Background to the study
The role and contributions of a healthy
and a sound financial system in a developing economy cannot be underestimated
(Raberto, Ponta, Teglio & Cincotti, 2016; Sander & Kleimeier, 2004;
White, 1999; Wilson & Campbell, 2016). All over the world, the banking
sector forms a fundamentally predominant component of the entire financial
system in an economy (Singh, 2010). Basically, the banking sector plays a major
important role in mobilizing the funds from deposits and giving them out as
loans to borrowers (Osei, 2015; Lysandrou & Nesvetailova, 2015). There are
substantial literature which support the fact that the development and growth
of an economy mostly depends on the success and how efficient the banking
sector can function (Greenbaum, Thakor & Boot, 2015; Lone, 2015; Armour
et., 2016; James, 2015). Globally, banks constitutes the most significant
players in the financial market especially in the developing world and Ghana is
not an exception. The Banking system in Ghana accounted for 70 percent of the
financial sector according to Bawumia et. al., (2008). This suggest that the
banking sector is crucial to the growth and development of the Ghanaian economy
as failure of this sector could have a negative effect on the entire economy.
Over the years, the banking industry
in Ghana has been characterised by several reforms and restructuring and this
is as a result of pressure from both the internal and external economic
developments and other macroeconomic shocks (Abaid, Detragiache & Tressel,
2008; Aryeetey et., 1996; Aryeetey et., 1997; Aryeetey et., 1998). Recently one
development in the sector which was initiated to reduce systematic risk is the
adoption of the International Financial Reporting Standards (IFRS) in line with
international standards by Bank of Ghana (Sanusi, 2010). Also other moves of
the happenings in the sector include among others the establishment of
Collateral Registry and Credit Reference Bureaus which seeks to promote
transparency and ease credit accessibility, the setting up of the Financial
Intelligence Centre (FIC) to address money laundering and counter financing for
terrorism, and the recapitalization of the banks required by Bank of Ghana
(Kwakwa, 2014). All these measures by initiated by the Bank of Ghana and the
motive behind is to mitigate risk and stabilize the banking system (Kwakwa,
Moreover these reforms being
undertaking by the central Bank of Ghana are well backed by tighter and
effective supervisory oversight to ensure financial stability and
soundness of the financial system (Kwakwa, 2014). These reforms
in the Ghanaian Banking sector have totally changed the face of the industry.
These well sequence financial sector reforms have been driven by banking sector
liberalization, enhanced competition, and gradual capital account
liberalization (Bawumia et al., 2008). It is therefore made the industry
very attractive to foreign Banks especially banks from the neighbouring country
Nigeria. The industry has witnessed number of foreign
banks gaining entry into Ghana to make business.
Historically, the entry of
foreign banks in Ghana began in the year 1896, when the Bank of the
British West Africa (which later became Standard Chartered
Bank in 1985) was first opened as a branch in Ghana (then called Gold
Coast), Accra (www.citifmonlinecom). This bank operated for a while and
its success from operations attracted other foreign banks to begin operations
in the then Gold Coast (www.citifmonlinecom). In 1918, the Colonial Bank also
started its operations but later merged with Anglo-Egyptian Bank, the National
Bank of South Africa and Barclays Bank and became known as Barclays Bank
(www.citifmonlinecom). The period 1920 – 1950 saw only two banks (the Bank of
the British West Africa and Barclays Banks) operating in Ghana (then Gold
Coast) which all of them were foreign owned (www.citifmonlinecom). The only
domestic bank which was first established in that era was the Ghana Commercial
Bank in 1953 and it was tasked to reduce the control of the banking sector by
the two expatriate banks (www.citifmonlinecom).
Ghana gained independence in the year 1957, the industry has been a substantial
inflow of foreign bank investment into the country. A large percentage of these
banks are from Nigeria. Available statistics indicates that these banks are
highly making profit even more than the domestic banks. It is of this reason
why this thesis sought to investigate the factors that is influencing the entry
of foreign banks into the Ghanaian Banking economy.
1.2 Problem Statement
In general, the theory of finance and
accounting clearly elaborates how firms like banks can make profit from their
operations. Basically banking in the developing countries like Ghana has
resorted to the traditional way of banking thus accepting deposits and giving
out loans. This traditional way of banking is predominant in the Ghanaian
banking sector and it has made it attractive for foreign banks to gain entry.
on factors which determines the profitability of foreign banks have been
studied extensively in advanced countries and the developed world countries (Claessens,
Demirguc-Kunt, Huizinga, 2001; Kosmidou, Pasiouras & Tsaklanganos, 2007;
Stum, 2004; William, 2003). Literature survey on foreign bank profitability has
also shown there are other several works which has been done in other countries
(Clarke, 2003). For instance, Pasiouras & Kosmidou, (2007) used a bank
level data to examine how bank’s specific characteristics and the overall
banking environment affect the profitability of commercial domestic and foreign
banks operating in the 15 EU countries over the period 1995–2001. Their results
indicate that profitability of both domestic and foreign banks is affected not
only by bank’s specific characteristics but also by financial market structure
and macroeconomic conditions. Also Senguta, (2007) established the fact that
success in gaining borrowers of higher quality by offering cheaper loans
increases with the efficiency (cost) advantage.
due to limited data, little research has been done on foreign bank
profitability in Ghana. The closest studies on this topic are the works done by
Buchs, (2005) and Matthew & Laryea (2012).
therefore the need to conduct much research in the case of Ghana. This study therefore seeks to examine the determinants
of foreign bank profitability in Ghana. The
problem of the study therefore is to investigate some key determinants of
profitability and the extent to which they impact on profitability of foreign
banks in the Ghanaian banking sector.
Objective of the thesis
The broad objective of the study
is by using statistical and
econometric methods to assess the factors that contribute to the profit pattern
of foreign banks in Ghana. This assessment should be usable by the management
of these banks to improve the profit. The
specific objectives for the study are as follows:
identify factors that significantly determines the profitability of Foreign
Banks in Ghana.
ascertain the extent to which these factors impact on banks profitability and
the relationship of the factors and profitability.
are the factors that determine profitability of foreign banks in Ghana?
what extent does these factors impact on profitability?
1.5 Significance of the study
This thesis on the factors that determine
the profitability of foreign banks in Ghana will be of importance to academics,
the Ghana banking industry, the central bank of Ghana, policy makers and the management
of banks in Ghana. To a larger extent, it will also be of importance to
customers of banks and the general public. It is expected that the findings of
this thesis will inform foreign banks and local Ghana how to be competitive
with regards to the variables used.
1.6 Organization of the Study
The research was organized into five main
chapters. Chapter one dealt with introduction of the study. That is background
of the study, the statement of the problem, the objective of the study, the
significance of the study, scope of the study and the limitations of the study.
Chapter two provides a review of relevant
literature of other authors in relation to the topic under study. The
literature review gives the explanation of basic terminologies and discussions
to give the understanding of the theory of banks and how banks makes profit.
Chapter three concentrates only on the methodology of the study. Chapter four
also dealt mainly with the presentation and analysis of data collected. Finally
chapter five focuses on the summary of findings, conclusions as well as the
recommendations for use by the various stakeholders including banks in Ghana, students
of the general public.
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