Bank Competition and Financial Sector Stability in Ghana

Abstract

In spite of the various policies implemented since the Financial Sector Adjustment Programme of 1986 to liberalise Ghana’s financial sector and enhance stability, the stability of Ghana’s banking sector continues to be a challenge. This study analysed the effects of competition in the banking industry on the overall stability of the financial sector in Ghana. Using z-score as well as non-performing loan ratio as proxies for financial sector stability, the study found that higher levels of market power (low competition) enhance stability of Ghana’s financial sector irrespective of the measure of stability (whether Z-score or NPL). The study also found that, the extent to which bank concentration influenced stability depends on the measurement of stability employed. The study further found that higher levels of concentration irrespective of the measure of stability, tend to affect the extent to which competition (market power) affects stability. Specifically, concentration beyond 5.3% and 16.8% reduces stability effect of a rise in the level of monopoly for Bank Z-score and NPL respectively. We thus recommend that the Bank of Ghana should work towards strengthening the capital adequacy framework and encourage the consolidation of smaller sized banks through the use of acquisitions and mergers. The consolidation of these banks would work to improve their level of market power, enhance their chances of survival in the market and the overall stability of the banking industry. We further recommend that some natural barriers such as minimum capital requirement should be created to reduce competitive pressures but at the same time it is important to also state that, in restricting entry into the banking industry, the Bank of Ghana must ensure that concentration of assets in the industry is well distributed.