Does Commercial Banks Presence Enhance Profitability in Ghana?

Abstract

The last few decades have witnessed an increasing drive for bank presence across Ghana due to commercial banks appetite for increased deposit mobilization. Although bank presence is crucial in savings mobilization for economic growth and development, its relationship with the financial performance of the banks is unknown within the context of a developing economy. The current study therefore investigates the implications of banks presence on the financial performance of the commercial banks in Ghana, using data from 2007 to 2013. Panel regression is used for the estimation. Our findings show that increasing banks presence does not necessarily translate into profitability of the commercial banks. A plausible deduction from the results indicate that growth in bank presence (bank branches) cannot improve alternate distribution channels of banks operations due to the strong competition in the financial sector, cost of operations and low savings culture in Ghana. The results also reveal that market concentration, cost management, capital adequacy and activity mix contribute positively to the financial performance of commercial banks in Ghana but not credit risk and management quality. We also document that the macroeconomic environment has positive effects on the financial performance of commercial banks. Following the above, we recommend that commercial banks should pay critical attention to bank specific factors such as cost management and capital adequacy ratios. Moreover, managers of the economy should strive to create a conducive and stable environment to increase their penetration in Ghana.