FINANCIAL AND OPERATIONAL PERFORMANCE OF BANKS IN GHANA: 2004-2012 by Isaac Fordjour B.A., Methodist University College, Ghana. 2006 M.B.A ., University ofNorthern British Columbia, 2014 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION UNIVERSITY of NORTHERN BRITISH COLUMBIA UBRARY Prince George,_B.C. UNIVERSITY OF NORTHERN BRITISH COLUMBIA May 2014 © Isaac Fordjour, 2014 iii ABSTRACT The study examines the empirical and fmancial performance of the leading major banks in Ghana over the period of 2004-2012 based on their financial statements. On the basis of profitability and cost based parameters, the leading six (6) major banks were investigated. The banks were used for the study because they control about 42.5% of the share of industry total assets and 42.2% of the industry's deposits. An empirical study was conducted on the performance of the six (6) major banks based on their profitability margins and operating cost parameters. In analyzing the banks' performance, comparisons were made with major banks from developed countries as well as banks from emerging market economies to verify the Ghanaian banking sector performance with banks from developed and emerging market economies. The study concluded that Ghanaian banks recorded a higher profitability margins than banks from developed economies due to relatively less competition of the banking sector; 42.2% of the share of industry total assets is being controlled by few major banks. Inter-bank performance indicated that foreign owned banks were profitable and efficient than domestic banks and this was due to profitable line of business and economies of scale. Finally, the study further establishes that the banks needed to expand their operations to embrace the large number of the people who are not saving with formal banks which will enhance performance growth and development of the banking sector. Key words: Ghana; banking competition; bank efficiency; bank ownership. JEL Classification Numbers: G21, D43. vi List of Tables Pages 2.1 Structure of the Ghanaian banking sector In 2012 7 3.1 Overview ofbanking concentration in Ghana-2012 22 4.1 Profitability of major banks in Ghana-An International comparison (2008-2012) 27 4.2 Pre-tax profit(% of total assets) of Ghanaian Banks vis-a-vis banks in emerging markets (2003-2012) 28 4.3 Pre-tax profit(% of assets) of Ghanaian banks (2004-2012) 28 4.4 Operating expenses to total Assets of major banksAn international comparison 30 4.5 Ratios of operating expenses to total assets 31 4.6 Cost income Ratio of Ghanaian banks (2004-2012) 32 4.7 Trends of Profitability among Major Ghanaian Banks (2004-2012) 33 4.8 Pre-tax Profit(% of total assets) of Ghanaian banksPre-Global Financial crisis (2004-2007) 34 4.9 Pre-tax Profit(% oftotal assets) of Ghanaian banksPost-Global Financial crisis (2008-20 12) 34 4.10 Cost income ratio of Ghanaian banks Pre-Global Financial crisis (2004-2007) 35 4.11 Cost income ratio of Ghanaian banks Post Global Financial crisis (2008-2012) 35 vii List of Charts Pages 4.1 Trends in profit in Ghanaian banks (2004-2012) 28 4.2 Pre-tax profits of Ghanaian banks by Ownership 29 viii Abbreviations ADB Agricultural Development Bank BBWA Bank of British West Africa BSIC Banque Sahelo-Saharienne pour I' investissent et la commerce DEA Data Envelopment Analysis DMU Decision making unit GDP Gross Domestic Product ERP Economic Recovery Program FIN SAP Financial Sector Adjustment program HFC Home Finance Company IMF International monetary fund Nffi National Investment bank PA Product approach PNDCL Provisional National Defense Council Law SG-SSB Societe General-Social Security Bank SSNIT Social Security and national Insurance Trust UT Unique Trust ix Acknowledgements To God be the Glory for great things He has done; He has given me the opportunity to enhance my academic knowledge. It has been an arduous process, but with God on my side and my strong faith in Him, I have persevered. Secondly, my sincere thanks go to my supervisor, Dr. Ajit Dayanandan. Thank you Sir for everything and may the good Lord richly bless you and give you everlasting grace and good health. Finally, a big thank you to my mother, Mrs. Lucy Fordjour back in Ghana; you called almost every morning just to pray with me, so that my faith will never ever waiver. Thank you Lucy. 1 CHAPTER I INTRODUCTION Ghana has made rapid strides in recent years in reducing poverty 1 and has attained lower middle-income status. However, the economy still relies on agriculture and natural resources (especially oif), but construction and services sectors account for more than half of the country's output (IMF, 2013 3). Most of the financial activities in Ghana revolved around banks. An efficient banking system lowers transaction costs which has an important bearing on the efficiency of financial intermediation (from savers to users of savings). Ghana is one of the few countries which have implemented fmancial sector and monetary policy reforms on a continuous basis. Among the financial sector reforms was the introduction of new banks (especially foreign banks) to improve competition of commercial banking in Ghana as well as enhancing efficiency was a crucial component. Among the monetary policy reforms, introduction of inflation targeting 4 was the most prominent component of reforms. The coverage of the banking system in Ghana in terms of population coverage is very low. The banking penetration ratio, at one bank branch per 54,000 inhabitants, is not high and the formal banking system reaches only 5 percent of the population. The 1 Ghana made rapid strides in poverty reduction- to less than 30 per cent of the population(IMF survey 2013) 2 Off-shore oil production started in late 2010.(1MF Survey 2013) 3 http://www.imf.org/external/pubs/ft/survey/so/20 13/car061213a.htm (Accessed on March 1, 2014). 4 The inflation targeting regime has been successful in reducing the headline inflation from 20 per cent levels in 2004 to 11 per cent in 2010(1MF Survey 2013) 2 geographical spread of banks is also uneven; 35 percent of bank branches are in the Greater Accra Region even though this region represents less than 13 percent of the country's population. About half of all bank branches in the interior belong to the dominant state owned banks which predominantly cover the less affluent rural areas. (Buchs and Mathisen, 2005). Rural and Community Banks have become a main channel for financial inclusion; a sizeable part of the population relies on the services of about 600 microfinance companies, as well as 3,000-5,000 individual susu (informal financial institutions that collects daily, weekly, bi-weekly or monthly contributions as savings on behalf of contributors for collection after a particular period) collectors that serve over half million customers. The Ghanaian banking system witnessed high level of concentration - few banks dominated the market. But in early 1980s, financial sector reforms were implemented under World-Bank-International Monetary Fund ' s Financial Sector Adjustment Programme (FINSAP). This reform package included measures to reduce bank concentration by increasing the number of banks especially the number of foreign-owned banks. Presently, commercial banks account for 75 per cent of the total assets of the financial system, pension funds follow (12 per cent) and insurance sector (4 per cent). Of the 21 commercial banks operating in Ghana as at the end of 2012, 21 of them were private sector and 5 of them state-owned. The three largest commercial banks still account for 55 percent of total assets of the banking sector (lssaq and Bopin, 2012). About 25 percent of total assets and 20 percent of deposits are held by a single state owned Ghana commercial bank. By 2012, all developmental banks were given 3 penmsswn to undertake commercial banking activities - m other words, universal banking system prevails in Ghana. Of the 26 commercial banks that operate in Ghana, 13 are subsidiaries of foreign banks and their share is estimated at 51 per cent of the bank assets. The banking sector has recorded significant growth between 2010-12 (by 60 per cent), with exceptionally high returns on asset and equity in 2012. The cost of credit is very high with lending rates to corporates exceeding 28-30 per cent in 2008-10 and the cost-to-income ratio was high as 61 per cent which raises questions about its efficiency and sustainability. Prior studies on bank efficiency has found that entry of foreign banks has improved operational efficiency of banks in Ghana (Issaq and Bokpin, 2012; Adoteye et. a!. , 2012). However, the puzzling question is why the cost of financial intermediation (proxied by real interest rate to corporate sector lending) remains high, in spite acclaimed bank (operational) efficiency gains. The present study examines this issue by examining trends in performance and efficiency of major (6) banks in Ghana during 2004-2012 and brings an international focus to the debate. These 6 major banks used for the study account for about 43 per cent of the total market share of industry' s assets and industry deposits (Ghana banking Survey 2013, pg 39). The main aim of the present study is to examme (a) Structure, conduct and performance of Ghanaian banks during 2008-2012; (b) Relative performance of the Ghanaian banks vis-a-vis private foreign banks; (c) Operational performance of Ghanaian banks vis-a-vis international trends (our main contribution) (d) Suggest appropriate policy measures to improve the operational efficiency of banks in Ghana. 