1Background to the studyThe role and contributions of a healthyand a sound financial system in a developing economy cannot be underestimated(Raberto, Ponta, Teglio & Cincotti, 2016; Sander & Kleimeier, 2004;White, 1999; Wilson & Campbell, 2016). All over the world, the bankingsector forms a fundamentally predominant component of the entire financialsystem in an economy (Singh, 2010). Basically, the banking sector plays a majorimportant role in mobilizing the funds from deposits and giving them out asloans to borrowers (Osei, 2015; Lysandrou & Nesvetailova, 2015). There aresubstantial literature which support the fact that the development and growthof an economy mostly depends on the success and how efficient the bankingsector can function (Greenbaum, Thakor & Boot, 2015; Lone, 2015; Armouret.
, 2016; James, 2015). Globally, banks constitutes the most significantplayers in the financial market especially in the developing world and Ghana isnot an exception. The Banking system in Ghana accounted for 70 percent of thefinancial sector according to Bawumia et. al.
, (2008). This suggest that thebanking sector is crucial to the growth and development of the Ghanaian economyas failure of this sector could have a negative effect on the entire economy.Over the years, the banking industryin Ghana has been characterised by several reforms and restructuring and thisis as a result of pressure from both the internal and external economicdevelopments and other macroeconomic shocks (Abaid, Detragiache & Tressel,2008; Aryeetey et., 1996; Aryeetey et., 1997; Aryeetey et., 1998).
Recently onedevelopment in the sector which was initiated to reduce systematic risk is theadoption of the International Financial Reporting Standards (IFRS) in line withinternational standards by Bank of Ghana (Sanusi, 2010). Also other moves ofthe happenings in the sector include among others the establishment ofCollateral Registry and Credit Reference Bureaus which seeks to promotetransparency and ease credit accessibility, the setting up of the FinancialIntelligence Centre (FIC) to address money laundering and counter financing forterrorism, and the recapitalization of the banks required by Bank of Ghana(Kwakwa, 2014). All these measures by initiated by the Bank of Ghana and themotive behind is to mitigate risk and stabilize the banking system (Kwakwa,2014). Moreover these reforms beingundertaking by the central Bank of Ghana are well backed by tighter andeffective supervisory oversight to ensure financial stability andsoundness of the financial system (Kwakwa, 2014).
These reformsin the Ghanaian Banking sector have totally changed the face of the industry.These well sequence financial sector reforms have been driven by banking sectorliberalization, enhanced competition, and gradual capital accountliberalization (Bawumia et al., 2008). It is therefore made the industryvery attractive to foreign Banks especially banks from the neighbouring countryNigeria. The industry has witnessed number of foreignbanks gaining entry into Ghana to make business. Historically, the entry offoreign banks in Ghana began in the year 1896, when the Bank of theBritish West Africa (which later became Standard CharteredBank in 1985) was first opened as a branch in Ghana (then called GoldCoast), Accra (www.citifmonlinecom).
This bank operated for a while andits success from operations attracted other foreign banks to begin operationsin the then Gold Coast (www.citifmonlinecom). In 1918, the Colonial Bank alsostarted its operations but later merged with Anglo-Egyptian Bank, the NationalBank of South Africa and Barclays Bank and became known as Barclays Bank(www.citifmonlinecom).
The period 1920 – 1950 saw only two banks (the Bank ofthe British West Africa and Barclays Banks) operating in Ghana (then GoldCoast) which all of them were foreign owned (www.citifmonlinecom). The onlydomestic bank which was first established in that era was the Ghana CommercialBank in 1953 and it was tasked to reduce the control of the banking sector bythe two expatriate banks (www.citifmonlinecom).AfterGhana gained independence in the year 1957, the industry has been a substantialinflow of foreign bank investment into the country. A large percentage of thesebanks are from Nigeria.
Available statistics indicates that these banks arehighly making profit even more than the domestic banks. It is of this reasonwhy this thesis sought to investigate the factors that is influencing the entryof foreign banks into the Ghanaian Banking economy. 1.2 Problem StatementIn general, the theory of finance andaccounting clearly elaborates how firms like banks can make profit from theiroperations. Basically banking in the developing countries like Ghana hasresorted to the traditional way of banking thus accepting deposits and givingout loans. This traditional way of banking is predominant in the Ghanaianbanking sector and it has made it attractive for foreign banks to gain entry.
Researchon factors which determines the profitability of foreign banks have beenstudied extensively in advanced countries and the developed world countries (Claessens,Demirguc-Kunt, Huizinga, 2001; Kosmidou, Pasiouras & Tsaklanganos, 2007;Stum, 2004; William, 2003). Literature survey on foreign bank profitability hasalso shown there are other several works which has been done in other countries(Clarke, 2003). For instance, Pasiouras & Kosmidou, (2007) used a banklevel data to examine how bank’s specific characteristics and the overallbanking environment affect the profitability of commercial domestic and foreignbanks operating in the 15 EU countries over the period 1995–2001. Their resultsindicate that profitability of both domestic and foreign banks is affected notonly by bank’s specific characteristics but also by financial market structureand macroeconomic conditions. Also Senguta, (2007) established the fact thatsuccess in gaining borrowers of higher quality by offering cheaper loansincreases with the efficiency (cost) advantage.However,due to limited data, little research has been done on foreign bankprofitability in Ghana.
The closest studies on this topic are the works done byBuchs, (2005) and Matthew & Laryea (2012). There istherefore the need to conduct much research in the case of Ghana. This study therefore seeks to examine the determinantsof foreign bank profitability in Ghana. Theproblem of the study therefore is to investigate some key determinants ofprofitability and the extent to which they impact on profitability of foreignbanks in the Ghanaian banking sector.
1.3Objective of the thesis The broad objective of the studyis by using statistical andeconometric methods to assess the factors that contribute to the profit patternof foreign banks in Ghana. This assessment should be usable by the managementof these banks to improve the profit.
Thespecific objectives for the study are as follows:· Toidentify factors that significantly determines the profitability of ForeignBanks in Ghana.· Toascertain the extent to which these factors impact on banks profitability andthe relationship of the factors and profitability.1.4Research Questions· Whatare the factors that determine profitability of foreign banks in Ghana?· Towhat extent does these factors impact on profitability?1.5 Significance of the studyThis thesis on the factors that determinethe profitability of foreign banks in Ghana will be of importance to academics,the Ghana banking industry, the central bank of Ghana, policy makers and the managementof banks in Ghana. To a larger extent, it will also be of importance tocustomers of banks and the general public. It is expected that the findings ofthis thesis will inform foreign banks and local Ghana how to be competitivewith regards to the variables used.
1.6 Organization of the StudyThe research was organized into five mainchapters. Chapter one dealt with introduction of the study. That is backgroundof the study, the statement of the problem, the objective of the study, thesignificance of the study, scope of the study and the limitations of the study.Chapter two provides a review of relevantliterature of other authors in relation to the topic under study. Theliterature review gives the explanation of basic terminologies and discussionsto give the understanding of the theory of banks and how banks makes profit.Chapter three concentrates only on the methodology of the study.
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