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Over the period 2005 to 2009 real Gross Domestic Product have grown at an average of 6.1%. The growth rate started at one of its highest of 5.8% in 2005 to its peak, 7.3% in 2008. These growth rates are significantly higher than the average growth rate of 0.77 percent of Sub-Saharan Africa (1960-2009). This above average growth rate over the past five years can largely be attributed to significant growth rates in the three major sectors of the economy, namely, agriculture, manufacturing and services. The services industry recorded the most significant average growth rate of 6.8%. Average growth rates in the agricultural and manufacturing sectors were 5.56% and 6.44% respectively on average over the five year period. (See diagrams below for more details)

Inflation and interest rates have showed a downward movement towards more stable low rates. These developments are very essential for the development and progress of banking activities in Ghana. The diagram below shows the trend in interest rates and inflation over the five year period.


The small country of Ghana has 27 banks, excluding the Bank of Ghana (Central Bank) as result of recent deregulation of the ban king industry. The past few years have seen a phenomenal growth in the Ghanaian banking sector. The Bank of Ghana describes the banking industry as well capitalised, very liquid, profitable and recording strong asset growth. the banking industry witnessed massive growth rates in total operating assets from GH¢6.85 million by the end of 2007 to GH¢12.42 million as at the end of 2009, this represents a percentage increase of 82%. (Source,Ghana Banking Survey).

The major development in the Ghanaian banking sector is the call by the central bank for commercial banks to meet some minimum capital requirements. Foreign banks were to meet a minimum capital requirement of of GH¢60 million as at the end of 2009 and local banks were required to meet a minimum capital requirement of GH¢25 million by the end of December, 2010. As the end of December 2010, 10 foreign banks and 6 of the local banks have met these capital requirements.


The performance of the banking industry has attracted the attention of many prominent researchers over the past few decades since the invention of large bank databases such Bankscope. Majority of the literature has focused on risk, ownership and performance of the banking sector across a panel of countries, mostly in the developing and transition economies.

In this section of the report we pay particular attention to literature on the performance of the banking sector with a key interest in the variables that have been used as measures of performance. We also try to delve into the various dimensions of performance used by most researchers.

Boubakri et al (2005), in investigating the relationship between privatization and bank performance in developing countries, used variables that covers four aspects of bank performance. These aspects are profitability, efficiency, risk exposure and capital adequacy. In measuring profitability, the researchers used Return on Equity (ROE) denoted by the formula net income divided by total equity as a measure of profitability. In a similar fashion they used Net Interest Margin (average interest rates on loans less average interest rate on liabilities) as an appropriate measure of banking efficiency. The level of risk exposure faced by the banks was measured by the ratio of past due loans to total assets. This measure of risk exposure largely reflects the level of credit risk exposure rather than overall risk faced by the bank. Lastly the researchers used risky assets to total assets ratio as a measure of capital adequacy of the banks under their study. Boubakri et al (2005) found that bank chosen for privatization on average have lower efficiency. Privatized banks also tend to have lower capital adequacy than government owned banks and also newly privatized banks exhibit an increase in profitability and a significant decrease in efficiency and more credit risk exposure.

Cornett et al (2002) used more elaborate measures of bank performance to gain an insight into the overall performance of banks around the introduction of section 20 subsidiaries in the United States. Cornett el al used profitability, capital risk, asset quality, operating efficiency, liquidity ratios, and growth indicators as measures of performance. Return on assets (ROA) and return on Equity (ROE) were the profitability measures employed. Core capital to assets, loan to total capital, and deposits to total capital were the capital risk measures employed. For asset quality indicators, the study employed loan losses to total loans ratio. Six variables were used as measures of operating efficiency: non-interest expense to non-interest revenue, net interest margin, non-banking revenue, return on loans, ratio of employee expenditure to non-interest expense. The ratio of loan to assets and investment securities to total assets were the two variables used to measure liquidity. Finally assets growth rates year after year; ratio of non-bank asset to total assets; and growth in non-banking assets, were the variables employed as measures of growth in the banking sector. Cornett et al (2002) found that section 20 activities in the United States increased banking industry adjusted operating cash flows return on assets however risk measures of performance did not change significantly after the introduction of section 20 subsidiaries.

Bonin, Hasan, and Wacthel, (2003) found that the banks in the eleven transition countries used for their study became more efficient during the latter parts of the 1990's. Government banks were less efficient than their private counterparts. Foreign banks were also more profitable but not significantly more efficient and larger banks were less efficient mainly due to the fact and the most the larger banks employed in the study were government owned. A notable observation of the Bonin et al (2003) research is the preference of Return on Assets to Return on Equity as a measure of profitability. In their opinion, return on equity is sensitive to strategies for writing off bad loans which makes its use problematic.

Cornett and Tehranian (1991) studied the performance large banks that had merged between the periods 1982 to 1987. The study used earnings before interest, depreciation, tax and amortization; a cashflow measure of profitability, as against the widely used accounting return on assets and equity. The conclusions from the study were that; merged banks produced superior cashflow returns on assets during the post-merger period. This improvement was primarily due to improvements in that ability to attract loans and deposits, increased employee productivity and asset growth.

Berger, Clarke, Cull, Klapper, and Udell (2003) used five diverse measures of performance on Argentine banks. These variables include profit efficiency rank, return on equity, cost efficiency, cost to asset ratio and non-performing loans ratios. Berger et al (2003) found that static performance finding suggest that state-owned bank tend to have poorer long term performance on average than private, domestically owned banks. Also state owned banks selected for privatization tend to perform even poorer on average than other state owned banks prior to privatization. In addition, state owned banks selected for privatization have significantly higher non-performing loans and finally privatization improves bank performance.