4 The research study is organised into five chapters. Chapter II reviews the existing literature and sets the hypothesis for empirical investigation. Chapter III describes the data base and methodology. Chapter IV presents the empirical results with regard to ratio analysis. Chapter V summarises the conclusions. 5 CHAPTER II REVIEW OF LITERATURE AND HYPOTHESIS DEVELOPMENT The chapter briefly reviews the literature on bank efficiency: Section 1 provides an overview of the Ghanaian banking system. Section 2 deals with various approaches to measuring the efficiency of banks. Section 3 examines the empirical results of efficient banks from developed economies. Section 4 examines the empirical studies of banks in emerging market economies. Section 5 examines empirical studies in other parts of Africa and finally Section 6 looks at empirical studies in Ghana and sets up the hypothesis for empirical investigation. 2.1 Overview of the Ghanaian Banking system Ghana has experienced strong per capita GDP growth over the last 20 years, consistently outperforming its peers in Africa and elsewhere. Growth has accelerated over the last 5 years with strong performance in 2011, in particular due to investment in oil extraction. Ghana' s financial sector is made up of a diversity of banks, insurance companies, discount houses, fmance houses, leasing companies, savings and loans associations and credit unions (Buchs et a!, 2005). Of all these financial institutions, the banking sector is the largest component consisting of 28 banks of which 8 are publicly listed on the Ghana stock exchange and 20 are private banks at the end of December 2012 (www.bog.gov.gh, see Table 2.1).There are a total of about 137 rural and community banks registered by the Central bank of Ghana as at December 2012 (www.bog.gov.gh). 6 The banking penetration ratio, at one bank branch per 54,000 inhabitants, is not high and the formal banking system reaches only 5 percent of the population. The geographical spread of banks is also uneven; 35 percent of bank branches are in the Greater Accra Region even though this region represents less than 13 percent of the country's population. About half of all bank branches in the interior belong to the dominant state owned banks which predominantly cover the less affluent rural areas. (Buchs and Mathisen, 2005). Rural and Community Banks have become a main channel for financial inclusion; a sizeable part of the population relies on the services of about 600 microfmance companies, as well as 3,000-5,000 individual susu (informal fmancial institutions that collects daily, weekly, bi-weekly or monthly contributions as savings on behalf of contributors for collection after a particular period) collectors that serve over half a million customers. 7 Table 2.1 Structure of the Ghanaian Banking Sector in 2012 Majority Number of Total Year of Name of Branches Assets{US$) incorporation ownershiE Bank 31 5.7 billion+('09) Foreign Access 2008 Bank 91 683 .6 million Local ADB 1965 83.25million 11 Local 2000 ARP Apex 300+ million(' 11 Foreign 20 Bank of 1997 Africa 1 73 billion(' 12) 2007 Foreign Bank of Baroda Foreign 92 £1.490 trillion Barclays 1917 Foreign 11 N/A BSIC Ghana 2008 Local 18 266 million 1990 Cal bank 1 684 million 1812 Foreign Citibank 20billion+ Foreign 78 Ecobank 1990 100 million 2010 Foreign 3 Energy Bank 6.318+ billion Fidelity 2006 Local 31 Local 7 387.5million First 1994 Atlantic 15 140million First Capital 2009 Local Plus Local 157 1.27 billion Ghana 1953 Commercial 22 1.4billion Guaranty 2004 Foreign trust Local 24 234.3 million HFC Bank 1990 Foreign 17 US$1.32 billion International 1996 Commercial Merchant Local 22 390million 1971 1963 Local 27 468.5+ million NIB Local 32 220 million Prudential 1993 bank SG-SSB 1975 Foreign 75 554+ million Stanbic 1999 Foreign 23 360+million('07) 1896 Foreign 35 19.071 billion Standchart 19 144.3+ million UniBank 1997 Local Foreign 32 12.3 billion United Bank 2004 for Africa UTBank 1995 local 24 378.4 million Foreign 26 Zenith 2005 15.22 billion Source: Ghana Banking Survey (2012), p 56 8 The first bank established by the British Colonial Administration in 1896 was called Bank of British West Africa (BBWA). On the onset of it operations, BBWA provided lending and borrowing services to customers (Amidu, 2007). Through the successes that BBWA chalked, another foreign bank known as Colonial Bank commenced operations in 1918, and, in 1925, had merged with another foreign bank under the leadership of Barclay' s group which became a major competitor to BBWA. In furtherance to that, the Bank of Gold Coast which later became the Bank of Ghana (that operated as the issue bank and later as a Central bank) was formed in 1950 together with the Commercial Bank. The Central bank developed faster after independence in 1957 and operated quite competitively rivaling foreign banks operating during the period (Arnidu, 2007). In 1983 when Ghana experienced severe hunger and famine, the Central Government sought the aid of the World Bank and International Monetary Fund (IMF) to implement the Economic Recovery Program (ERP) with its ideals tackling the idea of market economy (Amidu 2007). The Financial Sector Adjustment Program (FINSAP) was introduced as part of the ERP which was to enhance the financial services through legislation and regulatory frameworks by the Government in 1988. As furtherance to this, a new Banking law PNDCL 225 was passed in 1989 to streamline and strengthen the supervisory capacity of the Bank of Ghana (Frimpong, 2010b). According to the Ghana banking law, 1989, it also sought to appeal to suitable indigenous incorporated institutions to apply for licenses to commence banking activities in Ghana. In Amidu 's (2007) opinion, due to poor development and progress in the 9 Ghanaian Banking system in spite of all the potential strenuous legislative and regulatory instruments, the then Bank for Housing and Construction, Co-operative Bank as well as Bank for Credit and Commerce were all liquidated in the year 2000 due to poor financial performance. A new Banking Act of 2004 was introduced in Ghana to repeal the Banking Law of 1989. The Banking Act (673) as well as provisions under the Companies Code of 1963 (Act 179) were to strengthen the Banking services industry in Ghana. Apparently, the laws were meant to reduce Bank failures, increase efficiency and profitability as well as increase in customer satisfaction and confidence in the Ghanaian Banking system (Akoena eta/. , 2009). 2.2 The Concept of Efficiency: Parametric approach vs Non parametric approach Bank efficiency is usually measured by the increase in the size of the bank in terms of its portfolio diversification. It may also be seen as the bank' s ratio of weighted outputs to its inputs. Efficient banks are also characterized by reductions in administrative expenses relative to their total assets. An efficient bank has a higher intermediation efficiency which results in higher performance. The theory of efficiency has been argued through studies done by Debreu (1951 ). In the study by Farrell (1957), he was of the opinion that efficiency of a bank is made up of two components, namely: allocative efficiency and technical efficiency. He continued that allocative efficiency is measured through the decision making unit (DMU) of a bank in its optimal utilization of its inputs with level of prices known. For technical efficiency, Farrell (1957) argued that it is the DMU ' s ability to maximize its outputs from a given level of inputs. 