IDEAS home Printed from https://ideas.repec.org/a/kap/ecopln/v49y2016i1d10.1007_s10644-015-9174-6.html
   My bibliography  Save this article

Market power, efficiency and bank profitability: evidence from Ghana

Author

Listed:
  • Abdul Latif Alhassan

    (University of Cape Town)

  • Michael Lawer Tetteh

    (Zenith University College)

  • Freeman Owusu Brobbey

    (Methodist University College)

Abstract

This study examines the determinants of bank profitability in Ghana within the market power, relative market power and efficient structure frameworks. Using annual data on 26 Ghanaian banks from 2003 to 2011, we employ the Herfindahl Index and concentration ratio as our proxies for market power hypothesis while efficiency scores from the data envelopment analysis is employed as a proxy for the efficient structure hypothesis. The system generalized method of moment is employed to estimate a panel data model with return on assets, return on equity and net interest margin as our proxies for bank profitability. The results of the empirical estimation reject both the market power and relative market power hypotheses in the Ghanaian banking industry. While technical efficiency is found to have a positive relationship with profitability to support the efficient structure hypothesis, a negative relationship between scale efficiency and profitability is reflected by the inability of banks to operate at the optimal scale of operations. We also document evidence on the low persistence of profit which suggests a competitive banking industry. Implications for industry regulation are discussed.

