assessing the performance of ghanaian- owned banks

8/11/2019 Assessing the Performance of Ghanaian- Owned Banks

1/41

ASSESSING THE PERFORMANCE OF GHANAIAN-OWNED BANKS USING CAMEL MODEL

MBA Project Report

By

Dromor Tackie-Yaoboi

(531110332)

under the Guidance of

Mr. Francis Brobbey


2/41

EXECUTIVE SUMMARY

Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over

this period, the banking sector has experienced a paradigm shift. Hence, it is high time tomake performance appraisal of this sector. Accordingly, a framework for the evaluation ofthe current strength of the system, and of operations and the performance of the bankshas been provided by Central Banks measuring rod of CAMELS

Data was collated and analysed from case study banks from 2000 to 2005 usingCAMEL's framework and the findings from the study indicated that Domestic banks inGhana are well-capitalised, profitable, liquid, sound and stable but less efficient; staff andinfrastructural costs account for the high operational costs; reduction in reserverequirements have lead to improvement in the loans portfolio; and that size is not anindication of profit performance.

It is recommended that there is the need to reduce transactional cost and reserverequirements, charges and rates; address the occurrences of losses on the loan portfolio;develop a common IT infrastructure compatible for the industry; encourage the culture ofsavings and merger and consolidation among smaller banks.


3/41

CHAPTER ONEINTRODUCTION

Background to the Study

A sound financial system is indispensable for a healthy and vibrant economy. The banking sector

constitutes a predominant component of the financial services industry. The performance of any

economy to a large extent is dependent on the performance of the banking sector. The banking sectorsperformance is seen as the replica of economic activities of the nation as a healthy banking system acts

as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our

country have been assigned a significant role in financing the process of planned economic growth.

Significant changes that have occurred in the banking sector in the past five decades sinceindependence:

Reduction of government ownership during early 1950s to the advent of liberalization, privatization

and globalization, in the post-1983 era.

Banks in Ghana have undergone restructuring during 1988-2012 and still on-going. There have been

some improvements in the restructuring.

Profitability has soared in recent years with return on equity (ROE) between 16% and 24%, averaging20% over the last 16 years.

Capital adequacy ratios have seen improvement outpaced the statutory requirement of 10%.

In real terms, bad debts have been falling, and the problem of non-performing assets seems to have

been tackled.


4/41

CHAPTER ONEINTRODUCTION (CONT..)

It could however be argued that all is not well with the banking industry. The high profitability could be said to owe less to efficiency and competitiveness than to the structure

of the industry that enables most banks to reap supernormal profits (Ziorklui and Gockel, 2000).

Also, a carefully review of the balance sheets of banks in Ghana suggests that the banks in Ghana havegenerated extra returns by taking greater risks.

The flurry of reforms witnessed over the last one and half decade has brought about significantchanges in the banking arena in the country.

Statement of the Problem

Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over thisperiod, the banking sector has experienced a paradigm shift. Hence, it is high time to makeperformance appraisal of this sector. Accordingly, a framework for the evaluation of the currentstrength of the system, and of operations and the performance of the banks has been providedby Central Banks measuring rod of CAMELS which stands for capital adequacy, assets quality,

management efficiency, earning quality, liquidity and internal control systems. There are currently two major supervisory tools for rating Banks used by the Bank of Ghana and

these are in line with the BASEL core principles for effective banking supervision

CAMELS and;

CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls)


5/41

CHAPTER ONE

INTRODUCTION (CONT)

Objectives of the studyThe general objective of the study is to analyse performance of domestic banks in Ghana.

The specific objectives of the study include:

To analyse the capital adequacy of domestic banks.

To test for asset quality of domestic banks.

To assess the profitability of domestic banks. To analyse the cost efficiency of domestic banks

Hypothesis Testing

The study tested the following hypothesis:

H1: The profit growth of banks is not related to their size

H2: The profit growth of banks is related to their size

The hypothesis is be tested at 5% level of significance (95% confidence level)


6/41

CHAPTER ONE

INTRODUCTION (CONT) Justification for the Study

The functions of the banking system including providing payments and settlements systems,

mechanism for borrowing and lending, and pooling and allocation of funds, among othersimpinge on all aspects of the economy and are central to the overall performance of theeconomy. The efficacy of the financial systems in performing these functions is a majoringredient of the efficacy of the economy as a whole. Given the pivotal role of banking in aneconomy, the role of competition in this industry is particularly important.