10 The manner in which a bank conducts its business also needs to be addressed because the question here is what constitutes or qualifies to be an input and output? It must be emphasized that it is sometimes difficult to know what constitute a bank' s inputs and outputs, but this can be seen from a banks production or intermediation operations. In the production approach, it focuses on the use of labor, capital, interest, non- interest expense as inputs to generate loans, investments, bank saving, non-interest mcome as outputs. The intermediation approach on the other hand views bank' s transactionary operations with its savers and investors. In this approach banks use inputs such as: borrowings, owner's equity, non-interest income to generate outputs such as non-interest income, loans, investments and deposits with Central bank. In the study, Farrell (1957) concluded that cost efficiency is attained when there is an efficient combination of allocative and technical efficiency which is an indication that cost is minimized when a DMU is technically and allocativelly efficient. Estimating Technical Efficiency In estimating technical efficiency, there are two approaches used by researchers. These approaches are the parametric and the nonparametric. The parametric approach take into consideration the functional forms of variables and then estimate coefficients. Two types of parametric approaches are Stochastic (econometric) frontier approach and the distribution free approach. In their research studies on measuring the efficiency of Turkish Commercial Bank, Jackson et al. (2000) argued that the stochastic frontier approach which is also known as econometric frontier approach, takes into account the functional form of cost, profit, or production relationships that existed among the inputs 11 used, outputs generated as well as the environmental factors. In their study, Jackson et al. (2000) continued by alluding to the fact that the stochastic approach assumes inefficiencies in business follow a distribution pattern that is asymmetrical in nature. They were however of the view that both inefficiencies and errors were taken as being intersecting to the cost' s functions independent variables. The second parametric approach that Jackson et al. (2000) discussed was the distribution free approach, where in their study they were of the opinion that over a particular period of time, there is stability in efficiency differences but in the case of random errors, they gradually average out within a time period. However, in the nonparametric approach, we have the DEA (Data Envelopment analysis) which was used by Debreu (1951) in his studies on resource utilization. Debreu (1951) argued that the approach takes into consideration the bank' s use of various input factors to produce various outputs and takes into account the total goods produced by the best performing banks and use it as a benchmark to estimate an efficient frontier primarily through the use of nonparametric mathematic linear programming technique. Debreu (1951) was of the view that the DEA was an analysis based on the relative measuring of input/output efficiency through DMU by measuring its relative efficiency to an envelopment platform that takes into account the best DMU. According to Frimpong (2010a), DEA does not take into account the input/output prices to measure the best possible production frontier. He argued that the best frontier is identified by using linear-composite of efficient practices where there are specifications of both inputs and outputs. In this research, the DEA will generate a within sample efficiency score that is between a maximum inefficiency (0) and a maximum efficiency 12 (!),whereby a DEA score of0.7 shows that the bank was 30% technically inefficient. In their research on the technical scale efficiencies of Italian banks, Favero and Papi (1995) used DEA approach and they argued that the underlying principle of the approach is the ability of the producer to produce an output with a given number of inputs and this should be replicated by another producer. In that case, the total production of goods and services of various producers should be the same and also be on the same production schedule. According to Frimpong (2010a), when all the efficiency values ofDMUs in any sample is generated, a line that fits the best practice in a DEA model can be constructed and used as a benchmark in evaluating each individual unit. Frimpong (2010a) opined that in a DEA model a bank or for that matter, a producer is inefficient if the generated line is better than that of the producer by either making more units of products with the same input variable or making the same output units as the producers with a less input variable. In using the nonparametric approach, Hauner and Pieris (2005) argued that it is usually assumed that returns to scale operation is constant. 2.3 Empirical studies (Developed economies) The banking sectors of most developed economies (North America and Europe) are relatively efficient with varieties of banking activities. There is substantial competition in developed economies coupled with high degree of bank regulation that benefit banks to operate efficiently to strengthen the financial sectors of their economies (Isik et al., 2003). The banking sector of most developed economies is the driver of growth and development of these economies (Claessens et al. 2005). Due to flexible deregulatory 13 banking systems in developed economies, foreign banks are able to establish branches in other countries which enhance foreign direct investments (FDis) and also create demand for services needed by international community. However, the developed banking economies have not being able to take advantage of opportunities across borders as quickly and effectively as they should. In most developed economies like North America and Europe, foreign ownership of banks has been only 10% of total assets. (Akhavein et a/.1997). In most developed economies, there have been various studies to evaluate the technical efficiencies of banks using the DEA approach. Most of the statistics generated from evaluating bank efficiency are generally compared with other bank performance in other developed economies (Akhavein eta/. 1997). In a study of banks efficiency in Scandinavian countries (Sweden, Norway and Finland), Berg et a/. (1993) using the common frontier approach concluded that Swedish banks were operating at 0 .78 technical efficiency, with Norway at 0.57 and Finland 0.53 in that order. In the case of Berger and Humphrey (1998), their study on bank efficiency in US and 14 other nations, resulted in an estimated mean of 0.79 technical efficiency mean score of 0.84, which showed a technical inefficiency of 0.16. A Study to evaluate the efficiency of commercial banks m 10 EU nations (Belgium,Spain,theNetherlands,UnitedKingdom,France,Germany,ltaly,Denmark,Portugal and Luxembourg) concluded that banks from Spain, Portugal and Denmark were relatively efficient so they will operate efficiently in other sample EU nations.(LozanaVivas et. a/. , 2001) 14 Haslem (1968) concludes that differences in management' s objectives influence the bank' s efficiency. Haslem and Longbrake (1971) used operating ratios in evaluating differences in the efficiency of various banks. Isik et al. (2003) evaluated the performance of banks in Turkey following the country' s liberalization and argued that improved bank efficiency is primarily driven by efficient resource management practices rather than improved operational capacity. In their research, Claessens et al. (2001) found out that foreign banks tend to operate at higher interest margins, lower overhead expenses and higher profitability than domestic banks in most developed economies, whiles the opposite is true in developing countries. Bank performance, measured through the efficiency and profitability, is normally related to the total performance of the fmancial sector of the economy and effective reforms that regulate it (George et al 2007). Efficiency is normally seen from the rate of output from bank staff and employees. Various researchers have used various approaches to measuring a bank' s efficiency. For instance, Sherman and Gold (1985) as well as Ferrier and Lovell (1990) used the production approach (P A) where in their estimations, banks were the producers of deposits and loans. In their analysis, total bank efficiency, measured through production take into account deposits and loans that are efficiently processed. According to Biekpe (20 11 ), the intermediation approach where banks should be the