Suggested Citation

  • Abdul Latif Alhassan & Michael Lawer Tetteh & Freeman Owusu Brobbey, 2016. "Market power, efficiency and bank profitability: evidence from Ghana," Economic Change and Restructuring, Springer, vol. 49(1), pages 71-93, February.
    • Handle: RePEc:kap:ecopln:v:49:y:2016:i:1:d:10.1007_s10644-015-9174-6
    DOI: 10.1007/s10644-015-9174-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10644-015-9174-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10644-015-9174-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Elyas Elyasiani & Yong Wang, 2012. "Bank holding company diversification and production efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 22(17), pages 1409-1428, September.
    2. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    3. Athanasoglou, Panayiotis P. & Brissimis, Sophocles N. & Delis, Matthaios D., 2008. "Bank-specific, industry-specific and macroeconomic determinants of bank profitability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 121-136, April.
    4. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    5. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    6. Neelesh Gounder & Parmendra Sharma, 2012. "Determinants of bank net interest margins in Fiji, a small island developing state," Applied Financial Economics, Taylor & Francis Journals, vol. 22(19), pages 1647-1654, October.
    7. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    8. Yong Tan & Christos Floros, 2012. "Bank profitability and inflation: the case of China," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(6), pages 675-696, October.
    9. Joe S. Bain, 1951. "Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936–1940," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 65(3), pages 293-324.
    10. Dong Jin Shin & Brian H. S. Kim, 2011. "Efficiency of the Banking Industry Structure in Korea," Asian Economic Journal, East Asian Economic Association, vol. 25(4), pages 355-373, December.
    11. Molyneux, Philip & Thornton, John, 1992. "Determinants of European bank profitability: A note," Journal of Banking & Finance, Elsevier, vol. 16(6), pages 1173-1178, December.
    12. Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
    13. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    14. Georgios E. Chortareas & Jesus G. Garza‐Garcia & Claudia Girardone, 2011. "Banking Sector Performance in Latin America: Market Power versus Efficiency," Review of Development Economics, Wiley Blackwell, vol. 15(2), pages 307-325, May.
    15. Dietrich, Andreas & Wanzenried, Gabrielle, 2014. "The determinants of commercial banking profitability in low-, middle-, and high-income countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 337-354.
    16. Anthony Aboagye & S.K. Akoena & T.O. Antwi‐Asare & A.F. Gockel, 2008. "Explaining Interest Rate Spreads in Ghana," African Development Review, African Development Bank, vol. 20(3), pages 378-399.
    17. Anthony Q. Q. Aboagye, 2012. "Bank Concentration And Economic Costs Of Deposit Mobilization And Credit Extension In Ghana," Journal of Developing Areas, Tennessee State University, College of Business, vol. 46(2), pages 351-370, July-Dece.
    18. Joaquín Maudos Villarroya, 1996. "Market structure and performance in Spanish banking using a direct measure of efficiency," Working Papers. Serie EC 1996-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    19. Jesus Gustavo Garza-Garcia, 2012. "Does market power influence bank profits in Mexico? A study on market power and efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 22(1), pages 21-32, January.
    20. John H. Boyd & Mr. Gianni De Nicolo & Abu M. Jalal, 2009. "Bank Competition, Risk, and Asset Allocations," IMF Working Papers 2009/143, International Monetary Fund.
    21. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    22. Kwaku Ohene-Asare & Mette Asmild, 2012. "Banking efficiency analysis under corporate social responsibilities," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(2), pages 146-171.
    23. Qichang Ye & Zongling Xu & Dan Fang, 2012. "Market structure, performance, and efficiency of the Chinese banking sector," Economic Change and Restructuring, Springer, vol. 45(4), pages 337-358, November.
    24. E. W. Chirwa, 2003. "Determinants of commercial banks' profitability in Malawi: a cointegration approach," Applied Financial Economics, Taylor & Francis Journals, vol. 13(8), pages 565-571.
    25. Lloyd-Williams, D. M. & Molyneux, Phil & Thornton, John, 1994. "Market structure and performance in Spanish banking," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 433-443, May.
    26. Ephraim W. Chirwa & Montfort Mlachila, 2004. "Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1-5.
    27. Yong Tan & Christos Floros, 2012. "Bank profitability and inflation: the case of China," Journal of Economic Studies, Emerald Group Publishing, vol. 39(6), pages 675-696, December.
    28. Gilbert, R Alton, 1984. "Bank Market Structure and Competition: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 617-644, November.
