Determinants of performance of Ghana’s banking industry: an application of data envelopment analysis

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Performance evaluation of the banking sector in Ghana has assumed primal importance due to intense competition, greater customer demands and changing banking reforms. Based on cross sectional data for 22 banks, this dissertation attempts to measure the relative performance of Ghanaian banks during the year 2007 using the CCR Data Envelopment Analysis model. The analysis uses two input variables and two output variables. The mean level of Technical Efficiency for the industry is found to be 74 per cent. This implies that banks in Ghana can produce 1.35 times as much output from the same inputs, if they operate at ‘efficiency frontier’. In 18 inefficient banks, the technical inefficiencies range from 12.4 per cent to 203 per cent. Segmentation of the banking sector in Ghana was done along ownership’ status and market share of total assets. A detailed analysis per banking ownership group reveals that domestic private banks are the most efficient ones, followed by foreign and then state- owned banks. As far as size is concerned, the results suggest that the medium-sized banks are more efficient than small and large-sized banks. Moreover, there is rank- distinct positive relationship between bank’s efficiency on business specialty. State bank ownership exhibits a significantly negative factor on bank efficiency. The relationship between efficiency and risk profile is not as pervasive but there is a noticeable tendency for efficiency to be positively correlated to risk profile. An analysis of efficiency—profitability matrix based on the efficiency scores and Return on Equity (ROE) reveals that the 9 banks that fall in the ‘sleeper’ and ‘question mark’ quadrants have the TE score below the industry average. The resource utilization process in these banks features the presence of considerable wastage of resources. The ‘star’ quadrant contains 6 banks which are flagship units in the industry in terms of both efficiency and profitability. Both Stanbic Bank (Ghana) Limited and HFC Bank Ghana Limited appear as an ideal benchmark for the laggards on the efficiency and profitability dimensions of performance evaluation.
A thesis submitted to the Board of Postgraduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirements for the award of the Degree of Master of Business Administration, 2008