mobilizers of surplus funds which they repackage into loans is the best measure of efficiency. Healthy competition among banks in the financial sector also enhances efficiency and also reduces the costs associated with operations. Besides these methods propounded by various researchers in measuring bank efficiency, other measures are: 15 bank margins, transactionary costs as well as profits extracted from the company's financial data. 2.4 Empirical studies (emerging market economies) After deregulation and economic reforms in most emerging economies during the recent decades, bank efficiency has become an important performance measurement to assess the impact of the reforms. Most emerging economies in Asia have undergone structural reforms in their financial sectors which has greatly enhanced their banking sector efficiency (Kurnbhakar et al., 2003). After the IMF undertook some restructuring on weak banks in emerging economies like Indonesia, Phillipines and Thailand in the mid-2000s, Arif and Can (2009) undertook a study on the efficiency of banks in emerging economies using DEA approach. In the study, Arif and Can (2009) concluded that in emerging economies, efficiency of the restructured banks has not improved better than the pre-IMF intervention period. Morgono et a!., (20 10) undertook a study on the efficiency of banks in the pre-and post-Asian economic crisis in 1997. They were of the view that cost efficiency of banks in Indonesia improved in the post crisis era, but, at a decreasing rate than the pre-crisis era. There had been studies conducted on the effects of reforms and deregulation on the banking sector in Pakistan. In evaluating the efficiency of banks in Pakistan, Qayyam et al., (2007) wanted to assess the impact that reforms have had on the banking sector in Pakistan using the Data Envelopment Analysis (DEA) approach. In their analysis, 16 Qayyam eta/. , (2007) were of the opinion that banks that have been privatised during the reforms were more efficient than public banks. In a recent study by Akhor (20 10), he concluded that the average level of bank efficiency in Pakistan was low and that the foreign banks operating in the country have a higher level of efficiency than domestic banks. In most emerging markets, there are many studies that have concluded that fmancial sector reforms enhance banking sector performance, and also privatized banks perform best than both public and foreign banks (Ahmed 2006). Efficiency researches on public banks in the Asian banking system are limited; however, in their research on the Indian banking sector between 1986 and 1991, Bhattacharya, Lovell, and Sahay (1997) concluded that public sector banks in India were more efficient and profitable, operating efficiently in a deregulated environment; nonetheless, it should be emphasized these studies related to the pre-deregulated era. In a research undertaken by Ataullah and Le (2002) regarding the efficiency of the three groups of bank ownership in India and Pakistan, the researchers used financial ratio analysis and non-parametric operational efficiency methods. However, Rezvanian et a/. , (2003), concluded that public Indian banks are less efficient and profitable than both foreign and private banks. In the opinion of Kumbhakar and Sarkar (2003) as well and Saha and Ravisankar (2000), Indian public banks with high cost efficiencies are also highly profitable. According to Sathye (2003), public banks in India are more efficient than both foreign banks and private banks. From the analysis undertaken by Sarkar, Sarkar, and Bhaumik (1998), there were huge differences in the performance of public sector banks and private sector banks in India. In the case of 17 Shanmugam and Das (2004), state-owned Indian banks and foreign-owned banks in India perform better than the privately-owned Indian banks. Other research study came to the final conclusion that greater efficiency enhances bank performance (Rezvanian et al., 2003). Yu and Luu (2003) were of the opinion that the efficiency of Taiwanese banks was due to mergers rather than expansion through the opening of new bank branches. 2.5 Empirical Studies on Bank Efficiency in Mrica During the latter parts of 1980s and the beginning of 1990s, many African countries enacted financial sector reforms to enhance Banking efficiency (Brownbridge and Harvey 1998). Various researchers have concluded that there is a positive relationship between efficient banking competition and the efficiency and profitability outcomes. According to Berger and Humphrey (1998), efficient competition through market power leads to lower cost efficiency. This result was collaborated by Casu and Girardone (2006), who found out through their extensive research that there was a positive relationship between market power and efficiency. According to Turk-Ariss (2009), an improvement in market power promotes efficiency. According to the study by Nagalande (2003), the rate of banking sector efficiency is regarded as a vital push towards macroeconomic stability. Hartmann (2004) however was of the view that banking efficiency is a tool for economic growth and an essential factor to the effectiveness of monetary policy. It should be emphasized that there is a paucity of research on the study of the efficiency of African banking economies. Oberholzer and Westhaizen (2004), in their research about the efficiency of ten ( 10) regional branches of a South African bank, used 18 the Data Envelopment Analysis (DEA) to investigate the bank' s performances. South African banks are very competitive; hence their operations enhance the banking industry and the economy in general. Most of these banks are engaged in individual and corporate bodies (Claessens and Laeven, 2005). They also help the central government to undertake efficient monetary policies by serving as conduits to enhance the growth and development of the economy (Van Leuvensteijn et al. , 2008). However, in the view of Hanner and Peiris (2005), the efficiency of Ugandan banks was due to improved banking sector reforms undertaken by the Central Bank of Uganda. The process of evaluating a bank' s efficiency is of paramount interest to shareholders, policy makers, and fellow competitors in the banking industry, tax agencies, employees and potential investors. Bank' s efficiency and profitability helps managers to know how well their organizations have done over a period of time and also to be able to forecast into the future. Financial regulators are also very interested in appraising the overall performance of banks in the banking industry in order to ensure the safety and continuous growth as well as enhance the preservation of bank confidence in the banking system. Since banks are either privately or publicly owned, their main core business of providing financial services in the future anticipation of accruing returns on these services would enhance shareholders wealth. 2.6: Empirical Studies of bank efficiency in Ghana and hypothesis development One of the prime areas of research in banking is the relationship between banks' performance and structure of the market. In markets with high concentration or 19 dominance of few banks (oligopoly), banks are likely to achieve higher profits. This leads to our first hypothesis: Hl: Financial Performance is positively related to market concentration. Researchers that have used nonparametric approach in their studies were Akoena et al (2009), Frimpong (2010a) and Adoteye et al. , (2012). Akoena et al. , (2009) in their analysis of efficiencies of banks in Ghana using DEA concluded that smaller banks as a group were on an even scale like large banks as a group in terms of technical efficiencies (T.E.). However, they concluded that smaller banks as a unit have larger scale efficiencies than larger banks. From their studies, the technical efficiency (T.E.) of smaller banks had a DEA score 0.98 and that for larger banks were 0.97. In the case of Frimpong (2000a), he investigated the efficiency of Ghana Banks in 2007 using DEA, and estimated the average TE in the banking sector to be 0.74.This indicated that the average inefficiency in the banking sector was 0.26. In his study, he found out that private domestic banks were more efficient, followed by foreign banks then public banks. This leads to our second hypothesis H2: Performance of banks in Ghana will vary with ownership; private sector banks will be more efficient than public sector banks. Adoteye et al., (2012) investigated the technical efficiency of Ghanaian banking industry and the effects of foreign banks between the period 2000 - 2008 using a DEA approach. In their study, they concluded that only banks with a TE score of 1 were considered efficient and banks with TE score of less than 1 were considered as inefficient. In their analysis, no bank was efficient in 2000 as their TE scores were less 20 than 1. In their conclusion, the average TE score for foreign banks was 0.84 and that for domestic banks was also 0.84. In the period between 2005-2008, foreign banks average TE score was 0.71 and that for domestic banks was 0.78, hence the Ghanaian banking sector within the period 2000-2008 being relatively inefficient. 