The effect of banking sector reforms on interest rate spread: Evidence from Ghana

Figures & data

Table 6. The List of the Banks Used in This Study

Name of Bank	Code	Year of Establishment	Ownership Type	Number of Branches
Access Bank (Ghana) LTD	ABG	2008	Foreign	47
Agricultural Development Bank LTD	ADB	1965	State-owned	78
Bank of Africa Ghana LTD	BOA	1997	Foreign	26
Barclays Bank Ghana LTD	BBG	1917	Foreign	60
callback LTD	CAL	1990	Private Local	30
Ecobank Ghana LTD	EBG	1990	Foreign	68
FBNBank Ghana LTD	FBN	1996	Foreign	18
Fidelity Bank Ghana LTD	FBG	2006	Private Local	72
First Atlantic Bank LTD	FAB	1994	Foreign	31
First National Bank LTD	FNB	2015	Foreign	7
GCB Bank LTD	GCB	1953	State-owned	183
Guaranty Trust Bank (Ghana) LTD	GTB	2004	Foreign	32
Prudential Bank LTD	PBL	1993	Private Local	40
Republic Bank Ghana LTD	RBL	1990	Foreign	43
Societe General Ghana LTD	SGB	1975	Foreign	43
Stanbic Bank Ghana LTD	SBG	1999	Foreign	39
Standard Chartered Bank Ghana LTD	SCB	1896	Foreign	27
United Bank for Africa (Ghana) LTD	UBA	2005	Foreign	28
Zenith Bank (Ghana) LTD	ZBG	2005	Foreign	27

Table 7. Major Reforms in the Ghanaian Banking Industry from 2008 to 2020

Year	Key Reforms
2008	Borrowers and Lenders Act, 2008 (Act 773), Non-Banking Financial Institutions Act, 2008 (Act
	774), Home Mortgage Finance Act, 2008 (Act 770), and Anti-money laundering Act, 2008 (Act749).
2008	Banks to comply with International Financial Reporting Standards (IFRS)
2008	Introduction of E-zwich, the biometric smart card
2008	BOG’s notice for the requirement of the minimum stated capital of GH¢60 million to maintain
	Class 1 (Universal) Banking status
2009	Introduction of the cheque-codeline clearing system
2010	The guideline for licensing and operations of Credit bureaux under the Credit Reporting Act 2007
	(Act 726) was published by the Bank of Ghana.
2011	Introduction of collateral registry in Ghana backed by Act 773
2011	Bank of Ghana reduced the Net Open Position (NOP) of Banks to make the cedis attractive
2012	BOG’s notice for the requirement of the minimum stated capital of GH¢120 million to maintain Class 1
	(Universal) Banking status
2013	Introduction of the GH-link mobile by GhIPSS
2013	Introduction of a new Base Rate calculation formula by the Bank of Ghana
2013	Introduction of the limit on over-the-counter cheque payments to third parties
2013	Introduction of a new VAT law on the business of banking
2014	Introduction of Instant Payment Schemes by GhIPSS
2015	The Energy Sector Levies Act 2015 (Act 899) passed by Parliament
2015	Introduction of the guidelines for E-money Issuance in Ghana
2016	Banks and Specialised Deposit-Taking Institution’s Act, 2016 (Act 930) passed to repel all the
	Existing Banking Laws of Ghana; Depositors’ Protection Act, 2016 (Act 931) passed into law
2016	Adoption of IFRS-9 for Banks in Ghana
2017	BOG’s notice for the requirement of the minimum stated capital of GH¢400 million to maintain Class 1 (Universal) Banking status

