Effect of interest rate changes on profitability of banks in Ghana

Abstract

The study examines the effect of interest rate changes on bank profitability, using the pooled OLS panel data of 25 banks in Ghana between 2006 and 2015 (Bank of Ghana data scope). This population of the study consisted of banks in Ghana listed on Ghana Stock Exchange. The data gathered was analyzed using STATA 12.0. The explanatory variables used were interest rate changes, interest margin, deposit growth, Loan Loss Provision, Ownership Bank size whiles profitability indicator, ROA, we used as the dependent variable. From the descriptive statistics, the average profitability value suggests that the overall profitability of banks in Ghana is relatively low. Pearson’s correlation coefficient was used to analyzed the association among the variables (Both dependent variables and independent variables). It was observed that the correlations among all variables were low and there was weal positive and negative relationship among the variables. However, there was a strong positive correlation between interest rate changes and interest margin from the pooled OLS panel result, Interest rate changes and interest margin were positive and significantly (1% level of significant) linked to return on asset (ROA). The findings agree with those of Ongore and Okoth (2013) who found that interest rate volatility affected the performance of organizations especially in the financial sector in Kenya. In the regression model, the positive relationship between interest rate and bank return on asset may reflect how fluctuating and volatile interest rate may have contributed to the return on the asset of banks. This suggests that banks respond very fast to changes in interest rate.