21 CHAPTER III DATASOURCEANDMlliTHODOLOGY This chapter presents the data source and methodology used in the empirical investigation. Section 1 discusses the data sources and Section 2 explains the methodology used in empirical investigation. 3.1 Data source Most of the banks in the Ghanaian banking sector are not listed on the Ghana Stock Exchange. The data on fmancial parameters for the study was taken from S&P Capital IQ. Key financials from the profit and loss account as well as the balance sheet was extracted from S&P Capital I.Q. during 2004-2012. Financial data are complex, not easy to understand and many times not very useful to the analysts and researchers. By analyzing the complex financial data (from balance sheet and profit and loss account) and deriving meaningful ratio's one can derive clarity and analytical insights into the working ofbanks (Fraser and Ormiston, 2013; Higgins, 2007). There were a total of six (6) major banks used in the study because they control a total of 42.2% of the total industry assets as well as 42.5% of the total industry deposits (Ghana Banking Survey, 2013 , pp. 39-40). 22 Table 3.1: Overview of Banking Concentration in Ghana-2012 Major banks in Ghana % of Industry total assets % of Industry total deposits Ecobank Ghana Ltd 11.4 13.0 Ghana Commercial Bank 11.0 11.3 Standard Chartered Bank 8.7 8.2 SG-SSB Bank 3.9 4.2 CAL Bank 4.3 3.8 HFC Bank 2.2 1.7 Total Banking System 42.5 42.2 Source: Ghana Banking Survey (2013), pp. 39-40. 3.2 Methodology The fmancial ratio approach was used to investigate the performance of major banks in Ghana during 2004-2012. The annual audited fmancials for the years 2004-2012 were collected from S&P Capital IQ . The periods from 2004-2012 constitute a period where the banking sector experienced the entry of many foreign owned banks as well as the world economic crisis. From the income statements and balance sheets of the major banks in Ghana, the relevant fmancial ratios were generated from the S&P Capital IQ software. Further statistical analysis were done by comparing average major Ghanaian banks ' performance to major banks in emerging markets, as well as major banks in developed countries. 23 There were also inter-bank average compansons between foreign owned Ghanaian banks and domestic owned Ghanaian banks. The study executes three tests and that was (i) the profitability of major banks in Ghana in comparison with international (developed and emerging market) trends, (ii) profitability of major Ghanaian banks by ownership (foreign banks and domestic banks), and (iii) profitability of major banks in Ghana. There were two (2) performance parameter ratios used for this study on major banks in Ghana, and these are the profit and cost-based parameters. Profit based parameters show the ability of the Bank to achieve maximum profits with a given level of outputs. The higher the Profit margin (Profitability), the more profit efficient the bank will be. In the case of profitability, numerous researchers have come to the conclusion that it depicts management's efficiency in enhancing higher growth and returns on capital. The profit-based ratios used to investigate major banks' performance in Ghana during 2004-2012 were; In computing the pre-tax profit of major banks in Ghana during 2004-2012, we investigated how the banks were using their total assets to generate total revenue. During the period of study, the pre-tax profit of the major banks each year was computed to evaluate the trend to know whether the bank is profitable or not. Based on the financial figures extracted from S&P Capital IQ, the pre-tax profit was computed as: Gross profit before tax (total revenue) X lOO%. Total assets 24 The gross profit before tax is the whole excess revenue the banks make in terms of income from interest loans, investments, and profit before corporate tax deductions. The total assets are both total fixed and current assets of the banks. The next profit parameter used to investigate the performance of major banks in Ghana during 2004-2012 was the net profit to average assets. The ratio of net profit to average assets was an indication of how the major banks in Ghana use their total assets to generate their net profit. The ratios of the banks over the years give an indication of whether the banks were performing profitable relative to previous years and other banks performance or they performed badly. An increasing figure is an indication that the banks is doing profitably well. The net income to average assets was computed as: Net Income Total assets -----xlOO% The net income of the firm is the total revenue or income the firm makes within the years less the total expenses. The higher the banks net income, the higher the rate of net profit to average assets, and the bank' s profitability. In the final profitability ratio used for this study, we investigated how the bank uses its total assets to generate its gross income. The gross income to total assets ratio is another indicator of the profitability of Ghanaian banking sector. This shows that the major Ghanaian banks are efficiently using their assets in income generating activities to improve their business activities. It was computed as: Gross Income Total assets -----xlOO% In any banking industry profitability is an indication that the banks are operating efficiently and the additions to incomes and operating profits are positive. This gives the banks the financial capacity to expand and increase its market share. However, the 25 efficiency of the major banks in Ghana was also investigated to know whether the banks were operating at their least cost of scale. The efficiency of any bank has a direct correlation with profitability. The cost-based parameter used was the cost to income ratio which is an indication of how the bank generates its income and the cost associated with that. A bank that incurs higher costs in generating incomes is perceived to be relatively less efficient, and bank with a lower income generating cost ratio is seen as relatively efficient and a profitable bank; in conclusion, the lower the ratio, the more efficient the bank. Cost Income Ratio = Operating expenses . . x 100% 0 peratmg mcome The operating expenses of the major banks mostly consist of expenses the banks incur through operational and administrative activities. Most of the expenses are incurred on staff wages, employee benefits, pension schemes, etc. The ratio informs the banks on the rate at which its cost is changing in relation to the income generated by the banks. 26 CHAPTER IV FINANCIAL AND OPERATIONAL PERFORMANCE OF GHANAIAN BANKS (2004-2012) This chapter analyses the performance of Ghanaian banks in an international perspective during 2004-2012. Section 1 discusses the overall performance of Ghanaian banks as compared with major developed and major emerging market economies. Section 2 examines the operating expenses of Ghanaian banks vis-a-vis major developed and emerging market economies. Section 3 analyses the general trend of profitability among major Ghanaian banks and section 4 examines the trend of profitability and cost-incomeratio among major Ghanaian banks before and after the global financial crisis. Section 5 summarizes the findings of the chapter. 