Determinants of Banks Profitability: Empirical Evidence from Ghana’s Commercial Banking Industry

Abdul-Hamid Ahmed and Kouadio Stephane N’Dri
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Abdul-Hamid Ahmed: Department of Economics, PhD Candidate, Concordia University, Montreal, QC, Canada
Kouadio Stephane N’Dri: Department of Economics, PhD Candidate, University of Montreal, Montreal, QC, Canada

International Journal of Economics and Financial Research, 2021, vol. 7, issue 4, 175-189

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.

Keywords: Commercial banks profitability; Banks specific variables; Macroeconomic variables; Sure model; Ghana. (search for similar items in EconPapers)
Date: 2021
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