    29. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    30. Nicholas Biekpe, 2011. "The Competitiveness of Commercial Banks in Ghana," African Development Review, African Development Bank, vol. 23(1), pages 75-87.
    31. Husain AL‐Omar & Abdullah AL‐Mutairi, 2008. "Bank‐Specific Determinants of Profitability: The case of Kuwait," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 24(2), pages 20-34, December.
    32. Fu, Xiaoqing (Maggie) & Heffernan, Shelagh, 2009. "The effects of reform on China's bank structure and performance," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 39-52, January.
    33. Thao Ngoc Nguyen & Chris Stewart, 2013. "Concentration and efficiency in the Vietnamese banking system between 1999 and 2009," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 21(3), pages 268-283, July.
    34. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    35. David Tennant & Abiodun Folawewo, 2009. "Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries," Applied Financial Economics, Taylor & Francis Journals, vol. 19(6), pages 489-507.
    36. Antonio Trujillo-Ponce, 2013. "What determines the profitability of banks? Evidence from Spain," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(2), pages 561-586, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nathaniel Blankson & Godfred Amewu & Kenneth Ofori-Boateng & Kwame Adanu, 2022. "Banking reforms, efficiency and competition: new empirical evidence from a panel vector autoregressive analysis of Ghanaian banks," SN Business & Economics, Springer, vol. 2(5), pages 1-24, May.
    2. Hongxing Yao & Muhammad Haris & Gulzara Tariq, 2018. "Profitability Determinants of Financial Institutions: Evidence from Banks in Pakistan," IJFS, MDPI, vol. 6(2), pages 1-28, May.
    3. Salah Mohammed Abdulahi & Mekonnen Kumlachew Yitayaw & Habtamu Legese Feyisa & Wondmagegn Biru Mamo, 2023. "Factor affecting technical efficiency of the banking sector: Evidence from Ethiopia," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(1), pages 2186039-218, December.
    4. Martin Boďa & Emília Zimková, 2017. "Malmquist index analysis of the recent development of the Slovak banking sector from two different angles," Economic Change and Restructuring, Springer, vol. 50(2), pages 95-131, May.
    5. Abayomi Oredegbe, 2020. "Canadian Banking Industry Profitability: Exploring the Relevance of Two Competing Hypotheses," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(4), pages 1-67, April.
    6. Vera-Gilces, Paul & Camino-Mogro, Segundo & Ordeñana-Rodríguez, Xavier & Cornejo-Marcos, Gino, 2020. "A look inside banking profitability: Evidence from a dollarized emerging country," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 147-166.
    7. Olszak, Małgorzata & Kowalska, Iwona, 2023. "Do competition and market structure affect sensitivity of bank profitability to the business cycle?," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    8. Kwabena Owusu Banahene, 2018. "Ghana Banking System Failure: The Need for Restoration of Public Trust and Confidence," International Journal of Business and Social Research, LAR Center Press, vol. 8(10), pages 1-5, October.
    9. Ma³gorzata Olszak & Iwona Kowalska, 2021. "Do competition and market structure matter for sensitivity of bank profitability to business cycle?," Faculty of Management Working Paper Series 12021, University of Warsaw, Faculty of Management.
    10. Roland Banya & Nicholas Biekpe, 2018. "Banking efficiency and its determinants in selected frontier african markets," Economic Change and Restructuring, Springer, vol. 51(1), pages 69-95, February.
    11. Amin Jan & Maran Marimuthu & Muhammad Kashif Shad & Haseeb ur-Rehman & Muhammad Zahid & Ahmad Ali Jan, 2019. "Bankruptcy profile of the Islamic and conventional banks in Malaysia: a post-crisis period analysis," Economic Change and Restructuring, Springer, vol. 52(1), pages 67-87, February.
    12. Syed Manzur Quader & Mohammad Nayeem Abdullah, 2020. "How financial market in Bangladesh appraises efficiency?," Economic Change and Restructuring, Springer, vol. 53(3), pages 475-494, August.
    13. Freeman Brobbey Owusu & Abdul Latif Alhassan, 2021. "Asset‐Liability Management and bank profitability: Statistical cost accounting analysis from an emerging market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1488-1502, January.
    14. Bijoy Rakshit & Samaresh Bardhan, 2022. "Does Bank Efficiency Enhance Bank Performance? Empirical Evidence From Indian Banking," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(Special I), pages 103-124, March.
    15. Muhammad Haris & Yong Tan & Ali Malik & Qurat Ul Ain, 2020. "A Study on the Impact of Capitalization on the Profitability of Banks in Emerging Markets: A Case of Pakistan," JRFM, MDPI, vol. 13(9), pages 1-21, September.
    16. Kwabena Owusu Banahene, 2018. "Ghana Banking System Failure: The Need for Restoration of Public Trust and Confidence," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 8(10), pages 1-5, October.