2017/19 Licensing of new financial institutions put on hold

Table 1. Definition of empirical model variables

Variable	Symbol	Description	Expected sign
Dependent Variable:
Net Interest Margin	NIM	Estimated using the annualized NIM	(+)
Bank-specific Factors:
Lagged NIM	NIMt-1	Lagged Annualized Net Interest Margin	(+)
Bank Size	LNSIZE	Natural logarithm of total assets	(±)
Bank Capital	CAP	Total owners’ equity over total assets	(±)
Return on Assets	ROA	Return on assets as a proxy for profitability	(±)
Liquidity	LIQ	Ratio of total loans over total deposits	(±)
Loan Loss Provision	LLP	Loan loss provision over total loans	(+)
Efficiency Factors:
Cost-to-income ratio	CIR	Operating cost to income ratio	(+)
Macroeconomic Factors:
GDP Growth Rate	GDPG	A proxy for economic growth in Ghana	(±)
Inflation Rate	INF	Change in consumer price index	(+)

Table 2. Summary Statistics of the Explanatory Variables

Variable	Observations	Mean	Std. Dev.	Minimum	Maximum
SIZE	233	1,926	1,837	95	9,721
CAP	233	0.170	0.127	0.006	0.833
ROA	233	0.029	0.026	−0.102	0.190
LIQ	233	0.577	0.164	0.240	0.980
LLP	233	0.086	0.096	−0.045	0.720
CIR	233	0.543	0.167	0.009	0.960
GDP	233	0.062	0.035	0.005	0.140
INFL	233	0.125	0.040	0.071	0.193

CAP, ROA, LIQ, LLP, CIR, GDPG, and INFL are recorded ratios; SIZE is in a million Ghana Cedis.

Table 3. Pairwise Correlation Matrix of Interest Rate Spread Determinants

	LSIZE	CAP	ROA	LLP	LIQ	CIR	GDP	INFL
LSIZE	1.000
CAP	−0.291	1.000
ROA	0.217	−0.222		1.000
LLP	−0.170	−0.001	−0.130	1.000
LIQ	0.099	−0.066		0.084	−0.119	1.000
CIR	−0.147	−0.083	−0.230	0.256	−0.338	1.000
GDP	−0.246	0.247	−0.062	0.122	−0.206	0.184	1.000
INFL	−0.041	0.085	−0.210	0.032	0.282	0.097	−0.427	1.000

Table 4. Variance Inflation Factor—Interest Rates Spread Determination

Explanatory Variables	VIF	1/VIF (Tolerance)
Gross Domestic Product Growth (GDPG)	1.74	0.576
Inflation (INFL)	1.67	0.600
Liquidity Ratio (LIQ)	1.38	0.726
Cost-to-income ratio (CIR)	1.31	0.766
Bank Capitalization (CAP)	1.26	0.792
Natural Log of Bank Size (LSIZE)	1.20	0.832
Bank Profitability (ROA as proxy)	1.19	0.837
Credit Risk (LLP as proxy)	1.10	0.906
Mean VIF	1.36

Table 5. Determinant of bank interest rate in Ghana

Variables/Estimates	RE Model	Two-step System GMM
NIMt-1	-	−0.238(0.238)
LSIZE	0.004** (0.002)	0.008* (0.004)
CAP	0.001 (0.013)	0.015 (0.018)
ROA	0.199 (0.121)	0.303** (0.107)
LLP	0.014 (0.013)	−0.021(0.014)
LIQ	0.021 (0.013)	0.032 (0.019)
CIR	−0.028** (0.013)	−0.005 (0.011)
GDP	0.054(0.053)	0.207** (0.082)
INFL	0.100 *(0.060)	0.248* (0.132)
CONS	0.061*** (0.022)	−0.029 (0.041)
F-Statistics (p-value)	0.000	0.000
Number of Banks	19	19
Number of valid instruments		22
Number of Observations	233	214
Hansen J test (p-value)		0.715
Arellano-Bond tests:
AR (1) p-value		0.340
AR (2) p-value		0.476
Difference-in-Hansen test (p-value):
GMM instruments for levels		0.155

The significance level at 10%, 5%, and 1% are denoted by *, **, and ***, respectively. T-statistics are in parentheses below the estimated coefficients.