Abstract
This study examines the determinants of bank profitability in Ghana within the market power, relative market power and efficient structure frameworks. Using annual data on 26 Ghanaian banks from 2003 to 2011, we employ the Herfindahl Index and concentration ratio as our proxies for market power hypothesis while efficiency scores from the data envelopment analysis is employed as a proxy for the efficient structure hypothesis. The system generalized method of moment is employed to estimate a panel data model with return on assets, return on equity and net interest margin as our proxies for bank profitability. The results of the empirical estimation reject both the market power and relative market power hypotheses in the Ghanaian banking industry. While technical efficiency is found to have a positive relationship with profitability to support the efficient structure hypothesis, a negative relationship between scale efficiency and profitability is reflected by the inability of banks to operate at the optimal scale of operations. We also document evidence on the low persistence of profit which suggests a competitive banking industry. Implications for industry regulation are discussed.
Similar content being viewed by others
Notes
For example Nigeria.
See Roodman (2009) for more on xtabond2.
The RMP hypothesis was postulated by Shepherd (1982).
Agudze-Tordzro et al. (2014) note that good customer service and management are key factors that lead to bank competitive advantage and profitability.
Formal test to for the existence of outliers conducted supported the observation. The concerned variables were winsorized to produce normalised values.
References
Aboagye AQQ (2012) Bank concentration and economic costs of deposit mobilization and credit extension in Ghana. J Dev Areas 46(2):351–370
Aboagye AQQ, Akoena SK, Antwi-Asare TO, Gockel FA (2008) Explaining interest rate spreads in Ghana. Afr Dev Rev 20(3):378–399
Agudze-Tordzro K, Buame S, Narteh B (2014) Customer retention strategies: a study of Ghanaian banks. Eur J Busin Manag 6(15):31–39
Alhassan AL (2015) Explaining bank productivity in Ghana. Manag Decis Econ. doi:10.1002/mde.2748
Alhassan AL, Kyereboah-Coleman A, Andoh C (2014) Asset quality in a crisis period: an empirical examination of Ghanaian banks. Rev Dev Finance 4(1):50–62
AL-Omar H, AL-Mutairi A (2008) Bank-specific determinants of profitability: the case of Kuwait. J Econ Adm Sci 24(2):20–34
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297
Athanasoglou P, Brissimis S, Delis M (2008) Bank-specific, industry-specific and macroeconomic determinants of bank profitability. J Int Financ Mark Inst Money 18(2):121–136
Bain JS (1951) Relation of profit-rate to industry concentration: American manufacturing, 1936–1940. Q J Econ 65:293–324
Baltagi B (2001) Econometrics analysis of panel data. Wiley, West Sussex
Banker RD, Charnes A, Cooper WW (1984) Some models for estimating technical and scale inefficiencies in data envelopment analysis. Manag Sci 9(30):1078–1092
Baumol WJ (1982) Contestable markets: an uprising in the theory of industry structure. Am Econ Rev 72(1):1–15
Berger AN (1995) The profit-relationship in banking–tests of market-power and efficient-market hypotheses. J Money Credit Bank 27:405–431
Berger AN, Hannan TH (1998) The efficiency cost of market power in the banking industry: a test of the “quiet life” and related hypotheses. Rev Econ Stat 80:454–465
Biekpe N (2011) The competitiveness of commercial banks in Ghana. Afr Dev Rev 23(1):75–87
Blundell RW, Bond SR (1998) Initial conditions and moment restrictions in dynamic panel data models. J Appl Econom 87:115–143.
Boyd JH, De Nicolo G, Jalal AM (2009) Bank competition, risk and asset allocations IMF working paper 09(143).