Survival in today competitive environment depends on performance and growth. Competitionhas implications for efficiency, innovation, pricing, and availability of choice, consumer welfare,and the allocation of resources in the economy. If competition is weak, these advantages may be

lost and there is likely to be a transfer of welfare from consumers to both the producers of goodsand services and the shareholders of these firms.

Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over thisperiod, the banking sector has experienced a paradigm shift. Hence, it is high time to makeperformance appraisal of this sector. Accordingly, a framework for the evaluation of the currentstrength of the system, and of operations and the performance of the banks has been providedby Central Banks measuring rod of CAMELS which stands for capital adequacy, assets quality,management efficiency, earning quality, liquidity and internal control systems.

The main endeavour of CAMEL system is to detect problems before they manifest themselves.The Bank of Ghana has instituted this mechanism for critical analysis of the balance-sheet ofbanks by themselves and presentation of such analysis to provide for internal assessment of thehealth of banks. The analysis, which is made available to the Ghana, forms a supplement to thesystem of off-site monitoring of banks. The prime objective of the CAMEL model of ratingbanking institutions is to catch up the comparative performance of various banks (Bodla and

Verma, 2006).


7/41

CHAPTER ONE

INTRODUCTION (CONT) Methodology

Methodology will be fully discussed under chapter four ( Methodology chapter)

Organisation of the study

This study has being organised as follows: Chapter One- Introduction, Chapter Two-Literature Review, Chapter ThreeProfile of Domestic Banks, Chapter Four-

Methodology, Chapter Five - Results and Analyse of data, and Chapter Six-Conclusion and Recommendation.


8/41

CHAPTER TWO

LITERATURE SURVEY Overview of Banking in Ghana

Primary Banking activities in Ghana was usshered in by the then British WestAfrican Bank now Stanchart in 1896 in Accra. It was followed by Barclays Bank in1917.

The banking industry in Ghana witnessed some interventional policies aimed atcontrolling the cost and direction of finance in order to facilitate economicdevelopment soon after Ghana had attained political independence. Notableamong these policies were:

the establishment of public sector banks the imposition of administrative controls on interest rates; and

sectoral allocation of bank credits.

The financial crisis which plagued Ghana from 1983 to 1988 moved the Bank ofGhana (Central Bank) to embark on the Financial Sector Structural AdjustmentProgram (FINSAP) to address it. Notable among the major objectives of

FINSAP were: the restructuring of the financial sector and

the creation of new institutions including Ghana Stock Exchange (GSE) torevitalize the financial sector (Frimpong, 2008)


9/41

CHAPTER TWO

LITERATURE SURVEY( CONT..)

Overview of Banking in Ghana (cont..)

One notable success of the Structural Adjustment Progamme is that, it has revived the sector by improvingcustomer service and management procedures. (Blankson et al. (2009))

Key Developments in the Ghanaian Banking Industry since 1988 are:

Regulations

the promulgation of the following acts: Banking Act 2004 (Act 673) which replaced the Banking Law 1989(PNDCL 225); Foreign Exchange Act 2006 (Act 723); Credit Reporting Act 2007 (Act 726); Banking

(Amendment) Act 2007(Act 738); Borrowers and Lenders Act 2008 (Act 773); Home Mortgage Finance Act2008 (Act 770) and Anti-money laundering Act 2008 (Act 749).

Directives

the Bank of Ghana has lifted restrictions on the scope of operations of commercial banks. Thus, commercialbanks in Ghana are now universal banks with new minimum capital requirement of GH60 million for allforeign banks (banks with foreign majority ownership) and GH25 million for local/indigenous banks (banks

with local majority ownership). The bank has since 2006 abolished the secondary deposits reserves requirement of 15%.

Collapses

Notwithstanding the indefatigable efforts of Bank of Ghana to sanitize the banking sector for economicgrowth, in 2000 the sector saw the demise of three major banks: Bank for Housing and Construction; GhanaCo-operative Bank; and Bank for Credit and Commerce. The extinction of these banks brought to the forethe need for pragmatic approaches in capital adequacy, including holding a capital buffer of sufficient size,

enough liquid assets, and engaging in efficient risk management (Amidu, 2007).


