingn Banks average LLP%

18
16
Loan Loss Provision

14
12
10
8
6
4
2
0
2015 2016 2017 2018
Year

Data Source from financial report of Fidelity Bank, Ghana Banking Survey, and BoG annual report during the period 2015
to 2018.

75
 The non-performing loan ratio of Fidelity Bank was as low as 2.3% compared to the

industry which has a ratio of 14.9% in 2015. It is a good start for Fidelity Bank because debtors

can pay back their loans and that makes the credit risk exposure low. The next year 2016 has

shown that NPL and LLP ratio has increased dramatically to 12.2% and 9.12% respectively. In

this particular year, the bank faced a legacy debt exposure mainly due to the unpaid subsidies on

energy prices and foreign exchange under-recoveries concerning organizations in the energy

sector such as Tema Oil Refinery (TOR), Volta River Authority (VRA), Ghana Grid Company

(GRIDCo), Electricity Company of Ghana (ECG) and the Bulk Oil Distribution Companies

(BDCs), preventing these institutions from repaying their loans on schedule. To help to resolve

the issue inter stakeholders committee has been put in place with an additional fund of 134.8

million loan impairment provisions which justify the increase in loan loss provision. In 2017 the

NPL and LLP ratio have increased respectively by 4% and 7.16% because Fidelity Bank has

been selected by the government to help repay the legacy debt loan. Fidelity Bank performed

better than the industry and foreign banks.

76
4.2.2. Universal Merchant Bank

Figure 28. Comparison of UMB’s NPL with the Foreign and Industry Benchmark Averages

UMB NPL vs Foreign Average vs Industry Average

UMB NPL in % Industry NPL in % Foreign Bank average NPL in %
Non Performing Loan Ratio

30

20

10

0
2015 2016 2017 2018

YEAR

Data Source from Financial Reports of Universal Merchant Bank, Ghana Banking Survey, and BoG Annual Report during
the period 2015 to 2018.

Figure 29. Comparison of UMB’s LLP with the Foreign and Industry Averages

UMB LLP REPRESENTATION

UmB LLP in % Industry LLP in% Foreign Banks average LLP in %

14
Loan Loss Provision

12
10
8
6
4
2
0
2015 2016 2017 2018

Year

Data Source from financial report of Universal Merchant Bank, Ghana Banking Survey, and BoG annual
report during the period 2015 to 2018.

The non-performing loan ratio and the loan loss provision ratio were quite low as

compared to the industry and much lower than the foreign banks. In 2016 the NPL increased

from 6.3% to 10.16% and the LLP decreased from 5.93% to 4.64% despite the significant rising

trend of the NPL ratio in the industry, the bank tried to inverse the trend with the improvement of

77
the risk assessment framework and the enhancement of organizational risk culture at all levels

according to the UMB 2016 annual report. The nonperforming loan ratio and the loan loss

provision ratios for UMB Bank, the industry, and the foreign banks all increased in 2017. During

2018, the non-performing loan ratio decreased by 1.9% and the loan loss provision ratio

increased by 0.35% due to improvement in the management of credit risk. Despite the decrease

of NPL and LLP ratios of UMB Bank, credit risk exposure remain high.

4.2.3. Prudential Bank

Figure 30. Comparison of Prudential Bank’s NPL to The Industry Benchmark and The
Average of the Foreign Banks.

Prudential Bank NPL REPRESENTATION

30
Prudential NPL in % Industry NPL in% Foreign Bank average NPL in%
25

20
Nonperforming Loan

15

10

0
2015 2016 2017 2018
Year

Data Source from financial report of Prudential Bank, Ghana Banking Survey, and BoG annual report during
the period 2015 to 2018.

78
Figure 31. Comparison of Prudential Bank’s LLP with the Foreign and Averages.

Prudential Bank LLP vs Foreign Average vs

Industry Average
Prudential LLPin % Industry LLP in% Foreign Banks LLPin %
Loan Loss Provision

15

10

0
2015 2016 2017 2018
Year

Data Source from Financial Report of Prudential Bank, Ghana Banking Survey, and BoG Annual Reports during the period
2015 to 2018.

