Bank efficiency and bank competition: empirical evidence from Ghana's banking industry

Abstract

The Ghanaian banking industry has undergone considerably transformation since 1988 as a result of the gradual but steady implementation of financial service reforms. The main purpose of implementing the financial reforms is to build competitive and stable banking industry to enhance banks’ efficiency and ultimately stimulate economic growth and development.

Using annual data spanning from 2001 to 2010, this study investigates the level of bank efficiency and the degree of bank competition and their determinants in Ghana. In addititon, the study also examines the causal relationship between bank efficiency and competition.

The results suggest that Ghana’s banks are, on average, inefficient and competitively weak, but the level of efficiency has increased significantly from 2001 to 2010. This study also reveals that well-capitalized banks in Ghana are pure technically efficient and competitve but are cost inefficient. In addition, bank size influences bank pure technical efficiency suggesting that larger banks are pure technically efficient but have no influence on cost efficiency and competition. There is no indication that fee income has an impact on bank competition. The findings also exhibit that loan loss provision ratio has no effect on bank efficiency and competition in Ghana. Furthermore, this study finds GDP growth negatively influences bank cost efficiency while the rate of inflation positively affect bank pure technical efficiency, but has no impact on bank cost efficiency and bank competition. The results also reveal that lagged cost efficiency tends to persist from year to year. Similarly, market power persistence exists in banking industry of Ghana. The findings also reveal that bank capitalization has a negative impact on bank market power.

There is evidence that cost efficiency positively Granger-causes market power and hence causality negatively runs from cost efficiency to competition indicating that bank cost efficiency precedes competition. However, the reverse causality running from competition to cost efficiency is not supported. The findings also indicate that there is no causal relationship between bank pure technical efficiency and competition in Ghana.