Abstract
Over the years, Ghana’s commercial banking industry has been bedeviled with numerous challenges. The unbridled effect of this is the 2018 banking sector megrim which led to the collapse of seven major banks. This pointed out that it is very crucial to identify and mitigate the factors that negatively affect the performance of the banking sector. This paper is used to investigate the effect of banks specific variables (BSVs) and macroeconomic variables (MEVs) on the profitability of commercial banks (NIM, ROE, and ROA) in Ghana using FRED annual data of 25 years. In order to avoid endogeneity problems and aggregation bias, we used the SURE model to run the estimates simultaneously. The result reveals that profit earned by Ghana’s commercial banks is largely influenced by both internal factors such as KA, AQR, LMGT, MEFFI, and Z-Score and fluctuations in the macroeconomic environment (GDP and FOREX). The impact of KA, LMGT, MEFFI, and Z-score is significantly positive whereas AQR (NPLs) is found to have a negative effect on banks profitability. GDP has a significant negative impact on Ghana’s commercial bank’s profitability whiles forex induced commercial banks profitability positively, but inflation CPI does not determine the profitability of commercial banks in Ghana.
Highlights
The banking sectors all over the world act as the life blood of modern trade and economic development and through being a major source of finance to the economy (Murerwa, 2015)
The asset quality ratio (AQR) shows a negative contribution to the profitability of commercial banks in Ghana
Among the macroeconomic variables that influence the profit earned by commercial were gross domestic product (GDP) and foreign exchange rate (FOREX), but inflation CPI (INFCPI) does not in any way determines the profitability of banks in the Ghanaian economy
Summary
The banking sectors all over the world act as the life blood of modern trade and economic development and through being a major source of finance to the economy (Murerwa, 2015) The better their financial performance are, the more the shareholders for their investment rewards (Ongore et al, 2013). As one of SSA country, Ghana embarked the financial sector reforms in the late 1980s as part of ongoing Economic Recovery Program (ERP) (Nkegbe and Ustarz, 2015). These reforms could not stop seven major banks to collapse in recent years in Ghana. The megrim causing Uni Bank, UT Bank, Capital Bank, Sovereign Bank, Royal Bank, Beige Bank Limited and Construction bank (GH) Limited to cease to operate pointed out that it is very crucial to identify and mitigate the factors that negatively affects the performance of the banking sector in Ghana
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