In 2015, Prudential Bank has a non-performing loan ratio of 11.18% and a loan loss

provision ratio of 6.9% which were lower than the industry and foreign bank’s ratios. During the

following year 2016, the NPL ratio of the industry, Prudential Bank, and foreign banks increased

mainly due to the general slowdown in the economy, and high cost of production especially from

high utility tariffs according to Bank of Ghana Banking Sector Summary Vol2.1.

As the NPL of prudential bank decreased in 2017 from 19.84% to 17.87%; due to

improvement in the mitigation of loan risk, both the industry and foreign bank ratio increased

from 17.3% to 21.6%. The provision loan for loss ratio also increased for the reason that more

funds are put in place to manage the credit risk inconvenient. In 2018, NPL and LLP ratio

decreased in the banking sector due to the improvement in asset quality and followed by the

enforcement of the loan write off directive put in place.

79
4.2.4. ARB Apex Bank

Figure 32. Comparison f ARB APEX Bank’s NPL with the Foreign and Industry Averages

ARB Apex Bank NPL vs Foreign Average vs

Industry Average
Apex NPL in % Industry NPL in % Foreign Bank average NPL in %

30

25
NonPerforming Loan

20

15

10

0
2015 2016 2017
Year

Data Source from Financial Report of ARB APEX Bank, Ghana Banking Survey, and BoG Annual Report during the period
2015 to 2018.

Figure 33. Comparison of ARB APEX Bank’s LLP with the Foreign and Industry Average.

ARB Apex Bank LLP vs Foreign Average vs

Industry Average
Apex LLP in % Industry LLP in % Foreign Banks average LLP in %

25
Loan Loss Provision

20
15
10
5
0
2015 2016 2017

Year

Data Source from Financial Report of ARB APEX Bank, Ghana Banking Survey, and BoG Annual Report during the period
2015 to 2018.

ARP Apex Bank recorded a non-performing loan ratio of 15.9% and a loan loss provision

ratio of 13.72% which was higher than the industry and the foreign banks’ performance in 2015.

80
The number of non-performing loans and the provision put aside to mitigate the credit risk

raised. In 2016, the NPL and LLP ratio in the overall banking sector increased respectively by

2.6% and 5.66% for Apex Bank, 2.4%, and 0.7% for the industry and by 3.86% and 1.38% for

the foreign banks due to an economic downturn in the country.

During the following year 2017, the NPL ratio of the Apex Bank, the industry and the

foreign banks kept increasing and the LLP ratio decreased from 19.38% to 13.83% for APEX

Bank and from 8.6% to 10.7% for the industry as the demand for loans by small and medium

enterprises and also household and consumer credit raised according to the ARB Apex Bank

2017 annual report. Throughout the last three years of the period, the non-performing loan ratio

and loan loss provision ratios of ARB Apex Bank remained high as compared to the industry and

the foreign banks which exposed the bank to a high level of credit exposure.

81
4.2.5. First Atlantic Bank Limited

Figure 34. Comparison of First Atlantic Bank’s NPL with the Foreign and Industry Averages.

FAB NPL vs Foreign Average vs Industry Average

FAB NPL in % Industry NPL in % Foreign Banks average NPL in %

45
40
Non Performinng Loan

35
30
25
20
15
10
5
0
2015 2016 2017 2018
Year

Data Source from Financial Report of First Atlantic Bank, Ghana Banking Survey, and BoG Annual Report during the
period 2015 to 2018.

Figure 35. Comparison of First Atlantic Bank’s LLP with the Foreign and Industry Average.

FAB LLP vs Foreign Average vs Industry Average

FAB LLP in % Industry NPL in % Foreign Banks average LLP in %

20
Loan Loss Provision

15
10
5
0
2015 2016 2017 2018
Year

Data Source from Financial Report of First Atlantic Bank, Ghana Banking Survey, and BoG Annual Report during the
period 2015 to 2018.