10/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Overview of Banking in Ghana (cont..)

Performance Over the years, the performance of the industry has been impressive. Its total operating

assets grew by approximately 82% from about GH6.85 million in 2007 to approximatelyGH12.42 million in 2009.

Its gross loan grew from GH5.7 billion in 2008 to GH6.3 billion in 2009.

The total shareholders funds skyrocketed from GH1.1 billion in 2008 to GH1.8 billion in

2009. The return on equity (ROE) of the industry declined from 22% in 2008 to 12.1% in

2009(Banking Survey, 2010).

Structure of the Ghanaian Banking Sector

As at the end of June 2009, Ghana boasted of twenty-six (26) universal banks with ten (10)foreign banks and sixteen (16) local banks and 120 rural banks.

Among these banks, Barclays Bank (Ghana) Limited is the only bank licensed to undertakeoffshore banking (Banking Survey, 2010).

The banking industry in Ghana is undergoing rapid change driven partly by technological changeand the rapid growth of competing non-bank financial institutions.


11/41

CHAPTER TWO


Characteristics of the Ghanaian Banking Sector

Key features of the banking industry are as follows:

- A general lack of financial innovation;

- High spreads between deposit and lending rates;

- A re-emergence of non-performing loans assets portfolios.

- Limited credit facilities for private sector;

- A high rate of investment in government securities compared to loansand advances to the private sector;

- Low savings rate reflected in a high level of currency outside thebanking system; and

- Efficient credit operations are constrained by the lack of a creditinformation system.


12/41

CHAPTER TWO


Theoretical Prescription of CAMELS Framework

The Basel Committee on Banking Supervision of the Bank of InternationalSettlements (BIS) has recommended using capital adequacy, assets quality, managementquality, earnings and liquidity (CAMEL) as criteria for assessing a Financial Institutionin 1988 (ADB 2002). The sixth component, market risk (S) was added to CAMEL in1997 (Gilbert, Meyer and Vaughan 2000). However, most of the developing countriesare using CAMEL instead of CAMELS in the performance evaluation of the FinancialInstitutions. The central banks in some of the countries like Nepal, Kenya use CAELinstead of CAMELS.

CAMELS framework is a common method for evaluating the soundness of FinancialInstitutions. This system was developed by regulatory authorities of the U.S banks. TheFederal Reserve Bank, the Comptroller of the Currency and the Federal DepositInsurance Corporation all use this system (McNally 1996).

The main endeavour of CAMEL system is to detect problems before they manifest

themselves. The Bank of Ghana has instituted this mechanism for critical analysis ofthe balance-sheet of banks by themselves and presentation of such analysis to providefor internal assessment of the health of banks. The analysis, which is made available tothe Bank of Ghana, forms a supplement to the system of off-site monitoring ofbanks. The prime objective of the CAMEL model of rating banking institutions is tocatch up the comparative performance of various banks (Bodla and Verma, 2006).

CAMEL is, basically, a ratio-based model for evaluating the performance of banks.


13/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Capital Adequacy

Capital adequacy has emerged as one of the major indicators of the financial health of abanking entity. It is important for a bank to maintain depositors confidence and preventingthe bank from going bankrupt. Capital is seen as a cushion to protect depositors andpromote the stability and efficiency of financial system around the world. Capital Adequacyreflects the overall financial condition of the banks and also the ability of management tomeet the need for additional capital. It also indicates whether the bank has enough capital toabsorb unexpected losses. Capital Adequacy Ratio acts as an indicator of bank leverage.The following ratios measure Capital Adequacy:

Capital Adequacy Ratio (CAR)

The banks are required to maintain the capital adequacy ratio (CAR) as specified by Bankof Ghana from time to time. As per the latest Bank of Ghana norms, the banks in Ghanashould have a CAR of 10%. It is arrived at by dividing the sum of Tier-I, Tier-II and Tier-III capital by aggregate of risk weighted assets (RWA). Symbolically,

CAR= (Tier-I + Tier-II + Tier-III)/RWATier-I capital includes equity capital and free reserves.Tier-II capital comprises of subordinate debt of 5-7 years tenure, revaluation reserves,hybrid debt capital instruments and undisclosed reserves and cumulative perpetualpreference shares.Tier-III capital comprises of short-term subordinate debt. The higher the CAR, the

stronger the banks solvency position.