4.1. Performance of Ghanaian Banks - An International Perspective. The average pre-tax profit of Ghanaian banks at 4 percent to 5 percent during 2008-2010 is higher than bank profitability in advanced countries (Table 4.1 ). Even when compared to other emerging market economies like India, China, Indonesia, Malaysia etc., profitability ratios of Ghanaian banks is considerably higher (Table 4.2). Most of the Ghanaian banks had relatively high profitability ratios (see Chart 4.1). The largest banks show highest profitability ratio reaping the benefits of economies of scale and being price makers. The ability to be price makers is related to the structure of the banking market. Few large banks (around 6) dominate the market and concentration level in terms deposits, loans and assets is very high. Thus, the large profitability of large banks can be associated with concentration levels and this validates Hl. Ownership-wise, most of the 27 foreign banks had relatively higher profitability as compared with Ghanaian banks (Table 4.3) Table 4.1 Profitability of Major Banks in Ghana-An International Comparison (2008-2010) Australia(4) Pre-tax Profits(% oftotal assets) 2009 2008 2010 1.14 1.01 0.93 Austria (2) 0.67 0.63 0.46 Canada (5) 1.01 0.72 0.47 France (3) 0.45 0.18 0.04 Germany(4) 0.17 -0.11 -0.46 Italy (3) 0.37 0.36 0.27 Japan (10) 0.30 0.29 -0.16 N etherlands(2) -0.04 -0.15 -0.61 Spain (4) 0.95 0.88 1.07 Sweden (4) 0.61 0.34 0.67 Switzerland(4) 0.66 0.21 -1.75 United Kingdom (7) 0.25 -0.04 -0.05 United States (7) 1.02 0.42 0.28 Ghana (6) 4.06 3.56 5.21 Countries Note: Figures in brackets are numbers of banks covered in the estimation period. Source: (1) Bank for International Settlement (2011) pg. 71 and (2) For Ghana S&P Capital IQ. 28 Chart 4.1 Trends in Bank Profitability in Ghanaian Banks (2004-2012) Pre-Tax Profits (2004-2012 10 . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - +---------------------------------8 +---------------------------------9 7 +-~------------------------------. ~6 +--tll---1----1------------=-=--1---1-..... ~ "i' !!! 5 ~---1--1--1--1-----.....-----+--l--1-::--l­ • CAL Bank Ltd • Ecobank Ghana Ltd • Ghana Commercial 4 .,..________ c.. • HFC Bank Ghana Ltd 3 • SG-SSB Bank 2 • Standard Chartered 1 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Years Table 4.2: Pre-tax Profits(% of assets) of Ghanaian Banks vis-a-vis Major Emerging Countries (2003-2012) Indonesia Malaysia Years Ghana India China Korea 1.66 2003 3.75* 1.00 0.49 1.10 0.02 1.56 2006 3.20 0.88 0.62 0.99 0.98 2.60 1.20 2009 2.73 1.01 0.86 0.60 2.60 2012 3.80 0.98 1.28 1.60 0.09 *relate to 2004. Source: (1) FIBAC 2013 and (2) For Ghana S&P Capital IQ. Table 4.3:Pre-tax Profits (% of assets) of Ghanaian Banks (2004-2012) Ownership 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foreign banks 6.20 5.56 5.29 4.77 4.95 5.31 5.49 5.07 5.60 Domestic banks 3.95 3.07 3.12 3.13 2.82 1.84 2.63 2.05 4.82 Source: S&P Capital IQ. 29 Chart 4.2: Pre-Tax Profits of Ghanian Banks by Ownership- 2004-2012 Pre-Tax Profit • Foreign banks • Domestic banks 2004 2005 2006 2007 2008 2009 2010 2011 2012 Years In general, foreign banks in Ghana have a relatively higher profitability than domestic banks, thereby validating hypothesis 2 (Table 4.3 and Chart 4.2). Does the relatively high profitability of banks in Ghana reflect higher revenue stream and bemer productivity?. This is discussed in the next section. The Ghanaian banking industry as discussed in the earlier chapters has high concentration ratio. The market share of six banks in total assets of the banking industry has decline (from around 65 per cent in 2005 to 48 per cent in 2012), in part reflecting the licensing of several banks. 30 4.2. Operating/Cost Expenses of Commercial Banks in Ghana In this section, we examine the operating expenses of banks in Ghana vis a-vis banks in other emerging markets and developed countries. Table 4.4 Operating Expenses to total Assets of major Banks in Ghana- An International comparison (2008-2010). Australia( 4) Operating 2010 1.24 expenses 2009 1.20 2008 1.21 Austria (2) 1.94 2.00 2.00 Canada (5) 1.87 2.04 1.69 France (3) 0.63 1.10 0.97 Germany(4) 1.19 1.00 0.73 Italy (3) 1.70 1.79 1.86 Japan (10) 0.49 0.86 0.83 N etherlands(2) 1.39 1.01 0.90 Spain (4) 1.56 1.49 1.40 Sweden (4) 0.88 0.95 0.90 Switzerland(4) 2.13 2.10 2.57 United Kingdom (7) 0.90 1.18 0.99 United States (7) 2.94 2.79 2.45 Ghana (6) 4.35 5.48 1.03 Source: (1) Bank for International Settlement (2011) pg. 71 and (2) For Ghana S&P Capital IQ. Notes: Same as in Table 4.1. 31 Table 4.5: Ratios of Operating Expenses to Total Assets Years Ghana India 2.24 2003 7.31 * 2006 7.11 2.13 2009 7.12 1.71 2012 6.15 1.65 • Relate to 2004 . China 1.63 1.43 0.92 0.80 Indonesia 3.39 3.97 2.85 3.29 Malaysia 2.07 1.91 1.27 1.27 Korea 3.74 2.07 1.20 1.05 Source: FffiAC 2013 ad for Ghana S&P Capital IQ. Ghanaian banks have the highest operating expense ratio among emerging market economies (Table 4.5) and developed countries (Table 4.4). The average operating expense ratio of 6 to 7 per cent during 2003-2012 is nearly four times that of emerging market economies and developed countries. Banks in Ghana face huge funding cost. The cost-to-income ratio of major Ghanaian banks increased from 41 per cent in 2004 to 67 per cent in 2011 , and finally to 58 per cent in 2012 (Table 4.6). The increase in cost-income ratio was because of (i) the practice of benchmarking the corporate deposit rates to T -bills (inflation is high in Ghana- 8 to 12 per cent), (ii) a deposit structure that includes a large share of term deposits that lock interest rates for periods of time, (iii) high overheads and (iv) high nonperforming loans (around 15 per cent) . Because of this, banks in Ghana have to maintain high interest margins. 32 Table 4.6 Cost Income Ratio of Ghanaian Banks (2004-2012) Banks CAL Bank Ltd 2004 55 .28 2005 62.13 2006 57.32 2007 2008 2009 68 .04 65 .10 72.00 2010 2011 70.60 62.81 2012 42.17 Ecobank Ghana Ltd 53.25 54.31 53 .52 52.25 54.71 49.81 48.47 53.98 51.34 Ghana Commercial Bank 69.69 77.50 68.64 67.97 66.43 84.83 73.32 87.67 52.97 HFC Bank Ghana Ltd 67.85 86.44 79.59 72.34 72.83 81.63 79.62 82.41 78.82 SG-SSB Bank 61.29 66.88 65 .95 69.92 66.28 67.37 67.35 67.70 64.06 Standard Chartered Bank 48.73 51.40 48.92 52.96 58.99 50.38 52.76 52.30 61.96 Ave. of all banks 59.35 66.4 63.91 64.0 67.6 65.3 67.8 58.5 62.32 Source: S&P Capital IQ. 4.3. General Trends of Profitability among Major Ghanaian Banks (2004-2012) In this section, we examine the general trends of profitability among major Ghanaian banks during the period 2004-2012.Table 4.7 reflects the general trends of profitability among major banks in Ghana during the periods of2004-2012. During the period, Standard Chartered Bank was the relatively higher performing bank with the pretax profit increasing from 6.92% in 2004 to 7.14% in 2012, higher than the total bank average of 5.67% in 2004 and 5.21% in 2012, respectively. The lowest performing bank was HFC Bank with a pre-tax profit falling from 2.96% in 2004 to 2.16% in 2012, respectively. 33 Table 4.7 Trends of Profitability among Major Ghanaian Banks (2004-2012) Banks CAL Bank Ltd. 2004 5.11 2005 4.34 2006 4.22 2007 2.93 2008 3.31 2009 2.22 2010 2011 2.36 2.73 2012 5.75 Ecobank Ghana Ltd. 5.54 5.41 5.26 4.51 4.98 5.44 5.91 4.93 5.64 Ghana Commercial Bank 3.76 3.68 4.87 4.07 3.58 1.31 3.33 1.39 6.55 HFC Bank 2.96 1.18 1.46 2.4 1.57 1.98 2.19 2.03 2.16 SG-SSB Bank 6.13 4.84 4.41 3.77 5.07 4.59 4.09 4.05 4.36 Standard Chartered Bank 6.92 6.44 6.21 6.03 4.81 5.91 6.47 6.24 7.14 Ave. of Banks 5.07 4.32 4.41 3.95 3.89 3.58 4.06 3.56 5.21 Source: S&P Capital IQ. 4.4. Performance of Ghanaian Banks during Pre and Post Global Financial Crisis In this section, we examine the pre-tax profit of banks in Ghana before the recent global financial crisis and the impact on the Ghanaian banking sector after the Global economic crisis. Table 4.8 and 4.9 respectively reflect profitability of Ghanaian banks during pre and post fmancial crisis period. The pre-tax profit of Ghanaian banks should not record any significant deceleration in the post-financial crisis period (2008-2012) . The average pre-tax profit fell from 4.44% in 2004-2007 to 4.06% in 2008-2012. Similarly the cost-to-income ratio also did not show much change (Table 4.10 and 4.11 ). 34 Table 4.8 Pre-tax Profit(% of total assets) of Ghanaian banks before the Global Financial Crisis (2004-2007) Banks CAL Bank Ltd 2004 5.11 2005 4.34 2006 4.22 2007 2.93 Average (2004-2007) 4.15 Ecobank Ghana Ltd. 5.54 5.41 5.26 4.51 5.18 GhanaCommercial Bank 3.76 3.68 4.87 4.07 4.10 HFC Bank 2.96 1.18 1.46 2.40 2.00 SG-SSB Bank 6.13 4.84 4.41 3.77 4.79 Standard Chartered Bank 6.92 6.44 6.21 6.03 6.40 5.07 Ave. of Banks Source: S&P Capital IQ . 