In 2015 the non-performing loan ratio and loan loss provision ratio of First Atlantic Bank

is 19.66% and 11.4% respectively which are higher than the industry NPL and LLP ratio 14.9%

and 7.9% respectively. During the following year 2016, a dramatic increment of the FAB’s non-

82
performing loan by 21.34% has shown that the bank recorded a high number of non-performing

loans and managed with the loan loss provision of 18.15% to avoid being out of liquidity. In

2017, a noticeable decline of the NPL and LLP by 23% and 10.15% respectively shows that the

bank has been able to manage efficiently the credit risk faced, despite the increment of the ratios

in the industry. In 2018, the non-performing loan and loan loss provision ratio of First Atlantic

Bank, the overall industry, and of the foreign banks reduced due to the improvement in

managing credit risk.

83
4.3 Basel III Compliance

An analysis of the sample banks' compliance with the credit requirements detailed in the

Basel III Accords reveals that most of the sampled banks had capital adequacy ratios (CAR)

above the minimum required by the Basel Accords during the selected time frame. The minimum

CAR requirement to be compliant with the Basel III Accords is 10.5% which consists of a total

Tier 1 and Tier 2 capital ratio of 8% of a bank's risk-weighted assets plus an additional 2.5% as

the capital conservation buffer. The banks that did not meet these requirements were UMB in

2016 and 2017, and Prudential Bank in 2017. UMB had CARs of 10.13% in 2016 and 10.20% in

2017. Prudential Bank had a CAR of 10.36% in 2017. However, the capital conservation buffer

requirement was implemented in phases and the full 2.5% buffer was required in 2019 and

beyond. The capital conservation buffer in the years that UMB and Prudential bank failed to

meet the 2019 CAR requirements was 0.625% in 2016 and 1.25% in 2017 (Liang, n.d.), thus the

minimum CAR required by Basel III in 2016 was 8.0625% and 9.125% in 2017. Under these

levels, all the banks were compliant with the capital requirements of Basel III throughout the

sampled timeframe. Table 10. below shows a summary of the CAR’s for the sampled banks, the

industry average CAR for the timeframe, and the averages of five foreign banks listed on the

Ghana Stock Exchange. All capital adequacy ratios were provided in the annual reports of the

respective banks.

84
 Table 10. Capital Adequacy Ratios Summary Table

Banks 2015 2016 2017 2018

Industry Average 17.70% 17.80% 18.50% 21.90%
Foreign Benchmark 14.93% 15.14% 17.86% 23.83%
Fidelity Bank 29.46% 26.49% 26.97% 24.33%
UMB 11.47% 10.13% 10.20% 11.03%
Prudential Bank Ltd. 12.17% 12.20% 10.36% 12.97%
ARB Apex 32.00% 19.80% 19.10% N/A
First Atlantic Bank 14.30% 26.30% 23.44% 24.20%
Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BoG (2015-2018)

The banks' compliance with the liquidity requirements of Basel III, as determined by

their liquidity coverage ratio (LCR), could not be ascertained because the LCR’s could not be

calculated using the information available in the annual reports of the banks. This is due to the

inability to determine a stress scenario that applies to all banks which are needed to determine

the net cash outflows for that period.

4.3.1. Fidelity Bank

Figure 36. Fidelity vs. Industry Benchmark Figure 37. Fidelity vs. Foreign Benchmark

CAR: Fidelity Bank vs Industry CAR: Fidelity Bank vs Foreign Benchmark

Industry Fidelity Foreign Benchmark Fidelity

35.00% 35.00%
CAPITAL ADEQUACY RATIO
CAPITAL ADEQUACY RATIO

30.00% 30.00%
25.00% 25.00%
20.00% 20.00%
15.00% 15.00%
10.00% 10.00%
5.00% 5.00%
0.00% 0.00%
2015 2016 2017 2018 2015 2016 2017 2018
YEAR YEAR

Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BoG (2015-2018)

85
 Fidelity Bank has been compliant with the capital requirements of Basel III in every year

of the sampled timeline. The trend shows that the CAR for Fidelity has been on a gradual decline

from a high of 29.46% in 2015 to a low of 24.33% in 2018. In fact, among the banks sampled in

this study, Fidelity was the only one that had a CAR decrease following the conclusion of the

BoG recapitalization exercise in 2018. However, when compared to the Ghanaian banking sector

industry averages and the averages of the foreign banks operating in Ghana, Fidelity has CAR’s

that far exceed the competition. Among the banks that were the focus of this study, Fidelity had

the highest CAR. This reveals that Fidelity has built the highest capital cushion to absorb any

unexpected losses in periods of stress.

4.3.2 Universal Merchant Bank

Figure 38. UMB vs. Industry Benchmark Figure 39. UMB vs. Foreign Benchmark

CAR: UMB vs Industry CAR: UMB vs Foreign Benchmark

Industry UMB Foreign Benchmark UMB

25.00% 30.00%
CAPITAL ADEQUACY RATIO
CAPITAL ADEQUACY RATIO

25.00%
20.00%
20.00%
15.00%
15.00%
10.00%
10.00%
5.00% 5.00%

0.00% 0.00%
2015 2016 2017 2018 2015 2016 2017 2018
YEAR YEAR

Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BoG (2015-2018)

Universal Merchant Bank (UMB) has been compliant with the Basel III capital

requirements particularly when one considers the roll puts phases of the capital requirements. In

opposition to what the trend analysis of Fidelity Bank revealed, the analysis of UMB shows that

though they are Basel compliant, the bank's CAR has been consistently lower than the industry
86
 average and the average of the foreign banks. UMB looks to be just above the compliance level,

while the other industry players have CAR’s well more than the minimum Basel III

requirements. Trend analysis shows that the CAR for UMB declined in 2016 and 2017 from their

2015 high of 11.47% but rose slightly in conjunction with the banking sector reformation that

concluded in 2018. UMB needs to monitor its CAR levels so that it does not fall below the Basel

threshold of 10.5%.

4.3.3. Prudential Bank Ltd.

Figure 40. Prudential vs. Foreign Benchmark Figure 41. Prudential vs. Industry Benchmark

CAR: Prudential Bank vs Foreign Benchmark CAR: Prudential Bank vs Industry

Foreign Benchmark Prudential
Industry Prudential
30.00%
25.00%
CAPITAL ADEQUACY RATIO

CAPITAL ADEQUACY RATIO

25.00%
20.00%
20.00%
15.00%
15.00%
10.00%
10.00%

5.00% 5.00%

0.00% 0.00%
2015 2016 2017 2018 2015 2016 2017 2018
YEAR YEAR

Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BoG (2015-2018)

Prudential Bank Ltd. (PBL) has been compliant with the Basel III capital requirements

for the period 2015 – 2018. The CAR for each fiscal year was above the required threshold of

10.5%. At first glance, it may seem that PBL was not compliant in 2017, but the Basel III capital

adequacy ratio requirement was only 9.125% which PBL exceeded with their CAR of 10.36%.

Trend analysis reveals a generally upward trend in CAR apart from 2017 where PBL’s capital

adequacy ratio declined. However, PBL was able to meet the new capital reserve amount

87
 requested by BoG, and as such their CAR improved in 2018 to 12.97%. When compared to the

industry averages and foreign benchmarks, PBL has markedly lower CARs for each comparative

year. To compete effectively in the Ghanaian banking industry, PBL will have to improve their

capital adequacy ratios to the industry averages at the minimum.