14/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Debt-Equity Ratio

This ratio indicates the degree of leverage of a bank. It indicates how much of thebank business is financed through debt and how much through equity. Debt-Equity ratio is arrived at by dividing total borrowings and deposits byshareholders net worth, which includes equity capital, and reserves and surpluses.Higher ratio indicates less protection for the creditors and depositors in thebanking system.

Advances to Assets

This is a ratio of the Total Advances to Total Assets. This ratio indicates a banksaggressiveness in lending which ultimately results in better profitability. Totaladvances also include receivables. The value of Total Assets excludes therevaluation of all the assets.

Government Securities to Total Investments

This ratio shows the risk involved in a banks investment. GovernmentSecurities, are generally, considered as the most safe debt instrument, which, as aresult, carries the lowest return. Since government securities are risk-free, thehigher the Government Securities to investment ratio, the lower the risk involvedin a banks investment. It is arrived at by dividing the amount invested ingovernment securities by total investment.


15/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Assets Quality

The quality of assets is an important parameter to gauge the degree of financial strength.The prime motto behind measuring the assets quality is to ascertain the component ofNon-Performing Assets (NPAs) as a percentage of the total assets. This indicates whattypes of advances the bank has made to generate interest income. Thus, assets qualityindicates the type of the debtors the bank is having. The following ratios are necessary toassess assets quality:

Gross NPAs to Net Advance

It is a measure of the quality of assets in a situation, where the management has notprovided for loss on NPAs. The Gross NPAs are measured as a percentage of NetAdvances. The lower the ratio, the better is the quality of advances.

Net NPAs to Net Advances

It is a measure of the quality of assets in a situation where the management has notprovided for loss on NPAs. Net NPAs are Gross NPAs net of provisions on NPAs andinterest in suspense account. In this ratio, Net NPAs are measured as a percentage of netadvances.


16/41

CHAPTER TWO


Total Investments to Total Assets RatioTotal investments to total assets indicate the extent of deployment of assets in investmentas against advances. This ratio is used as a tool to measure the percentage of total assetslocked up in investments, which, by conventional definition, does not form part of the coreincome of a bank. It is arrived at by dividing total investments by total assets. A higher ratiomeans that the bank has conservatively kept a high cushion of investments to guard againstNPAs.

Net NPAs to Total Assets

It is a measure of the quality of assets in a situation where the management has notprovided for loss on NPAs. Here, the Net NPAs are measured as a percentage of TotalAssets. The lower the ratio, the better is the quality of advances.

Percentage Change in Net NPAsThis measure gives the movement in Net NPAs in relation to Net NPAs in the previous

year. The higher the reduction in Net NPAs levels, the better is for the bank. It is given bythe formula: %Change in Net NPAs = (Net NPAs at the end of the yearNet NPAs at thebeginning of the year)/Net NPAs at the beginning of the year.


17/41

CHAPTER TWO


Management Efficiency

Management efficiency is another vital component of the CAMEL Model that ensures thesurvival and growth of a bank. The ratios in this segment involve subjective analysisand efficiency of management. The management of the bank takes crucial decisionsdepending on the risk perception. It sets vision and goals for the organization and seesthat it achieves them. This parameter is used to evaluate management efficiency as toassign premium to better quality banks and discount poorly managed ones. The ratiosused to evaluate management efficiency are described as under:

Total advances to Total Deposits

The ratio measures the efficiency of management in converting the deposits available withthe bank (excluding other funds like equity capital, etc.) into high earning advances.

Total deposits include demand deposits, savings deposits, term deposits and depositsof other banks. Total advances also include the receivables.

Return on Net Worth

It is a measure of the profitability of a bank. Here, Profit After Tax is expressed as apercentage of Average Net Worth.