    17. Zoran Grubišić & Sandra Kamenković & Tijana Kaličanin, 2022. "Market Power and Bank Profitability: Evidence from Montenegro and Serbia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(1), pages 5-22.
    18. Usman Bashir & Shoaib Khan & Abdulhafiz Jones & Muntazir Hussain, 2021. "Do banking system transparency and market structure affect financial stability of Chinese banks?," Economic Change and Restructuring, Springer, vol. 54(1), pages 1-41, February.
    19. Serhat Yüksel & Shahriyar Mukhtarov & Elvin Mammadov & Mustafa Özsarı, 2018. "Determinants of Profitability in the Banking Sector: An Analysis of Post-Soviet Countries," Economies, MDPI, vol. 6(3), pages 1-15, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tan, Yong, 2017. "The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 89-106.
    2. Nathaniel Blankson & Godfred Amewu & Kenneth Ofori-Boateng & Kwame Adanu, 2022. "Banking reforms, efficiency and competition: new empirical evidence from a panel vector autoregressive analysis of Ghanaian banks," SN Business & Economics, Springer, vol. 2(5), pages 1-24, May.
    3. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    4. Tan, Yong, 2016. "The impacts of risk and competition on bank profitability in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 85-110.
    5. Hongxing Yao & Muhammad Haris & Gulzara Tariq, 2018. "Profitability Determinants of Financial Institutions: Evidence from Banks in Pakistan," IJFS, MDPI, vol. 6(2), pages 1-28, May.
    6. Moses Nyangu & Nyankomo Marwa & Ashenafi Fanta & Latacz-Lohmann Uwe, 2022. "The Dynamics of Bank Concentration, Competition and Efficiency in the East African Community," Journal of Industry, Competition and Trade, Springer, vol. 22(1), pages 21-49, March.
    7. Fazelina Sahul Hamid, 2017. "The Effect of Market Structure on Banks’ Profitability and Stability: Evidence from ASEAN-5 Countries," International Economic Journal, Taylor & Francis Journals, vol. 31(4), pages 578-598, October.
    8. Ayaydin, Hasan & Karaaslan, İbrahim, 2014. "Stock Market Development, Bank Concentration, Ownership Structure, and Bank Performance: Evidence from Turkey," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(1), pages 49-67.
    9. González, Luis Otero & Razia, Alaa & Búa, Milagros Vivel & Sestayo, Rubén Lado, 2019. "Market structure, performance, and efficiency: Evidence from the MENA banking sector," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 84-101.
    10. Vera-Gilces, Paul & Camino-Mogro, Segundo & Ordeñana-Rodríguez, Xavier & Cornejo-Marcos, Gino, 2020. "A look inside banking profitability: Evidence from a dollarized emerging country," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 147-166.
    11. Pankaj Sinha & Sakshi Sharma, 2016. "Determinants of bank profits and its persistence in Indian Banks: a study in a dynamic panel data framework," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 7(1), pages 35-46, March.
    12. Lartey, Theophilus & James, Gregory A. & Danso, Albert & Boateng, Agyenim, 2023. "Interbank market structure, bank conduct, and performance: Evidence from the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 210(C), pages 1-25.
    13. Mimouni, Karim & Smaoui, Houcem & Temimi, Akram & Al-Azzam, Moh'd, 2019. "The impact of Sukuk on the performance of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 42-54.
    14. Otero, Luis & Razia, Alaa & Cunill, Onofre Martorell & Mulet-Forteza, Carles, 2020. "What determines efficiency in MENA banks?," Journal of Business Research, Elsevier, vol. 112(C), pages 331-341.
    15. J.A. Bikker & Tobias M. Vervliet, 2017. "Bank Profitability and Risk-Taking under Low Interest Rates," Working Papers 17-10, Utrecht School of Economics.
    16. Seyed Alireza Athari & Mahboubeh Bahreini, 2023. "The impact of external governance and regulatory settings on the profitability of Islamic banks: Evidence from Arab markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2124-2147, April.
    17. Saona, Paolo, 2016. "Intra- and extra-bank determinants of Latin American Banks' profitability," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 197-214.
    18. Richard Oduro, 2024. "Impact of recapitalisation and dividend payout policies on financial sustainability of rural and community banks in Ghana," Future Business Journal, Springer, vol. 10(1), pages 1-18, December.
    19. Muhammad Haris & HongXing Yao & Gulzara Tariq & Ali Malik & Hafiz Mustansar Javaid, 2019. "Intellectual Capital Performance and Profitability of Banks: Evidence from Pakistan," JRFM, MDPI, vol. 12(2), pages 1-26, April.
    20. Faluk Shair & Na Sun & Sun Shaorong & Firdos Atta & Muhammad Hussain, 2019. "Impacts of risk and competition on the profitability of banks: Empirical evidence from Pakistan," PLOS ONE, Public Library of Science, vol. 14(11), pages 1-27, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:ecopln:v:49:y:2016:i:1:d:10.1007_s10644-015-9174-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.