Determinants of efficiency in the Ghanaian banking industry

Abstract

The twin forces of technological advancement and deregulation have led to financial integration and increased competition in the Ghanaian banking industry. This situation requires an extensive study into efficiency and its determinants in the Ghanaian banking sector, if Ghanaian banks are to survive and compete effectively in the global financial system. This study tries to determine the main determinants of efficiency in the Ghanaian banking industry, using bank specific balanced panel data for 22 banks in Ghana from 2010 to 2016. The study employed Arellano and Bover system generalized method of moment (GMM) estimator to evaluate the determinants of efficiency by regressing micro and macroeconomic variables on two dimensions of bank efficiency: cost and profit efficiency. The results gave an indication that operational cost, credit risk and bank size are the main determinant of cost efficiency in the Ghanaian banking industry; whereas profit efficiency is significantly influenced by only operational cost and credit risk. However, there is weaker evidence on the impact of capital structure, concentration inflation and real gross domestic product (GDP) growth on both cost and profit efficiencies.