18/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Earning Quality

Earning quality reflects quality of a banks profitability and its ability to earn consistently. The quality ofearning is a very important criterion that determines the ability of a bank to earn consistently, going

into the future. It basically determines the profitability of the bank. It also explains the sustainabilityand growth in earnings in the future. This parameter gains importance in the light of the argument that

much of banks income is earned through non-core activities like investments, treasury operation, and

corporate advisory service and so on. The following ratios try to assess the quality of income in terms

of income generated by core activity-income from lending operation.

Operating Profit to Average Working Funds Ratio

This ratio indicates how much a bank can earn from its operations net of the operating expenses forevery cedi spent on working funds. This is arrived at by dividing the operating profit by average working

funds. Average Working Funds (AWF) are the total resources (total assets or liabilities) employed by a

bank. It is daily average of total assets / liabilities during a year. The better utilization of funds will

result in higher operating profit. Thus, this ratio will indicate how a bank has employed its working

funds in generating profit. Spread or Net Interest Margin (NIM) to Total Assets

NIM, is the difference between the interest income and the interest expended as a percentage of total

assets. It is an important measure of a banks core income (income from lending operations). A higher

spread indicates the better earnings given the total assets. Interest income includes dividend income and

interest expended included interest paid on deposits, loan from the Bank of Ghana, and other short-

term and long term loans.


19/41

CHAPTER TWO


Net Profit to Average Assets / Return on Average Capital EmployedThis ratio measures return on assets employed or the efficiency in utilization of assets. It isarrived at by dividing the net profit by average assets, which are the average of total assets inthe current year and previous year. Thus, this ratio measures the return on assets employed.Higher ratio indicates better earning potential in the future.

Interest Income to Total Income

Interest income is a basic source of revenue for banks. The interest income to total incomeindicates the ability of the bank in generating income from its lending. This ratio measuresthe income from lending operations as a percentage of the total income generated by thebank in a year. Interest income includes income on advances, interest on deposits with theBank of Ghana, and dividend income.

Non- interest Income to Total IncomeThis measures the income from operations other than lending as a percentage of the totalincome. A fee-based income account for a major portion of a banks other incomes. Thebank generates higher fee income through innovative products and adapting the technologyfor sustained service levels. Non-interest income is the income earned by the banksexcluding income on advances and deposits with the Bank of Ghana.


20/41

CHAPTER TWO

LITERATURE SURVEY( CONT..) Liquidity

Liquidity is very important for any organization dealing with money. For a bank, liquidity is a crucialaspect which represents its ability to meet its financial obligations. It is of utmost importance for a bank

to maintain correct level of liquidity, which will otherwise lead to declined earnings. Banks have to takeproper care in hedging liquidity risk, while at the same time ensuring that a good percentage of funds

are invested in higher return generating investments, so that banks can generate profit while at the same

time provide liquidity to the depositors. Among a banks assets, cash investments are the most liquid. A

high liquidity ratio indicates that the bank is more affluent. The ratios suggested to measure liquidity

under CAMEL Model are as follows:

Liquid Assets to Total Assets

Liquid Assets include cash in hand, balance with the Bank of Ghana, balance with other banks (both in

Ghana and abroad), and money at call and short notice. This ratio is arrived by dividing liquid assets by

total assets. The proportion of liquid assets to total assets indicates the overall liquidity position of the

bank.

Government Securities to Total Assets

Government securities are the most liquid and safe investment. This ratio measures the proportion of

risk-free liquid assets invested in government securities as a percentage of the assets held by the bank

and is arrived by dividing investment in government securities by the total assets. This ratio measures

the risk involved in the assets held by a bank.


21/41

CHAPTER TWO


Liquid Assets to Demand DepositsThis ratio measures the ability of a bank to meet the demand from demand deposits in aparticular year. It is arrived at by dividing the liquid assets by total demand deposits. Theliquid assets include cash in hand, balance with the Bank of Ghana, balance with otherbanks (both in Ghana and abroad), and money at call and short notice.

Liquid Assets to Total DepositsThis ratio measures the liquidity available to the depositors of a bank. Liquid assets includecash in hand, balance with the Bank of Ghana, balance with other banks (both in Ghanaand abroad), and money at call and short notice. Total deposits include demand deposits,savings deposits, term deposits and deposits of other financial institutions.

