The Determinant of Profitability of Banks in Ghana

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This study examines the determinants of bank profitability in Ghana. These determinants have been categorized into internal factors which are bank-specific characteristics and external factors which can further be divided into macroeconomic factors and financial structure factors. The main objectives of the study are to determine the factors that influence commercial banks profitability in Ghana and to make recommendations for management decision making and policy objectives. A panel data of 26 commercial banks in Ghana was analysed over a period of 2000-2009, using a generalised least squares technique to estimate fixed effect regression models. Two key measures of profitability (dependent variables) analysed in this study comprised of Return on Average Asset (ROA) and Return on Average Equity (ROE). Bank-specific factors, which were incorporated into the regression models were capital adequacy, operating expense, liquidity, asset quality, and bank size. In addition, macroeconomic factors and financial structure factors captured in the regression models included inflation, Gross Domestic Products (GDP), money supply and banking industry concentration. The results for the ROA model indicate that capital adequacy, liquidity and bank size are positively significant to bank profitability while asset quality and operating expense are negatively significant to bank profitability. Moreover, inflation and GDP were positively significant to bank profitability while money supply and bank concentration were negatively significant to bank profitability. Apart from GDP, banking industry concentration, and asset quality, all the determinants were consistent when bank profitability was measured by Return on Equity (ROE). However, capital adequacy was negatively significant to bank profitability in the case of ROE.
A Thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Commonwealth Executive Masters in Business Administration, May, 2011