Does Information Sharing Promote or Detract from Bank Returns: Evidence from Ghana

Abstract

AbstractThis study examines the effect of information sharing through credit reference bureaus (CRBs) on the profitability of banks in Ghana. We adopt a Prais‐Winsten panel regression for 25 banks across four years to examine the empirical relations. We establish that information sharing through CRBs is positively related to bank profitability. This implies that as banks use the services of CRBs (indicating information sharing) they are able to boost their profitability. This is because information sharing can lead to an increase in interest income by reducing incomplete and false information which in turn leads to a reduction in collateral constraints. Further, information sharing reduces information asymmetry by lowering the evaluation (adverse selection) and monitoring costs (moral hazard) associated with the lending proposition. The major implications of our findings are that sharing information across banks is important for the profitability of the banking system as a whole. In this regard, it would be useful to find more efficient and cost‐effective ways to provide information sharing services to banks and other non‐bank financial institutions. We recommend that the laws that mandate the gathering of credit information be expanded to include credit data from tax agencies, utility agencies and court rulings on financial matters.