4.3.4. ARB Apex Bank

Figure 42. ARB Apex Bank vs. Industry Figure 43. ARB Apex Bank vs. Foreign

CAR: ARB Apex vs Industry CAR: ARB Apex Bank vs Foreign

Benchmark
Industry ARB Apex
Foreign Benchmark ARB Apex
35.00%
35.00%
CAPITAL ADEQUACY RATIO

30.00%

CAPITAL ADEQUACY RATIO

30.00%
25.00%
25.00%
20.00%
20.00%
15.00%
15.00%
10.00% 10.00%
5.00% 5.00%
0.00% 0.00%
2015 2016 2017 2018 2015 2016 2017 2018
YEAR YEAR

Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BOG (2015-2018)

ARB Apex Bank has been compliant with the Basel III capital adequacy requirements during the

period under this study. As mentioned earlier, ARB Apex had not published its 2018 financial

statements, so they were unavailable for review and analysis. Though ARB Apex has been

compliant, the data shows a declining trend in their CAR. From a high of 32.00% in 2015 to a

low of 19.1% in 2017, the bank has had a year on year decline in their capital reserves. Despite

the downward trend, the bank has had higher CARs than both the industry and foreign bank

averages. Looking at the trend, it is not implausible to say that in 2018, the CAR of ARB Apex

finally crossed below those of the industry and foreign banks. Unfortunately, due to the

88
 unavailability of the 2018 statements at the time of this report, it is unclear as to the impact of the

banking reform on the capitalization of ARB Apex.

4.3.5. First Atlantic Bank Limited

Figure 44. FAB vs. Industry Benchmark Figure 45. FAB vs. Foreign Benchmark

CAR: FAB vs Industry CAR: FAB vs Foreign Benchmark

Industry First Atlantic Bank Foreign Benchmark First Atlantic Bank

CAPITAL ADEQUACY RATIO

30.00%
CAPITAL ADEQUACY RATIO

30.00%
25.00% 25.00%
20.00% 20.00%
15.00% 15.00%
10.00% 10.00%
5.00% 5.00%
0.00% 0.00%
2015 2016 2017 2018 2015 2016 2017 2018
YEAR YEAR

Source: Financial Statements for Respective Banks (2015-2018) & Banking Sectors Reports, BOG (2015-2018)

First Atlantic Bank has been compliant with the capital requirements of the Basel III

accords, their capital adequacy ratios have consistently been above 10.5%. The trend analysis

reveals that their CAR’s have been steadily increasing over the period, though the CAR’s for

2017 and 2018 were lower than the high of 26.3% in 2016. Because the bank has been

capitalized well above the regulatory and Basel Accord threshold, the impact of the banking

sector reform was minimalized. There has only been a slight increase in the CAR for 2018, an

increase from 23.44% in 2017 to 24.2%. When comparing the CAR’s for the bank to the industry

average the trend shows the CAR for the bank to be generally higher than the industry average.

In comparison to the foreign bank averages, First Atlantic Bank has generally higher CAR’s,

though, in 2015 and 2018, the ratios were similar. In the context of this study, the bank joins

Fidelity Bank and ARB Apex as the only institutions to consistently have CAR’s higher than

both the industry and foreign banks averages.

89
 Chapter 5. Conclusion

5.1 Introduction
The purpose of the study was to assess the performance and credit risk management

practices within indigenous financial institutions in Ghana using several metrics including the

Basel III Accords. This chapter constitutes the discourse of the summary of findings, conclusion,

as well as recommendations of the research.

5.2 Summary
Banks in Ghana are collapsing due to poor credit risk management leading to poor overall

performance. Additionally, the international banking community has established standards

termed as Basel Accords which are designed to protect depositors at banks. If more of these

banks were compliant with the standards described in the Accords, they would still be

operational.

The main objective of the study was to assess the performance and the credit risk

management practices of indigenous financial institutions in Ghana that are not listed on the

Ghana Stock Exchange (GSE) while concurrently assessing the progress made towards

compliance with Basel Accords. Specifically, to determine the strength of the banks based on

key financial ratios, to determine the selected banks’ exposure to credit risk as well as checking

if the banks are moving per the new Basel III capital and liquidity requirements.