Approved Securities to Total Assets

This is arrived at by dividing the total amount invested in approved securities by total assets.Approved securities are investments made in the state-associated bodies like electricityboards, housing boards, corporation bonds, share of regional rural banks(Joshi andjoshi,2002; Bodla and Verma, 2006; Sisdiya et al.,2008)


22/41

CHAPTER TWO


Summary of Literature SurveyBanking activities officially started in Ghana in 1896 by the then British Bank for West

Africa, however, not until a little before political independence, the banking industry was inthe hands of foreigners. The Then Gold Coast administration made some policyinterventions that saw the establishment of Pubic Owned banks and the reduction of costof borrowing and general direction of finance in the country

o

However, the crisis of 1983 led to some structural adjustments of the financial sector bythe Bank of Ghana but that didn't stop the collapse of three eminent banks in the countryin the late 1990s. The banking industry in Ghana today have gone under a lot ofdevelopments including the enactment of the banking acts, Foreign Exchange Act, CreditReporting Act, Borrowers and Lenders Act, Home Mortgage Finance Act, Anti-moneylaundering Act and it has witness directives from the Bank of Ghana that have changed theface of banking in the country. Ghana currently has 26 banks and 120 rural banks with themajority in Ghanaian hands. Despite the gains made, the banking industry is still saddled

with challenges.o Finally, there were no uniform means of assessing the performances of banks so The Basel

Committee on Banking Supervision of the Bank of International Settlements (BIS) hasrecommended using capital adequacy, assets quality, management quality, earnings andliquidity (CAMEL) as criteria for assessing a Financial Institution.


23/41

CHAPTER THREEPROFILE OF SELECTED BANKS

Merchant Bank Ghana Limited (MBG)

Merchant Bank Ghana Limited (MBG) provides a comprehensive range of banking services to itscustomers and clients. The range of MBG's banking services includes:

Domestic and International Banking Operations for Corporate Customers, Small & MediumEnterprises (SMEs) and, High Net-worth Individuals;

Treasury Services , Money and Capital Market Operations, Foreign Remittances

The branch network of Merchant Bank currently stands at 21 .

o Mission

As a universal Bank in Ghana, Merchant Bank (Ghana) limited is committed to providing qualityfinancial products and services to our customers across our chosen market and maintaining our place as

a leading and preferred financial institution in Ghana.

o Vision

To become the leading, the most influential and best performing financial service provider in Ghana by

2012 and one of the leading banks in West Africa by 2015o Our Core Values

Performance-orientedorganization

All decisions and actions must be based on Unshakeable Facts.

We must at all times conduct our business with a sense ofCompetitive Urgency.

We must maintainHigh Ethical Standards in all our internal and external relationships


24/41

CHAPTER THREE

PROFILE OF SELECTED BANKS Ghana Commercial Bank Ltd

Ghana Commercial Bank Ltd. started in 1953 as the Bank of the Gold Coast to provide banking services to theemerging nation for socio-economic development. The Bank was to provide special attention to Ghanaian traders,business people and farmers who could not elicit support from the expatriate banks. The Bank had been whollygovernment owned until 1996 but today, government ownership stands at 21.36% while institutional and individualholdings add up to 78.64%.

From the one branch of the 1950s, GCB now has over 150 branches and 11 agencies throughout the country.

GCB provides a wide range of products and services for the benefit. of its customers. From the traditional products

of the Current/Savings Accounts, GCB now offers specialized products and services including Link2Home forGhanaians resident abroad, doorstep cash collection, loans and overdrafts. There are also investment products liketreasury bills as well as fixed and call deposits.

Today we can boast of being the widest networked Bank in Ghana.

