A Study of Bank Efficiencies in Ghana

Abstract

Reform of the financial system in Ghana started in the late 1980s. To date, the foreign exchange market and interest rate regimes have been liberalized; distressed banks have been restructured and the range of financial services available have been diversified. Reform has also meant a more liberal approach to bank licensing. As a result, the number of banks in the economy has increased, so has bank-intermediated debt. There is now some integration of the Ghanaian financial system with the global economy. The central bank however believes that the capital bases of the banks are too low and too shallow to support significant lending. To address this situation it proposes to increase the minimum capital requirements of banks nine fold over a maximum of four years (two in some cases). This study investigates the technical efficiency and economies of scale of Ghanaian banks to obtain a sense of what might happen to efficiencies in the industry when banks get bigger. Have large banks been more efficient than small banks? A data enveloping analysis was performed on annual bank data from 2000 to 2006. Findings suggest that the technical efficiencies of large banks as a group, and small banks as another are similar. However, the findings also suggest that small banks have larger scale efficiencies than the big banks. The implication of this is that (on the average at least) the large banks in Ghana are more removed from the point of their lowest average costs than the small banks and the central bank should be careful about encouraging banks to get bigger if its objective is to improve scale efficiency.