The Effectiveness of Altman’s Z Score Model in Predicting the Financial Health of Banking Lnstitutions in Ghana.

Abstract

The purpose of this study was to assess the relevance and effectiveness of Altman’s Z Score model in predicting the failures and the financial health of banking institutions in Ghana. The study was conducted using the quantitative research method and the descriptive analytical research design. Drawing on annual financial data from a sample of 5 failed banks and 21 non-failed banks licensed by the Bank of Ghana, the study examined the Altman Z Score model with data set from the 2012 financial year to the 2016 financial year. Analysis of the failed banks revealed a 75 per cent prediction accuracy for the Altman Z Score model five years prior to failure and a 100 per cent prediction accuracy four, three and two years prior to failure. Assessment of the financial health of the non-failed banks for the 2016 financial year, classified 9 banks as distressed, 11 banks into the grey zone and 1 bank as safe. The study concluded that Altman’s Z Score model is an effective model for predicting the failures and financial health of banking institutions in Ghana and recommends its consideration and adoption as the model of choice for assessing the financial health and the possible failure of banking institutions in Ghana.