Financial Distress and Financial Performance of Banks in Ghana

Abstract

While the financial performance of commercial banks in Ghana remains critical to economic stability, the impact of financial distress on key profitability indicators – return on assets (ROA) and return on equity (ROE) – has been underexplored. This study investigates the relationship between financial distress and financial performance of commercial banks in Ghana, controlling for firm size and age. Using a quantitative approach within an explanatory research design, panel data from 22 commercial banks (2011–2021) were analysed. Financial distress was measured using the bank-specific Z-score, with fixed and random effect models estimated, and system generalised method of moments (SGMM) for robustness. Findings revealed severe financial distress levels, significantly reducing ROA and ROE. The study accentuated the need for robust risk management and capital adequacy to mitigate distress, contributing to policy frameworks for banking stability in Ghana.