Determinants of intermediation margins of commercial banks in Ghana

Abstract

One of the expectations of financial sector reforms is an increase in the efficiency of the financial system, which often results in reduced cost of intermediation through convergence of relevant interest rates and by extension the reduction in the spread between savings and lending rates. The literature has also identified several micro and macro variables that are presumed to play critical roles in explaining interest rate spread. Drawing from Afanasieff, Lhacer and Nakane (2001), this paper focused on identifying the industry-based factors and the macroeconomic determinants underlying intermediation spread in Ghana within the Ho-Saunders (1981) framework. The paper estimates an extended classical 2-stage regression model for Ghana using quarterly data spanning between 1987(1) and 2006 (4). Our findings from the industry-based model suggest that, in the long-run, higher deposit elasticity, administrative cost and to some extent liquidity widen intermediation margin, whereas higher bank concentration and market size narrow commercial bank intermediation margin in Ghana. From the macroeconomic perspective, it is found that, in the long-run, higher rates of expected inflation, exchange rate and the prime rate of the Central Bank widen commercial bank intermediation margin whereas improved financial deepening and booming business cycle narrow the interest rate spread. The paper, therefore, recommends that stabilization of the domestic economy to reduce operational cost of banks, further liberalisation and modernization of the Ghanaian banking system as well as licensing of new banks that would engender both competition and concentration are required for narrowing the wide prevailing interest rate gap in Ghana.Commercial Banks; Financial Sector Reforms; Interest Rates; Intermediation Margins