Cost efficiency, competition and bank profitability in Ghana: The role of economic and financial freedom

Abstract

Ghanaian banking industry has experienced significant reforms in the quest to ensure efficiency and full openness to competition. This is eventually expected to stimulate profits of banks and increased economic and financial freedom is expected to play a significant role in such relationship. To this end, the study explored the linkage between bank cost efficiency, competition level of the market, and the profitability of banks in Ghana in the presences of economic and financial freedom. Using a panel data from 22 banks in Ghana over the period 2009 to 2018, it was observed that the cost efficiency of banks in Ghana is between 60% to 70% implying that banks have capability of reducing their costs up to 40% to 30%. Shadow return on equity was found to be positive except after 2016 when it became negative reflecting evidence of increased capital ratio. Also, the loan market was seen to be most competitive. Finally, it was observed that concentrated market has a detrimental effect on bank profit but efficient market has positive impact. In addition, both financial freedom and economic freedom show a positive impact on bank profits. In the presence of increased economic and financial freedom, competition tends to positively impact profits. It was recommended that domestic banks could mimic the cost efficiency practices of their foreign counterpart. Also, policymakers and regulators should be cautious in implementing recapitalisation programme by comparing the benefit gained from increased capital adequacy ratio with the associated impacts on the banks. Again, government should enhance freedom in the financial sector in terms of banking transactions and businesses banks can undertake.