Why do Ghanaian banks behave uncompetitively?

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Acompetitive banking system is important for effective financial intermediation-channeling savings into productive investment-and this, in turn, is a key to economic growth. A new study finds that an uncompetitive market structure as well as certain other characteristics of the banking system and economy are hampering financial intermediation in Ghana. Thierry Buchs, who recently transferred from the World Bank's International Finance Corporation to Switzerland's State Secretariat for Economic Affairs, and Johan Mathisen of the IMF's Policy Development and Review Department, spoke with Jacqueline Irving of the IMF Survey.

IMF SURVEY: Why are banks in Ghana behaving uncompetitively?

MATHISEN: The main reason is the government's continuing financing needs; banks have been able to rely on interest earnings on their large holdings of treasury bills, with little need to compete for lending business in the private sector.

A second reason is that large banks have advantages, including economies of scale, and the small savings base prevents smaller banks from emerging quickly. A third reason is that Ghana lacks an enabling business environment for the private sector.High investment costs might also deter new entrants-particularly costs of telecommunications, which are largely dysfunctional outside the main cities.

IMF SURVEY: Why did you do this research now?

BUCHS:We were struck by the Ghanaian banking sector's relatively high profitability indicators-significantly higher than those not only in many developed countries but also in other African countries and emerging markets.We thought these "super profits" were likely to be related to the market's uncompetitive nature. To estimate competition in the market, we looked at banks' financial statements, applying a model that had been derived and used for other markets worldwide since the 1980s but never before for an African country.We ran regressions using bank level data, allowing for bank-specific differences in the production function and differences in bank size and ownership.We then looked at the prices of factor inputs.

MATHISEN: Our study, which relied largely but not solely on the model, grew out of an IMF Financial Sector Stability Assessment (FSSA) Update for Ghana in 2003.We also incorporated local bankers' perspectives in our findings.

The model's framework is simple, testing whether marginal revenues equal marginal costs and the extent of any differential.

This enabled us to...