Branch Banking, Efficiency and Stability in the Ghanaian Banking Sector

Abstract

The purpose of the study is to investigate the relationship between branch banking and stability using efficiency as a conduit in the Ghanaian banking sector. Two measures of bank stability (the z-score and non-performing loans ratio proxies) were used. This is to ensure that the analysis of the relationship was from two complementary dimensions i.e. instability resulting from the risk of insolvency and non-performing loans. The fixed effect model was used to assess the impact of both bank-specific factors and macroeconomic indicators on bank stability after the Hausman test was adopted to ascertain the right model. The Data Envelopment Analysis (DEA), however was used to determine the efficiency of the banks using five output and input variables each. Again, the regression analysis was used to estimate the driving factors of efficiency with specific emphasis to bank branches. For the efficiency measure, the findings revealed the branch ratio as a significant factor driving efficiency of banks. Whereas for the stability measure, the findings ascertained a significant relationship for the branch variable when the NPL stability proxy was used. However, an insignificant relationship was ascertained between the branch variable and the z-score stability proxy. The implication of the study to regulators, as well as policy makers in Ghana must consider the role of bank branches in the Ghanaian economy as a driver for stability. The study is one of the few studies to ascertain the impact of bank branches considering both bank-specific variables and macroeconomic indicators on the stability of the Ghanaian banking sector.