The research approach used was a quantitative one. Also, the deductive approach was

utilized, and the descriptive survey design was used.

The unit of analysis was five indigenous commercial banks in Ghana that are not listed

on the GSE. Fidelity Bank, First Atlantic Bank, Prudential Bank Limited, ARP Apex Bank, and

Universal Merchant Bank were examined longitudinally over the years 2015 -2018. The data

90
collected was from financial statements which are considered as secondary data. The data were

analyzed using financial ratios to evaluate the impacts of credit risk on banks' performance.

According to the findings for Fidelity Bank, it has been compliant with the capital

requirements of Basel III in all the stated years. Also, based on the analysis of the performance

ratios for Fidelity, the results indicated that the bank performed moderately and even though

Fidelity’s NPL and LLP increased it still performed better than the foreign and industry averages

due to the measures put in place, thus additional fund of 134.8 million of loan impairment

provision. Universal Merchant Bank (UMB) has been compliant with the Basel III capital

requirements and generally has had a low NPL and LLP, however with high credit risk exposure

and UMB performed poorly since there hasn’t been an improvement in many aspects of the

bank. Prudential Bank Ltd. (PBL) has been compliant with the Basel III capital requirements for

the period 2015 – 2018, the bank had a decrease in NPL and LLP in 2017 and 2018. Based on

the analysis of the performance ratios, the strength of the bank was weak after the cleanup of

banks. ARB Apex Bank has been compliant with the Basel III capital adequacy requirements

during the period under study. Throughout the first three years of the period, NPL and LLP ratios

of ARB Apex Bank remained high as compared to the industry and the foreign banks’ average

which exposed the bank to a high level of credit exposure, but their high LLP ratio serves as a

buffer for those impaired loans. The performance of the bank was moderate based on the analysis

of the performance ratio. First Atlantic Bank has been compliant with the capital requirements of

the Basel III accords, their capital adequacy ratios have consistently been above 10.5%. In 2018,

the NPL and LLP ratios reduced due to the improvement in managing credit risk. Based on the

performance ratios, the strength of the bank was weak.

91
5.3 Conclusion
The research objectives have been achieved except for determining compliance with the

liquidity requirements of the Basel III Accords. The study has been able to use financial ratios to

determine the strength of the banks, the level of their credit risk exposure, and their degree of

compliance with the capital requirements of the Basel III Accords.

In assessing the strength of the bank, the study chose key performance ratios to help

assess the banks. The general trend shows that the banks have higher current ratios and generally

higher cash ratios, but their returns are lower than the industry and foreign benchmarks. It may

not be too hasty to conclude that these indigenous banks are not using their assets effectively to

generate consistent returns. This may be because the banks are transferring their funds to the

central bank to meet the high capital reserve requirements whereas the foreign banks may receive

capital injections from the parent bank. Overall, the assessment of the strength of the banks

reveals that the banks have strong assets but need to increase their efficiency to increase their

profitability and improve their generally low performance.

Fidelity had low exposure to credit risk because their NPL ratio was consistently lower

than the benchmarks and their LLP ratio was trending upwards and was higher than the

benchmarks in the last two years of the period. Compared to the other banks in this study, FBL is

performing much better when it comes to managing their credit risk exposure because their LLP

ratio is generally above their NPL ratio meaning that they have made enough provision for those

impaired loans. UMB had significantly lower NPL and LLP ratios, thus leading to the

conclusion that their credit risk exposure is high because they have not made enough provision

for the losses. Prudential had generally lower NPL and LLP ratios than the benchmarks, thus

based on this evidence it can be concluded that they are managing their credit risk exposure,

though one would like to see a higher LLP ratio. ARB Apex had an NPL that closely resembled

92
the industry average but had an LLP ratio significantly higher than the benchmarks. ARB Apex

is managing their credit risk exposure well by keeping their impaired loans in line with industry

averages while providing a larger cushion to take cater for any possible unexpected losses. FAB

had NPL and LLP ratios that were trending downwards leading to the conclusion that their credit

risk exposure is decreasing as they are reducing the number of impaired loans. The general trend

of the banks reveals lower NPL and LLP ratios than the benchmarks. While a low NPL ratio is a

sign of low credit risk exposure, the NPL ratio of these banks is still quite high. This is more a

statement to the nature of the banking industry in Ghana rather than an indictment on the credit

risk management practices of the individual banks.

