Differential effects of credit risk and capital adequacy ratio on profitability of the domestic banking sector in Ghana
Abstract Examining credit risk and banks' solvency effects on profitability are essential for overall health of the banking sector. However, earlier studies on these nexuses are not instructive given their failure to examine how credit risk and capital adequacy levels impact on profitability for the different types of banks. In addition to re examining the effect of credit risk and capital adequacy ratio (CAR) on profitability of the overall banking sector, this study aims at determining their differential effects on profitability of local and foreign banks within Ghana's banking sector. The study relies on data from 11 banks spanning 2006 2016 while employing the fixed effects estimation approach. Results from the study show a positive and significant effect of credit risk on profitability with huge effect for local relative to foreign banks. However, CAR negatively affects profitability of foreign banks with no apparent impact on local banks.