Buchs T, Mathiesen J (2008) Banking competition and efficiency in Ghana. Economy of Ghana, 1st edn. Boydell & Brewer, Woodbridge, pp 173–194
Charnes A, Cooper WW, Rhoades E (1978) Measuring the efficiency of decision making units. Eur J Oper Res 2:429–444
Chirwa EW (2003) Determinants of commercial banks’ profitability in Malawi: a cointegration approach. Appl Financ Econ 13(8):565–571. doi:10.1080/0960310022000020933
Chirwa EW, Mlachila M (2004) Financial reforms and interest rate spreads in the commercial banking system in Malawi. IMF Staff Pap 51:96–122
Chortareas G, Garza-Garcia JG, Girardone C (2011) Banking sector performance in Latin America: market power versus efficiency. Rev Dev Econ 15:307–325
Demsetz H (1973) Industry structure, market rivalry, and public policy. J Law Econ 16:1–9
Dietrich A, Wanzenried G (2014) The determinants of commercial banking profitability in low-, middle-, and high-income countries. Q Rev Econ Finance 54(3):337–354
Elyasiani E, Wang Y (2012) Bank holding company diversification and production efficiency. Appl Financ Econ 22(17):1409–1428
Farrell MJ (1957) The measurement of productive efficiency. J R Stat Soc 120(3):253–290
Fu XM, Heffernan S (2009) The effects of reform on China’s bank structure and performance. J Bank Finance 33(1):39–52
Garza-Garcia JG (2012) Does market power influence bank profits in Mexico? A study on market power and efficiency. Appl Financ Econ 22(1):21–32
Gilbert RA (1984) Bank market structure and competition: a survey. J Money Credit Bank 16:617–645
Goldberg L, Rai A (1996) The structure–performance relationship for European banking. J Bank Finance 20:745–771
Gounder N, Sharma P (2012) Determinants of bank net interest margins in Fiji, a small island developing state. Appl Financ Econ 22(19):1647–1654
Lloyd-Williams DM, Molyneux P (1994) Market structure and performance in Spanish banking. J Bank Finance 18:433–443
Maudos J (1998) Market structure and performance in Spanish banking using a direct measure of efficiency. Appl Financ Econ 8:191–200
Molyneux P, Forbes W (1995) Market structure and performance in European banking. Appl Econ 27:155–159
Molyneux P, Thornton J (1992) Determinants of European bank profitability: a note. J Bank Finance 16:1173–1178
Moyo J, Nandwa B, Oduor J, Simpasa A (2014) Financial sector reforms, competition and banking system stability in Sub-Saharan Africa. Presented at the joint RES-SPR conference on “Macroeconomic Challenges Facing Low-Income Countries”, Washington, DC 30–31 Jan 2014
Nguyen TN, Stewart C (2013) Concentration and efficiency in the Vietnamese banking system between 1999 and 2009: a structural model approach. J Financ Regul Compliance 21(3):268–283
Ohene-Asare K, Asmild M (2012) Banking efficiency analysis under corporate social responsibilities Int. J. Banking, Accounting and Finance 4(2):146–171.
Perry P (1992) Do banks gain or lose from inflation? J Retail Bank 14:25–30
Roodman D (2009) How to do xtabond2: an introduction to difference and system GMM in Stata. Stata J 9:86–136
Saka ANA, Aboagye AQQ, Gemegah A (2012) Technical efficiency of the Ghanaian banking industry and the effects of the entry of foreign banks. J Afr Busin 13(3):232–243
Shepherd WG (1982) Economies of scale and monopoly profits. In: Craven J (ed) Industrial organization, antitrust, and public policy. Kluwer Nijhoff, Boston
Shin DJ, Kim BHS (2011) Efficiency of the banking industry structure in Korea. Asian Econ J 25(4):355–373
Sologoub D (2006) The determinants of bank interest margins and profitability: case of Ukraine. www.bof.fi/bofit/seminar/bofcef06/sologub.pdf
Tan Y, Floros C (2012) Bank profitability and inflation: the case of China. J Econ Stud 39(6):675–696
Tennant D, Folawewo A (2009) Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries. Appl Financ Econ 19(6):489–507
Tetteh ML (2014) Local versus foreign bank performance: the case of Ghana. Banks Bank Syst 9(3):43–49
Trujillo-Ponce A (2013) What determines the profitability of banks? Evidence from Spain. Account Finance 53:561–586
Ye Q, Xu Z, Fang D (2012) Market structure, performance, and efficiency of the Chinese banking sector. Econ Change Restruct 45:337–358
Acknowledgments
The authors acknowledge the constructive comments of an anonymous reviewer which improved an earlier draft of the manuscript. The normal caveats apply.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Alhassan, A.L., Tetteh, M.L. & Brobbey, F.O. Market power, efficiency and bank profitability: evidence from Ghana. Econ Change Restruct 49, 71–93 (2016). https://doi.org/10.1007/s10644-015-9174-6
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10644-015-9174-6