The Bank's Mission

o To be the established leader in banking, satisfying the expectations of customers and shareholders, providing a fullrange of cost efficient and high quality services through the optimization of information technology and efficient

branch network.o For the achievement of this mission, the Bank is committed to:

o The provision of first class customer service.

o Focusing on our core business/competencies-commercial banking.

o Constant improvements in the use of information technology.

o Recruiting and retaining the best human resource to carry out the Bank's mandate.

o

Applying best practices in internal policies, procedures, processes and service delivery.o Constant improvement in shareholder value

CHAPTER THREE
http://www.gcb.com.gh/company-information/missionhttp://www.gcb.com.gh/company-information/mission


25/41

CHAPTER THREE

PROFILE OF SELECTED BANKS National Investment Bank Ltd

Established in March 22, 1963, the National Investment Bank Ltd. was the first development bank in Ghana topromote and strengthen rapid industrialization in all sectors of the Ghanaian economy. NIB Ltd. now operates as auniversal bank in focusing on development/commercial banking activities.

NIB Ltd. has undergone management, institutional and financial restructuring, which has strengthened theorganization and now has 27 branches nationwide.

NIB Ltd. has in the past participated in foreign lines of credit, which were administered by Bank of Ghana to meetterm loan and working capital needs of the Bank's customers.

We are also one of the designated financial institutions, which sources funds from Export Development andInvestment Fund (EDIF) for on lending to exporters as Term and Working capital loans.

o Products and Services

Apart from its development banking activities, NIB Ltd. also provides corporate and commercial banking facilitiesinvolving both domestic and foreign transactions at very competitive rates and on flexible terms. They include,Current and Savings Account, Call Deposits, Fixed Deposits, Loans and Advances, Personal Loans, Overdrafts,Western Union Money Transfer, Mobile Cash Management Services and Warehousing.

o

VISIONTo be the most renowned Ghanaian bank for growth and efficiency

o MISSION

Our mission is to offer the highest-quality, customer-focused banking services to our clients and to create value for ourshareholders.

o CORE VALUES

Competence, Creativity, Candour, Collaboration,Community, Commitment, and Customer Service Excellence


26/41

CHAPTER THREE

PROFILE OF SELECTED BANKS Agricultural Development Bank

In 1964, Bank of Ghana set up a Rural Credit Department to prepare the necessarylegislation, plans and procedures for the establishment of a specialized bank for theprovision and administration of credit and other banking facilities in the agricultural sector.

In 1970, The Agricultural Development Bank Act, 1970 (Act 352) was passed to broadenthe Banks functions. ADB was granted a full banking licence in that year under the BankingAct, 1970 (Act 339).

In 2004, ADB gained a Universal banking licence under Banking Act 2004 (Act 673) which

removed restrictions on banking activity. ADB is a universal bank offering full range of banking products and services in retail,

commercial, corporate and investment banking. Its business focus is universal banking withdevelopment focus.

Set up in 1965 by Act 286, ADB is wholly publicly-owned. The Government owns 52% ofthe shareholding, with the remaining 48% held by the Financial Investment Trust on behalfof the Bank of Ghana.

o VisionTo be among the Top 3 performing banks in Ghana by 2012, balancing market orientationwith a development focus on Agric and more

o Mission

ADB is committed to building a strong customer-oriented Bank, run by knowledgeable andwell-motivated staff, providing profitable financial intermediation and related services for a

sustained and diversified agricultural and rural development.

CHAPTER THREE


27/41

CHAPTER THREE

PROFILE OF SELECTED BANKS

CAL Bank

CAL Bank commenced operations in July 1990, and is considered to be one of themost innovative banks in Ghana.

o The Bank mobilizes resources in world financial markets, and channels them tothe Ghanaian market. In this way, CAL Bank supports the development of the

national economy, focusing particularly on the manufacturing and export sectors.o significantly developed its retail banking operations with specialized products and

services to cater for the retail market. To complement retail banking and in linewith its expansion programme, CAL Bank has developed a network of over 48ATM's and 18 branches and is in the process of opening several branches in major

cities and business districts in Ghana Mission

We aspire to be a financial services institution of preference through delivery ofquality service, using innovative technology and skilled personnel to achievesustainable growth and enhanced stakeholder value. The Bank's vision is to be a

leading financial services group creating sustainable value for our stakeholders.


28/41

CHAPTER FOURMETHODOLOGY

MethodologyThe general objective of the study is to analyse performance of domesticbanks in Ghana. The specific objectives of the study include:

To analyse the capital adequacy of domestic banks.

To test for asset quality of domestic banks.

To assess the profitability of domestic banks. To analyse the cost efficiency of domestic banks.

