Asset‐Liability Management and bank profitability: Statistical cost accounting analysis from an emerging market

• Date: 01 January 2021
• DOI: http://doi.org/10.1002/ijfe.1860
• Published date: 01 January 2021

RESEARCH ARTICLE

Asset-Liability Management and bank profitability:

Statistical cost accounting analysis from an emerging

market

Freeman Brobbey Owusu

1

| Abdul Latif Alhassan

2

1

Department of Accounting and Finance,

Sheffield Business School, Sheffield

Hallam University, Sheffield, UK

2

Development Finance Centre (DEFIC),

Graduate School of Business, University of

Cape Town, Cape Town, South Africa

Correspondence

Freeman B. Owusu, Department of

Accounting and Finance, Sheffield

Hallam University, Sheffield, UK.

Email: f.b.owusu@shu.ac.uk

Abstract

This paper employs the Statistical Cost Accounting (SCA) model to examine

the relationship between profit and Asset-Liability Management (ALM) struc-

ture of 27 banks in Ghana over the period 2007–2015. The findings confirm

the central hypothesis of the SCA model and provide evidence that profitability

is linked to balance sheet items in Ghana. It also documents evidence that

domestic banks have higher rate of return on assets than foreign banks over

the study period. In addition, high profit banks were observed to have higher

rate of return on assets as well as higher rate of cost on liabilities than low

profit banks. These findings provide useful insights to bank management

through the identification of the assets items that generate highest return on

bank profitability.

KEYWORDS

Asset and Liability Management, banking, Profitability, Statistical Cost Accounting

1|INTRODUCTION

The economic growth of every country is influenced

greatly by the activities of banks. Thus, a sound banking

system is essential for the economic development of every

nation (Ayadi, Arbak, Naceur, & De Groen, 2015;

Goodhart, 2004). For most African countries with thin

and illiquid stock markets (see Allen, Otchere, &

Senbet, 2011), the banking industry remains the main

financial intermediary through which funds are trans-

ferred from surplus units to deficit units for productive

use. Hence, failure of the banking system will generate

serious negative externalities for the rest of the economy

(Morris & Turner, 1996). Banking crises and failures in

developing economies far outweigh those in developed

economies (Caprio & Klingebiel, 1996). According to

Morris and Turner (1996), banking problems in the

developing economies have dire consequences for the

domestic economies and rippling effect on other coun-

tries as a result of the integration of financial markets

globally.

Through prudent management of assets and liabili-

ties, banks are able to ensure going concern. Poor Asset

and Liability Management (ALM) has been identified as

one of the root causes of bank failures (Daumont, Le

Gall, & Leroux, 2004; Kapur, Hadjimichael, Hilber, &

Szymczak, 1991). ALM involves the strategic manage-

ment of the assets and liabilities of an institution (bank)

to optimize profitability, improve liquidity, and to protect

it against various bank risks (Brick, 2014). It is an indis-

pensable part of risk management, which is at the very

core of financial management of banks. ALM goes

Received: 24 October 2018 Revised: 13 October 2019 Accepted: 18 June 2020

DOI: 10.1002/ijfe.1860

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2020 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd.

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