4.32 4.41 3.95 4.44 Table 4.9 Pre-tax Profit(% of total assets) of Ghanaian banks post Global Financial Crisis (2008-2012) Banks CAL Bank Ltd 2008 3.31 2009 2.22 2010 2.36 2011 2.73 2012 5.75 Average (2008-2012) 3.27 Ecobank Ghana Ltd. 4.98 5.44 5.91 4.93 5.64 5.38 Ghana Commercial Bank 3.58 1.31 3.33 1.39 6.55 3.23 HFC Bank 1.57 1.98 2.19 2.03 2.16 1.99 SG-SSB Bank 5.07 4.59 4.09 4.05 4.02 4.36 Standard Chartered Bank 4.81 5.91 6.47 6.24 7.14 6.11 Ave. of Banks 3.89 Source: S&P Capital IQ. 3.58 4.06 3.56 5.21 4.06 35 Table 4.10 Cost Income Ratio of Ghanaian banks before the Global Financial Crisis (2004-2007) Average (2004-2007) 60.69 Banks CAL Bank 2004 55.28 2005 62.13 2006 57.32 2007 68.04 Ecobank Ghana Ltd. 53 .25 54.31 53.52 52.25 53.33 GhanaCommercial Bank 69.69 77.50 68.64 67.97 70.95 HFC Bank 67.85 86.44 79.59 72.34 76.56 SG.SSB Bank 61.29 66.88 65.95 69.92 66.01 Standard Chartered Bank 48.73 51.40 48.92 52.96 50.50 Ave. of Banks 59.35 Source: S&P Capital IQ. 66.40 62.32 63.91 63.01 Table 4.11 Cost Income Ratio of Ghanaian banks after Global Financial Crisis (2008-2012) Banks 2008 2009 2010 2011 CAL Bank 65.10 72.10 70.60 62.81 Average (20082012) 42.17 62.54 Ecobank Ghana Ltd. 54.71 49.81 48.47 53.98 51.34 51.66 GhanCommercial Bank 66.43 84.83 73 .32 87.63 52.97 73.04 HFC Bank 72.83 81.63 79.62 82.41 78.82 79.06 SG SSB Bank 66.28 67.37 67.35 67.70 64.06 66.55 Standard Chartered Bank 58.99 50.38 52.76 52.30 61.96 55.28 Ave. of Banks 64.00 Source: S&P Capital I.Q. 67.60 65.30 67.80 58.50 64.68 2012 36 4.5. Conclusions Ghanaian banks have recorded tremendous (double-digit) growth in the last decade. But still foreign banks dominate the market. There are six major banks which account for nearly one-half of the total assets of the banking system. The high concentration of banks has resulted in banks generating very high profits (compared to their peers in developed and emerging market economies) and can be attributed to high concentration level (hypothesis 1). Substantial part of the financial intermediation is still done by non-bank institutions including micro-finance institutions. The performance of foreign banks was comparatively better than that of domestic banks (predominantly state-owned) thereby validating the hypothesis that ownership matters in fmancial performance. The operating cost and cost to income ratio of Ghanaian banks are one of the highest in the world reflecting (i) the practice of benchmarking the corporate deposit rates to T-bills (inflation is high in Ghana- 8 to 12 per cent), (ii) a deposit structure that includes a large share of term deposits that lock interest rates for periods of time, (iii) high overheads and (iv) high non-performing loans (around 15 per cent). Because of this, banks in Ghana have to maintain high interest margins. The performance of Ghanaian banks during in the post-global financial period was not much impacted. The world experienced liquidity crises at the latter part of 2008, and banks in America, Europe and other parts of the world were seriously affected. Banks in Ghana however, appear not to have been much affected by the crises. As competition in the Ghanaian banking sector intensifies as indicated by the 2013 IMF report, eventually profitability of the banks will also reduce because new banks have entered the market with the objective of gaining market share and making profit at the expense of the market share and profitability of the incumbent banks in the industry. 37 CHAPTERV CONCLUDING OBSERVATIONS The commercial banks in Ghana are important partners to economic development of the country. They transfer temporary idle funds from surplus units to the deficit units for a fee. By this they are able to encourage the savings culture of the various economic units, and thereby accumulate funds for both investment and consumption. Thus, banks influence the aggregate demand of the country that sparks off the multiplier effects on employment and income in the economy. There had been twenty eight commercial banks in Ghana by 2012 (Table 2.1 ). Many of the existing banks are also opening more branches in the country. Ghana Commercial bank had the largest contribution to bank branches in Ghana during the study period. The result has been a relatively keen competition and efficiency in the financial sector. A number of studies have found a positive relationship between competition and efficiency, and between competition and the rate of productivity growth. Banks simply have to operate at high level of efficiency to ensure their survival. The Ghanaian banking system has witnessed steady growth in assets and profitability. The structure of the banking system is still dominated by 6 major banks which account for nearly one-half of the total assets of the banking system. The Ghanaian banks are dominated by foreign-owned banks; British banks dominate the banking market. The domestic component of the banking system is still dominated by state-owned banks. The state has controlling interest in five commercial banks through shareholding by government and the state controlled pension fund - Social Security and National 38 Insurance Trust (SSNIT).Rural and Community Banks have become a main channel for financial inclusion; a sizeable part of the population relies on the services of about 600 microfinance companies, as well as 3,000-5 ,000 individual susu (informal fmancial institutions that collects daily, weekly, bi-weekly or monthly contributions as savings on behalf of contributors for collection after a particular period) collectors that serve over a half a million customers. The study examined the performance of major banks in Ghana during 2004-2012. The parameters of the analysis were categorized into profitability based and cost-based. The profit based parameters were pre-tax profits, net profit to average assets ratios, and gross income to average assets ratios. The cost-based parameter was the cost-to-income ratio. The fmancial variables were specifically chosen to measure their impact on the performance of major banks in Ghana during 2004-2012. The six (6) major banks were chosen because they form about 42.5% of the banking industry' s total assets and also receive about 42.2% of the banking industry' s total deposits (Ghana Banking Survey 2013, pp. 39-40). Although the banking sector has experienced high growth, concentration ratio is still very high in spite of allowing new players into the market. The high concentration of banks has resulted in banks generating very high profits (compared to their peers in developed and emerging market economies) and can be attributed to high concentration level (hypothesis 1). Substantial part of the fmancial intermediation is still done by nonbank institutions including micro-finance institutions (the so-called shadow banks) 39 The performance of foreign banks was comparatively better than that of domestic banks (predominantly state-owned) thereby validating the hypothesis that ownership matters in financial performance. The operating cost and cost-to-income ratio of Ghanaian banks is one of the highest in the world reflecting (i) the practice of benchmarking the corporate deposit rates to T-bills (inflation is high in Ghana- 8 to 12 per cent), (ii) a deposit structure that includes a large share of term deposits that lock interest rates for periods of time, (iii) high overheads and (iv) high non-performing loans (around 15 per cent). Because of this, banks in Ghana have to maintain high interest margins. This has substantial bearing on real interest rates in Ghana- which is one of the highest among emerging market economies. This adversely impacts private sector investment and future economic growth. A remedy to reduce high real interest rates lies in reducing inflation and bringing fiscal deficit down (which presently is about 12 per cent of GDP). Increasing competition through new bank licensing so far had only marginal impacts. A sustainable reduction in cost-to-income ratio calls for substantial improvement in productivity through the use of information technology. The study found out that indeed the Ghanaian banks has been expenencmg profitability during these years of global fmancial crisis in spite of many challenges facing financial institution around the world as reported by IMF country report 2013 . 