Bank Concentration and Economic Costs of Deposit Mobilization and Credit Extension in Ghana

Abstract

Welfare losses due to misallocation of resources in the deposit and loans markets and inefficiency costs in both markets resulting from the concentration of the Ghanaian banking industry are estimated, respectively using the Harberger's triangle and deviations from cost efficient stochastic frontier approaches. Corporate governance variables hypothesized in the literature to be correlated with bank inefficiencies were also investigated. Estimates suggest that net welfare loss over 2001 - 2008 averaged 2.6% of gross domestic product (GDP) per year, while inefficiency costs averaged only 0.7% of GDP. Bank concentration is positively correlated with efficiency in both deposits and loans markets. The elasticity of operating costs with respect to deposits exceeds the elasticity with respect to loans. We recommend that steps be taken to reduce bank concentration as the resultant narrowing of interest rate spreads will likely yield welfare gains that exceed efficiency gains realizable from increased concentration.