Interest Rate Spread in Ghana’s Banking Sector: 2000 – 2014

December 3, 2016 Posted by admin

Abel Fumey and Isaac Doku
Department of Economics, University of Ghana, Legon, Accra – Ghana,
Data Link University College, Tema – Ghana

Abstract
The study examines the interest rate spread in post-regulatory banking industry in Ghana within the period 2000 to 2014 for twenty four (24) banks using a panel data from annual bank balance sheet and income statements. The main objective is to identify the factors that influence the seemingly high interest rate spread in Ghana. The factors are classified into bank specific variables, banking industry variables and the macroeconomic variables. Findings from the study reveal that high operating costs and Bad debt increase the interest spreads in Ghana. They also reveal that prime rate and liquidity reserve requirements act as important determinants of higher spread. From macroeconomic point of view, inflation and Treasury bill rates are found to have significant influence on wide spreads. Also an inclusion of time dummy in the model showed that the global financial crises that occurred between 2006 and 2009 had a negative impact on the spread thereby reducing the spread. In general, the study found that high interest rate spread is caused by a combination of factors from the three mentioned classified sources above but the factor cannot be attributed to any particular specific source. The study concludes that the impact of the financial liberalization in Ghana did not contribute much in making the banking sector competitive and efficient. Hence, the spread remained high particularly in the study period. The study recommends that Government must ensure prompt payment of debt owed the banks to enable them have clean portfolios and minimize spreads, since a greater part of the non- performing loans are in the hands of the state.

Keywords: post regulatory, bank specific variables, financial market variables, macroeconomic variables, panel data, Ghana.

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