The third objective of this study is to determine if the banks are compliant with the new

Basel III capital and liquidity requirements. It is concluded that the indigenous banks used in this

research study are indeed compliant with the Basel III capital requirements; however, the data

used was insufficient to conclude the compliance with the liquidity requirements. Among the

sampled banks, 60% of the banks consistently had CAR’s that were above both the industry and

foreign benchmarks (FBL, ARB Apex, and FAB). The two banks that did not have CAR that

beat the benchmarks also failed to comply with the Basel III capital requirements during specific

years (2016, 2017). Coincidentally, these are the years before the recapitalization exercise

embarked upon by BoG.

The results of this study suggest that Ghanaian banks are, generally, more compliant with

the Basel III capital requirements than their foreign counterparts. However, it should be noted

that the downward trend in the CAR’s across the period is closing the gap between foreign and

the local banks used in this study. The same can be said regarding the comparison of the local

banks chosen for this study and the industry averages. The data suggests that as early as 2019,

the CAR’s for these local banks will be lower than the industry and foreign benchmarks. The
93
high CAR’s of these indigenous banks show that the banks are relatively safe, and the risk of

insolvency is low.

5.4 Implications and Recommendations

This section has been grouped into three categories. They are implications to practice,

implications to policy, and implications to research.

5.4.1 Implications to Practice

This research will be to help managers to be more cautious when granting loans to

customers by ensuring easy and flexible payment terms for their customers. Management of

Fidelity Bank should conduct thorough background checks to prevent the distribution of loans to

clients that are not able to be repaid. This will help their organization to finance itself and

prevent the bank from facing any legacy debt exposure. This will also enable managers to

monitor the NPL to prevent the possibilities of high NPLs. Also, the research will aid the banks

in knowing how well they are performing in terms of the NPL (more importantly) and the capital

required to operate effectively to handle its credit risk well. This will help employees enhance

their understanding of the relationship between the changes in profitability and non-performing

loans and how it affects the entire organization. This research will inform managers of the

essence of the NPLs and profitability to manage effectively to influence prospective investors of

the organization.

5.4.2 Implications to Policy

The research can be beneficial to developmental agencies as our research emphasized the

financial problems in the banking sector. Developmental agencies can help the banking sector

thrive and can establish more policies to improve and keep track of any progress to be made. The

research has indicated that banks in this study have been able to meet the Basel III requirements
94
which prevent banks from insolvency, thus encouraging the international community to transact

with the various banks even though some did not meet the requirement in some periods.

5.4.3. Implications to Research

The research can serve as reference material to other researchers when conducting their

research. However, our research is limited to five banks in Ghana and this can be a lacuna for

which other researchers may focus on increasing in-depth knowledge in this field.

5.4.4. Recommendations
This study determined the strength of the five local banks using seven key financial ratios

during the period 2015 to 2018. More research can be made on other local banks during a

different period and can be compared to the actual outcomes. Per the conclusion and implications

above, management of the different local banks should effectively and efficiently increase the

use of their asset to generate consistent profits and increase the return on investment. Also, the

banks should be careful regarding the distribution of loans to borrowers that are not able to repay

by reducing the credit terms and gathering enough information concerning the debtors. On the

other hand, even though the general trend of the banks revealed a low NPL compared to the

industry, it remains quite high. The selected banks should reduce the Non-Performing Loan ratio

to avoid the credit risk exposure and must increase their liquidity to maintain a high Loan Loss

Provision ratio which is the amount set aside to solve the inconvenience of non-performing

loans.

95
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