BANK REFORMS, COMPETITION, AND STABILITY IN THE GHANA BANKING INDUSTRY by James Antwi A dissertation submitted to the Faculty of the University of Delaware in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics Spring 2020 © 2020 James Antwi All Rights Reserved BANK REFORMS, COMPETITION, AND STABILITY IN THE GHANA BANKING INDUSTRY by James Antwi Approved: __________________________________________________________ Michael A. Arnold, Ph.D. Chair of the Department of Economics Approved: __________________________________________________________ Bruce W. Weber, Ph.D. Dean of Alfred Lerner College of Business & Economics Approved: __________________________________________________________ Douglas J. Doren, Ph.D. Interim Vice Provost for Graduate and Professional Education and Dean of the Graduate College I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ James L. Butkiewicz, Ph.D. Chair of dissertation committee I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ Evangelos M. Falaris, Ph.D. Member of dissertation committee I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ Kenneth A. Lewis, Ph.D. Member of dissertation committee I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ Breck Robinson, Ph.D. Member of dissertation committee ACKNOWLEDGMENTS I am very grateful to Professor James L. Butkiewicz, who chaired my dissertation committee, for his constant guidance and support. My research has benefited greatly from the inspiration and the immense knowledge he provided. To my committee members Professor Evangelos M. Falaris, Professor Kenneth A. Lewis, and Professor Breck Robinson, I express my profound appreciation for your valuable contribution in reading and providing critical comments and corrections. I thank Deborah Sharpley and the professors in the Economics department for their support throughout my studies in this program. This doctoral project is dedicated to my wife, Gloria, my children Mame, Ama, Rachel, and Joel, for their support. I give thanks to my Lord and Master, Jesus Christ, who gives me life, knowledge, wisdom, strength, and courage to reach this highpoint in my academic pursuit. iv TABLE OF CONTENTS LIST OF TABLES ....................................................................................................... vii LIST OF FIGURES .................................................................................................... viii ABSTRACT ................................................................................................................... ix Chapter 1 INTRODUCTION .............................................................................................. 1 1.1 Background ................................................................................................ 1 1.2 Purpose of the Study .................................................................................. 4 1.3 Research Questions .................................................................................. 10 1.4 Problem Statement and Background ........................................................ 11 1.5 Economic Growth in Ghana..................................................................... 16 1.6 Ghana Cocoa Sector Financing ................................................................ 18 1.7 Method and Organization of the study..................................................... 19 2 REVIEW OF LITERATURE ........................................................................... 20 2.1 Bank Competition and Financial Stability ............................................... 20 2.2 Bank Competition, Bank Stability, and Economic Growth ..................... 25 2.3 Bank Recapitalization and Financial Stability ......................................... 27 2.4 Universal Banking and Financial Stability .............................................. 30 3 THE BANKING INDUSTRY AND MACROECONOMIC DEVELOPMENT IN GHANA ........................................................................ 32 3.1 Historical Perspective of Banking Policies in Ghana .............................. 32 3.2 Structure of Ghana’s Banking System ..................................................... 35 3.3 Administrative Structure of the Bank of Ghana ...................................... 40 3.4 Ghana Banking Sector Regulations ......................................................... 41 3.5 Banking Sector Performance in Ghana .................................................... 48 3.6 Macro-Financial Stress Tests ................................................................... 52 3.7 Macroeconomic Development in Ghana ................................................. 55 3.7.1 Real Sector Performance and Economic Activity ....................... 56 v 3.7.2 Inflation and Interest Rates .......................................................... 58 3.7.3 Bank Credit to Private Sector Development ................................ 61 4 METHODOLOGY ........................................................................................... 62 4.1 Data Consideration and Sources .............................................................. 62 4.2 Description and Explanation of Variables ............................................... 63 4.3 Measure of Bank Competition ................................................................. 66 4.3.1 Estimating the Lerner Index ......................................................... 67 4.4 Measure of Bank Stability ....................................................................... 68 4.4.1 Estimating the Z-score ................................................................. 68 4.5 The Degree and Evolution of Bank Competition .................................... 69 4.6 Model for Bank Competition and Financial Stability .............................. 69 4.7 Model for Bank Recapitalization and Financial Stability ........................ 72 4.8 Model for Bank Competition, Bank Stability, and Economic Growth .... 72 5 EMPIRICAL RESULTS ................................................................................... 75 6 CONCLUSION AND POLICY RECOMMENDATION ................................ 93 REFERENCES ………………………………………………………………...……. 96 vi LIST OF TABLES Table 1-1: Real Interest Rates and Inflation Rates in Selected Sub-Saharan African Countries ........................................................................................................ 6 Table 1-2: Non-Performing Loans Value (in Percent) for Selected SSA Countries .... 13 Table 2-1: Summary of Literature Review on Bank Competition and Stability .......... 24 Table 3-1: The Structure of Ghana Banking Sector...................................................... 36 Table 3-2: Evolution of Banks in Ghana ...................................................................... 39 Table 3-3: A List of Regulations in the Ghana Financial Industry From 1998 to 2017 ................................................................................................ 47 Table 3-4: Bank Performance and Financial Indicators (in Percent) ........................... 51 Table 3-5: Selected Macroeconomic and Financial Indicators (in Percent) ................. 56 Table 4-1: Overview of Variables Names and Definitions ........................................... 65 Table 5-1: The Lerner Index for Ghana (1998 – 2018) ................................................ 77 Table 5-2: Summary Statistics for Bank Stability, Competition, Bank Specific and Macro Variables ................................................................................... 78 Table 5-3: Parameter Estimates for the Effect of Competition on Bank Stability ........ 82 Table 5-4: Parameter Estimates for the Effect of Bank Recapitalization on Bank Stability ........................................................................................................ 86 Table 5-5: Summary Statistics for the Effect of Bank Stability and Competition on Economic Growth .................................................................................. 91 Table 5-6: Panel Unit Root Test Results for Sub-Sahara Africa Countries 1996-2014 .................................................................................................... 91 Table 5-7: Parameter Estimates for the Long- and Short-Run Effects of Competition and Stability on Economic Growth ........................................ 92 vii LIST OF FIGURES Figure 1-1: Non-Performing Loans in Ghana ............................................................... 10 Figure 1-2: Real GDP Growth (in percent) for Selected SSA countries ...................... 17 Figure 1-3: Ghana’s Real GDP Growth (annual %) ....................................................