Income Structure, Risk-Taking Behaviour, Competition and Profitability of Banks: Evidence from Ghana

Abstract

This study examined the relationship between bank income structure, risk-taking and competition on bank profitability. The study employed fixed effect panel regression of twenty five banks in Ghana covering periods between 2008 and 2013. The study revealed that net non-interest income positively affects risk adjusted return on equity; net fees and commissions income negatively affects risk adjusted return on asset while net trading income positively affects risk adjusted return on asset. Moreover, the results revealed mixed results between bank income structure and banks’ risk-taking behaviour due to the different measure of variables used in the study. Furthermore, the findings established that bank competition improves bank profitability measures. However, the study does not find any significant relationship between bank risk-taking and profitability measures. These findings have implication for policy-makers and bank managers. First, bank managers should strengthen income diversifications, specifically on their fees and commissions as well as trading activities in order to improve their profitability. The varying effect of income structure variables on profitability suggests that managers must be careful and selective in their income structure options so as to focus on the income structure activities that yield higher returns for the banks. Measures must also be put in place to control risks associated with loan losses in order to enhance returns to the banks. Policy-makers like government and its allied regulatory agencies must endeavour to enact policies that promote bank profitability through risk-taking behaviours, income diversification and competitive environment.