Analysis of the Relationship between Interest Rates and Gearing Ratios of Banks Listed on the Ghana Stock Exchange

Abstract

This study aims at analysing the relationship between interest rates and gearing ratios of banks listed on the Ghana Stock Exchange. The research design was a correlational analysis using time series data. The population for this study consists of all the (10) banks listed on the Ghana Stock Exchange. The data for the study was purely secondary and the selected period ranged from 2012 to 2016, (5 years). The data were analysed with trend and correlation analysis and represented with charts and tables using descriptive statistics. The study findings revealed that of the listed banks the debt-to-equity ratio also known as the gearing ratio had both a minimum and maximum for 0.89 and 0.92 respectively with the expected mean being 0.79 which deviated from the actual mean by 0.18. Comparably the interest rate results showed a minimum and maximum value of 0.04 and 9.56 respectively with their respective mean values of 2.13, also deviating from the actual mean by 1.91. In addition GDP had minimum and maximum values of 3.70 and 9.30 with the mean standard deviation values of 5.51 and 2.26. Based on the findings the study concluded that there is a negative relationship between the gearing ratio and interest rate and a positive relationship between GDP and inflation. Thus, any increase in the interest rate could result in a decrease in gearing ratio. Based on conclusions above, the study recommends that financial managers must strive to obtain debt instrument with lower interest rate in order to boost the long-term financial strength (gearing) of their firms. Also the Bank of Ghana (BoG) should sanitise the monetary environment through their monetary policy regulation to ensure lower or stable interest rate so as to facilitate the strength of the gearing ratio of banks in the economy.