Analyzing the Impact of Liquidity and Financial Leverage on the Performance of Rural and Community Banks in Ghana

Abstract

Rural and community banks have a significant impact on the financial system and economic growth in Ghana. These banks continue to play a vital role in the growth of the rural areas in the Ghanaian communities. While rural and community banks are crucial to the economic development in the country, performance of some of these banks over the past ten years has fallen short of expectations due to inability to meet their short and long term obligations. The study accessed the effect of leverage and liquidity on the performance of the rural and community banks in Ghana. A sample of 120 banks was selected for this study. ROE was employed as proxy for bank’s performance and liquidity and financial leverage represented the independent variables. Pearson correlation and multiple regression were utilized to analyze the secondary data collected from the 120 banks by SPSS. The findings from the study indicate that: 1/ leverage had no statistical significant relationship with performance; 2/ liquidity had a statistical positive relationship with performance; and 3/ leverage and liquidity had statistical significant positive impact on bank’s performance. The results contribute to academic literature and to improve the performance of the rural and community banking system in Ghana.