Factors influencing the profitability of Domestic and Foreign banks in Ghana


End date: 31 July, 2015 Project type: BSU Students' Master Thesis Project code: mge13-1O1 BSU Countries: Ghana Lead institution: Aarhus University (AU), Denmark Project coordinator: Douglas Afoakwah Opoku-Agyemang

Project summary

This thesis examines the factors influencing the profitability of domestic and foreign banks in the Ghanaian banking industry using a panel data of 27 banks from 2003 to 2013. Bank profitability is measured by Return on Average Assets and Return on Average Equity. The variables affecting bank profitability were categorized into Bank-specific variables, industry-specific and macroeconomic variables. The bank-specific variables were operating efficiency, credit risk, liquidity, bank size, bank growth, funding cost, years of experience and bank ownership. The external variables included Bank Concentration and macro-economic variables, which are Real GDP, Inflation and Money Supply.
The study uses the Generalized Least Square technique (GLS) to estimate random effect regression model and adopt the Generalized Methods of Moments (GMM) as robustness check.
The findings revealed that foreign banks performed better than domestic banks within the period but the difference is not substantial. Moreover, foreign banks are more capitalized than domestic banks.
The study found that bank-specific variables are significant in explaining profitability but the external variables are not significant apart from Money Supply. Operating efficiency, credit risk, bank capitalization and funding costs were the main variables that significantly influenced bank profitability. Profitability in the industry was also affected negatively by the global financial crisis of 2007.
Moreover, it was found that factors such as capitalisation, bank size and financial crisis were significant for foreign banks while bank ownership and deposit growth had significant impact on domestic banks.
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