The banking sector is a major source of debt finance for most companies in Ghana. The Bank of Ghana in 2017 embarked on a major financial sector clean-up in an attempt to build a more robust financial...

The banking sector is a major source of debt finance for most companies in Ghana. The Bank of Ghana in 2017 embarked on a major financial sector clean-up in an attempt to build a more robust financial system in Ghana. The President his State of the Nation’s Address in January 2021, indicated that GH¢21billion was used in funding the cleaning up exercise. However, some believe that the financial sector clean-up is needless especially considering the amount of money involved in the clean-up. In a recent Board meeting of your company, the directors were divided as to whether to continue to rely on bank financing (debt) as a major source of financing. Some believe it is time to focus on equity financing as a major source of finance.  This is because the license of Wele Bank Ghana Ltd, your bankers had been withdrawn during the financial sector clean-up. As the Finance Director of your company, you have been tasked to present a proposal to the Board of Directors for consideration.  Your proposal must address the following;

1. Explain how continuous reliance on debt financing will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition 2.


2. Following the agency theory of capital structure, discuss how debt financing can be used as a mechanism to deal with the agency problem.