GHANA BANKING SYSTEM AND ECONOMY-STRATEGIC

GHANA BANKING SYSTEM AND ECONOMY-STRATEGIC ANALYSIS FROM GHANA COMMERCIAL BANK

GHANA BANKING SYSTEM AND ECONOMY-STRATEGIC ANALYSIS FROM GHANA COMMERCIAL BANK

Abstract

This paper examines the effect of financial sector reforms on net interest margins of Ghanaian banks during the period 1997-2006. The results show that the degree of risk aversion, high operating costs and uncompetitive nature of the market structure are the main determinants of wider margins. Despite recent developments in the financial landscape, we argue that financial sector reforms have not yet succeeded in bringing about a major decline in the operating costs of banks as more than half of this burden is passed on to customers. This is by far the major significant effect on wider margins in Ghana.

GHANA BANKING SYSTEM AND ECONOMY-STRATEGIC ANALYSIS FROM GHANA COMMERCIAL BANK

Chapter 1

INTRODUCTION

Ghana had disastrous performance on economic growth in the last 20 years. Real per capita income fell by a factor of two during this period. This is reflected in a pattern of trade that continuously deteriorated from 1970 to 1990 in real terms, but started to pick up in recent years, only after it reformed and liberalised the economy and made the exchange rate regime responsive to market fundamentals. Despite these successive reforms and devaluations, the tendency for imbalances has widened even further. Why these reforms in the exchange rate system have not been effective is an interesting issue to investigate.

The exchange rate has been used as a tool for regulating flows of trade and capital by many developing economies, which tend to have persistent deficits in the balance of payments because of a structural gap between the volumes of exports and imports. These economies tend to have inelastic demand for both exports and imports. In addition, the rate of growth of imports is often higher than the rate of growth of exports resulting in rising imbalances in trade. There have been many discussions in the literature about the determinants of real and nominal exchange rates and how these affect the trade and growth in an economy. Should an economy adopt a fixed or flexible exchange rate system? Should it target the real or the nominal exchange rate?



BACKGROUND

The role of financial sector reforms as an engine to economic development has been given much attention over the past few decades. It is largely documented from the economics literature that a liberalised financial system that has a sound and prudent banking practices creates competition, and thus leads to better delivery of financial services. Most countries in Africa experienced various series of financial repression during the 1970s and 1980s, of which Ghana is no exception. During this period, public ownership dominated the banking system, whilst most economies in sub-Saharan Africa could hardly boast of foreign ownership with the exception of Barc1ays and Standard Chartered that were established during the colonial period. Governments determined the structure of interest rates, whilst controls on sectoral allocation of credit were imposed on banks.

Financial sector reforms in Ghana started in the late ...