Housing and construction finance, deposit mobilisation and bank performance in Ghana

Abstract

We analyse bank performance in Ghana over the period 2001–2007. We posit a two‐equation simultaneous system for return on assets and volatility of earnings. In addition to other explanatory variables, this study is interested in the impact of deposits as a proportion of total assets and the proportion of housing and construction loans that banks extend. The triangular system is estimated by the least squares dummy variable approach. We find that the coefficients of the deposit ratio are very small in both equations and not at all significant. At the 10% significance level, the ratio of total loans to assets is positive and significant in both equations. Housing and construction loans tend to increase return on equity and decrease volatility. Increases in equity to assets ratio increase return on assets and decrease volatility of earnings significantly. The impact of non‐interest income is small and tends to increase return on assets and decrease volatility. Non‐performing loan ratio has the expected sign and is significant in the return on assets equation. Increases in inflation decrease profitability and increase volatility. We recommend that banks raise longer‐term financing on the capital market to undertake longer‐term profitable projects such as housing finance.

Keywords:

• bank performance
• return on assets
• volatility of earnings
• loans
• deposits
• equity

Notes

1. In the US, total real estate loans average about 40%.

2. The Habitat for Humanity International (HFHI), generally referred to as Habitat for Humanity or simply Habitat, is an international, non‐governmental, non‐profit organization devoted to building, ‘simple, decent, and affordable’ housing.

3. The combined effect is established as a partial derivative .