40 References Adoteye, N. A. S., Aboagye, Q.Q.A. & Gemegah, A. (2012). Technical efficiency of the Ghanaian banking industry and the effects of the entry of foreign banks. Journal ofAfrican Business, 13, 232-243. Ahmed, U. (2006).Impact of fmancial sector reforms on efficiency and productivity of domestic commercial banks in Pakistan. MPhil Thesis, FUUAST, Islamabad. Akhavein, J. D.,Berger, A. N., & Humphrey, D. B. (1997). The effects of bank megamergers on efficiency and prices: Evidence from the profit function. Review of Industrial Organization, 12, 95-139. Akhtar, M. H. (2010). X-efficiency analysis of Pakistani commercial banks. International Management Review, 6, 12-24 Akoena, S. K., Aboagye, A. P. Antwi-Asare, T.O. & Gockel, F.A. (2009). A study of efficiencies of Ghanaian banks. A paper presented at the CSAE Conference 2009 on 'Economic Development in Africa', University of Oxford, 22-24 March. Amidu, M. (2007). Determinants of Capital Structure of Banks in Ghana: An Empirical Approach. Baltic Journal ofManagement, 2, 67-79. Ariff, M., & Can, L. (2009). IMF bank restructuring efficiency outcomes: Evidence from East Asia. Journal of Financial Services Research, 35, 167-187 Ataullah, A., & Le, H. (2002). Financial liberalization and banking efficiency: A comparative analysis of Indian and Pakistan banks. Working Paper, Durham Business School. University of Durham, UK and Department of Economics and Politics, Nottingham Trent University, Nottingham, UK. 1-27. Bank of Ghana (2004) Ghana Banking Act 2004, Accra, Ghana. 41 Battacharyya, A., Lovell, C.A.K., & Sahay, P. (1997). The impact ofliberalization on the productive efficiency of Indian commercial banks. European Journal of Operational Research, 98, 333-346. Berg, S., Forsund, F., Hjalmarsson, L.,& Suominen, M. (1993). Banking efficiency in the nordic countries. Journal of Banking and Finance, 17,371-388 Berger, A. N. (2007). Obstacles to a Global Banking System: 'Old Europe' versus 'New Europe', Journal of Banking and Finance, 31, 1955-1973 Berger, A.N.,& Humphrey, D.B. (1998).Efficiency of financial institutions: International survey directions for future research. European Journal of Operational Research, 98, 175-212. Bienkpe, N.(2011) The competitiveness of Commercial Banks in Ghana. African Review, 23, 75-78 Brownbridge, M.,& Harvey, C. (1998). Financial liberalization in difficult circumstance. In Brownbridge, M. and Harvey, C. (Eds.). Banking in Africa, Oxford: Africa World Press Inc. Buchs, T., & Mathisen,J. (2005). Competition and Efficiency in Banking: Behavioral Evidence from Ghana. IMP Working Paper. WP/05117 Accessed on February lOth, 2014 from http: //www.imf.org/extemal/pubs/ftlwp/2005 /wp0517.pdf Casu, B.,& Girardone, C. (2006). Bank competition, concentration, and efficiency in the single European market. The Manchester School, 74, 441-468. Claessens, S.,& Laeven, L. (2005).Financial dependence, banking sector competition and economic growth. Journal of European Economic Association, 3, 179-207. 42 Claessens, S., Demirguc-Runt A. ,& Huizinga, H. (2001). How does foreign entry affect domestic banking market?,Journal of Banking and Finance, 25, 891-911. Debreu, G. (1951). The coefficient of resource utilization. Econometrica, 19, 273-292 Farrell, M.J. (1957).The measurement of productive efficiency. Journal of the Royal Statistical Society Series A (General), 120, 253-290. Favero, C., & Papi, L. (1995) .Technical efficiency & scale efficiency in the Italian banking sector. A non-parametric approach. Applied Economics, 27, 385-395 Ferrier, G. D. , & Lovell, C.A. ,& Knox (l990).Measuring cost efficiency in banking. Econometric and linear programming evidence.University of North Carolina Department of Economics. Working Paper Series (U.S) No. 88-14, September: 138. Flamini, V., McDonald, C.,& Schumacher, L. (2009).Determinants of commercial bank profitability in Sub-Saharan Africa. Accessed in March 4th 2014 from https: //www.imf.org/extemal/pubs/ft/wp/2009/wp0915 .pdf Fraser, L.M., & Orimiston, A.(2013).Understandingfinancial Statements .(Tenth Edition) New Jersey, Pearson. Frimpong, M.J. (2010a). Investigating efficiency of Ghanaian banks: A non-parametric approach. American Journal of scientific research, 7, 64-76 Frimpong, M.J. (2010b). The fmancial performance of commercial banks in Ghana :A Post-FINSSP Analysis.Banking and Finance Letters,2, 349-360 George, M.,& Bob-Milliar, K.G.(2007). Developments in Ghanaian Banking sector .People' s Daily Graphic, Monday April30, pp 18-19 43 Ghana Banking Survey (2012) .Enhancing customer value to sustain profitable growth. 2012 Ghana Banking Survey.Accessed on September 20, 2013 at http:www.pwc.com/gh Ghana Banking Survey (2013). Harnessing the SME potential. Ghana Banking Survey 2013. Accessed on November 20, 2013 at http:www.pwc.com/gh Hartmann, P. (2004). Impact of fmancial infrastructure transformation on monetary policy execution: the Namibia experience, Keynote Address at the Perago User Group Conference. BIS Review 53. South Africa. Haslem, J.A. (1968).A statistical analysis of the relative profitability of commercial banks. Journal of Finance, 23, 167-176. Haslem, J.,A.,& Longrake, W.A. (1971). A discriminant analysis of commercial bank profitability.The Quartely Review of Economics and Business: Journal of the Midwest Economics Association, 2, 39-46. Hauner, D., & Peiris, S.I. (2005). Bank efficiency and competition in low income countries: the case of Uganda. Working Paper WP/05/240, African Department, Washington D.C. accessed on march 1st 2014 at http://www .imf.org/extemal/pubind.htm Higgins, R. C.,(2007). Analysis For Financial Management, New York, McGrawHill/Irwin, Issahaq, Z.,& Bokpin, G.A.(2012). Expansion and Efficiency in Banking: Evidence from Ghana, Managerial and Decision Economics, 33, 19-28. doi: 10.1002/mde.1556 44 International Monetary Fund Survey (2013). Ghana 's Advance to Middle-Income Status Requires Firm Policies. Economic Health Check. Accessed on March 1 2014 at http: // www.imf.org/external/pubs/ft/survey/so/2013/car061213a.htm Isik, 1., & Hassan, M.,K. (2003). Financial deregulation and total factor productivity change: an empirical study of Turkish commercial banks, Journal of Banking and Finance, 27, 55-85. Jackson, P.M.,& Fethi, M.D.(2000).Evaluating the technical efficiency of Turkish Commercial Banks: An application of DEA and Tobit analysis. International DEA Symposium, University of Queenland, Brisbane, Australia. Kumbhakar, S.C., & Sarkar, S. (2003).Deregulation, ownership and productivity growth in the banking industry: evidence from India. Journal of Money, Credit and Banking, 3, 403-424. Lozano-Vivas, A., Jesus, T. P., & Iftekhar, H. (2001).European Bank Performance beyond Country Borders: What Really Matters. European Finance Review, 5, 141-165. Margono, H., Sharma, S., C., & Melvin, P., D. (2010), Cost Efficiency, Economies of Scale, Technological Progress and Productivity in Indonesian banks, Journal of Asian Economics, 21, 53-65 Ngalande, E.E., (2003). The importance of fmancial system modernization in Africa. Keynote Address of the Perago User Group Conference. BIS Review, 27 South Africa. 45 Oberholzer, M., &Van De Westhuizen, K.(2004).An empirical study on measurmg efficiency and profitability of bank regions. Meditari Accountancy Research, 12, 165-178. Qayyum, A. (2007), Financial Sector Reforms and the Efficiency of Banking in Pakistan, South Asian Network of Economic Research Institutes (SANE!). Rezvanian, R., Narendar, V. R. , & Nyadroh, E. (2003). Profitability of Banks in India: An Assessment. Alliance Journal of Business Research, 68-90. Saha, A., & Ravinsankar, T. (2000). Rating of Indian commercial banks: a DEA approach. European Journal of Operational Research, 124,188-203. Sarkar, J. , Sarkar, S., & Bhaumik, S.K. (1998). Does ownership always matter? Evidence from the Indian banking industry. Journal of Comparative Economics, 26, 262281. Sathye, M.,(2003). Efficiency of banks in developing economy: the case of India. European Journal of Operational Research, 148, 662-671. Shanmugan, R.,R., & Das, A., (2004). Efficiency of Indian commercial banks during reform period. Applied Financial Economics, 14, 681-86. Sherman, H.D. & Gold, F. (1985). Bank branch operating efficiency: evaluation with data envelopment analysis. Journal of Banking and Finance. 9, 297-315. Turk-Aris, R. (2009). On the implications of market power in banking: evidence from developing countries, Journal of Banking and Finance, 34, 765-75 . Vander Vennet, R.(1996). The effects of Mergers and Acquisitions on the efficiency and profitability of EC credit institutions. Journal of Banking and Finance, 20,15311558. 46 Van Leuvensteijn, Rok Sorensen, C., Bikker, I., &Van Rixtel, A. (2008). Impact of bank competition on the interest rate ofpass-through in the Euro area. Working Paper Series, No. 885. European Central Bank. Accessed on 30th January 2014 at http: //www. ecb. europa. eu/pub/pdf/scpwps/ecbwp885. pdf www.bog.gov.gh www.ghanabusinessnews.com/generalbankingnews www.ghanaweb.com/business/economy Yu, P., & Luu, B.V. (2003). Banking mergers: the impact of fmancialliberalization on the Taiwanese banking industry. Review of Quantitative Finance and Accounting, 20, 385-413.