In conclusion, Beck and Jerome (2006) looked at bank privatization and performance using evidence from Nigeria. Beck el al (2006) employed the two widely used accounting measures of profitability, ROE and ROA, and the share of non-performing loans total loans as measures of profitability. The study concludes that privatization has a positive impact on growth, government owned banks performed slightly lower than privately owned banks. These results are consistent with prior studies in the past that have looked at performance of the banking industry.

In the nutshell, diverse dimensions of performance have been used in studies that seek to evaluate the performance of the banking sector. These dimensions include profitability, capital risk, asset quality, efficiency, liquidity, and growth prospects or indicators.



Following the literature, I adopted two standard measures of profitability; return on asset and return on equity as reported by Bankscope database. The subsequent paragraphs discuss the trends in these ratios over a six year period from 2004 to 2009. For more details please see appendix to the document.

Return on Equity (ROE)

This ratio is the net income divided by equity of the respective banks. In 2004, the Ghanaian banking sector had an average ROE of 31.7%. This percentage can be classified as excessively high. By the end of 2009 the ratio had averaged only 8.7%. the sharp fall can largely be attributed to the influx of many foreign banks such as Zenith, United Bank for Africa and Sahel Sahara Bank. These new banks normally recorded far below average return on equity. (See appendix for details)

Return on Assets

Return on asset for the Ghanaian banking sector also showed similar trends as return on equity. The region recorded a high ratio of 3.24% in 2004 as against an average of 0.51% in 2009. Again this dwindling average is largely caused by the influx of new and foreign banks that recorded below average returns in their first years of operation. (See appendix for details)

Asset Quality

The quality of assets is also used as a measure of performance according to the literature. This ratio was computed as loan loss reserves divided by gross loans made by the banks. The lower the ratio, the better the quality of assets employed by the banking industry. Over the period 2005 to 2008 this ratio declined from its 11.42% average to 6.53%. This significant drop could not be maintained in 2009 as the ratio increased again to 8.32%. Again one major reason for this sharp rise can be attributed to the influx of aggressive foreign banks which employed reduced credit standards in a bid to win a chunk of the market share. (see appendix for details)


Efficiency in the banking sector has diverse dimensions. It could be in terms of cost or resource allocation. In this analysis, efficiency was measured in terms of the major operations of banks which is intermediation. The ratio used to measure efficiency here is the net interest margin. This ratio reflects the excess the banks are able to make on the interest revenue after deducting interest expenses. The ratio marginally reduced from 10.41% in 2004 to 8.81% in 2009. Intense competition in the banking industry has driven most banks to reduce the interest spreads. Also current fovourable macroeconomic developments such as low inflation and prime (discount) retes have also contributed to the downward movements in this ratio. (See appendix for details)


The final measure of performance to be discussed here is liquidity. This is the life blood or engine of any thriving banking industry. This performance indicator was measured as the ratio of liquid assets to deposits and short term funding. The higher the ratio, the more liquid the banking sector can be viewed. The average ratio was 63.56% in 2004. this ratio is on the decline as 42.28% was recorded in 2009. Over the years liquidity has been sacrificed for profitability by the banks in Ghana. (See appendix for details).


This report has analysed the performance of the Ghanaian banking industry using four distinct dimensions or indicators of performance; profitability, efficiency, asset quality, and liquidity. Profitability has been on the declined as the reults of the intensifying competition in the banking sector. The changes in the quality of asset has shown mixed movements. However on average the level of quality of assets improved over the six year period under study. The efficiency of the sector also increased marginally over the same period as depicted by the net interest margin. Excessive competition has compelled most banks to cut their interest rate spreads and channel more resources in to productive used. Finally, on the issue of liquidity, of the sector has declined as more banks became aggressive in their lending approach.

Overall, the banking sector has improved tremendously given the level of intense competition however such competition should be highly monitored to sustain the quality of assets and liquidity in the sector.


In writing the report, I employed only single overall measures of the above performance indicators. The use of a single framework may neglect some aspects of performance measurement but it is my belief that these omissions will not affect the findings of the report in any significant manner.


Beck, T., Cull, R., Jerome, A., (2006), Bank Privatization and Performance: Empirical Evidence from Nigeria, Journal of Economic Literature. G21, G28, G34, O55.

Berger, N. A., Davies, S. M., Flannery, F. J., (1998), Comparing Market and Supervisory Assessment of Bank Performance, Who Knows What and When, Journal of Economic Literature, G 21 G28 G38 E 58

Bonin, P. J., Hasan, I., Wacthel, P., (2003), Bank Performance, Efficiency and Ownership in Transition countries, Croatian National Bank.

Boubakri, N., Cosset J-C., Fischer, K., Guedhami, O., (2005), Privatization and bank performance in developing countries, Journal of Banking and Finance, Vol.29 pp.2015-2041.

Cornett,M, M., Ors, C., Tehranian, H., (2002), Bank Performance around the Introduction of Section 20 Subsidiaries, Journal of Finance, Vol. 507, Issue 2, pp. 501-521

Cornett,M, M., Tehranian, H., (1991), Changes in corporate performance associated with bank acquisitions, Journal of Financial Economics Vol.31 pp. 211-234.