Based on these objectives, the following can be hypothesize as:

H1: The profit growth of banks is not related to their size

H2: The profit growth of banks is related to their size

To achieve the above objectives we made use of the following methods:


29/41

CHAPTER FOURMETHODOLOGY (CONT)

CAMEL Framework

This study will use the CAMEL approach to analyse capitalization, asset quality, solvency,profitability, efficiency and liquidity in the banking industry; Where C=capital adequacy,A=Asset Quality, M=Management Efficiency, E=Earnings/profitability and L=Liquidity.(Bank of Ghanas uses this approach to measure soundness, asset quality, efficiency,solvency, profitability and liquidity of Banks in Ghana).

Alhadeff and Alhadeff (1964) compared the growth of the top 200 banks in the US over

the period 1930-60 to the growth of total bank assets. They found that the top 200 banksgrew more slowly than the total did. Within the top 200, the bottom segment grew morerapidly than the top, but showed greater variance in growth rates. Rhoades and Yeats (1984)replicated this study for the period 1960-71. They too found that the largest banks grew lessthan the system as a whole. This points to de-concentration in banking. Scholtens (2000)also confirms that profit growth is inversely related to size when bank size is measured by

assets. Scholtens (2000) findings saw profit growth positively correlated with equity. Hisfindings indicated the utmost importance of bank soundness, rather than asset size, forsustainable bank performance. In this research work I follow the same hypothesis ofScholtens (2000) for the banking industry in Ghana as we want to find out whether profit(performance of banks in Ghana) is related to bank size.

o

H1: The profit growth of banks is not related to the sizeo H2: The profit of banks is related to their size.

CHAPTER FOUR


30/41

CHAPTER FOURMETHODOLOGY (CONT) Data

The data cover the period from 2000 to 2005. The main datasources are the annual reports and accounts for the financialinstitutions particularly the 5 selected domestic banks in Ghana.The financial sector reforms in Ghana started in 1998. This is whywe decided to use the period 2000 to 2005. The pre reforms

period data is scarcely available. These financial institutions areGhana commercial Bank (GCB), Merchant Bank Ghana (MBG),Agricultural Development Bank (ADB), National InvestmentBank (NIB), and CAL Bank (CAL).

With respect to the characteristics that might affect profit growth

(GPAT) with a bank, we investigate bank assets and bank capital(equity or shareholders fund which indicates the strength of abank). Bank assets are the traditional size indicator of a bank andthis forms the basis of our hypothesis while the equity indicatesthe strength of a bank.

CHAPTER FIVE


31/41

CHAPTER FIVEDATA ANALYSIS AND INTERPRETATION

Capital Adequacy Ratio (CAR)

Capital Adequacy Ratio = Equity/ Total Assets %

Source: Calculated from Audited Accounts of Banks

Case study

Banks

2000 2001 2002 2003 2004 2005 Average

GCB 10.0 8.7 9.4 9.3 10.7 12.3 10.1ADB 18.1 22.6 21.1 15.5 18.1 18.1 18.9

CAL 14.8 14.6 13.7 12.6 20.1 18.9 15.8

MBG 16.5 15.5 11.8 10.2 13.2 13.5 13.5

NIB 27.5 30.9 19.9 12.6 11.5 12.0 18.9

Industrial

Average

11.1 12.5 11.6 11.0 11.9 12.5


32/41

CHAPTER FIVE

DATA ANALYSIS AND INTERPRETATION Asset Quality

Asset Quality = Provision/Net Advances (%)

Source: Calculated from Audited Accounts of Banks'

Case study

Banks

2000 2001 2002 2003 2004 2005 Average

GCB 9.7 9.8 13.9 6.4 4.7 2.9 7.9

ADB 8.2 10.9 13.4 11.0 12.2 5.0 10.1CAL 0.3 1.2 2.6 3.4 2.6 4.2 2.4

MBG 11.7 6.0 13.8 9.9 5.7 3.2 8.4

NIB 21.5 5.5 5.8 8.9 4.6 8.2 9.1

Industrial

Average

6.9 7.2 6.0 4.9 3.8 3.0

CHAPTER FIVE


33/41

CHAPTER FIVE

DATA ANALYSIS AND INTERPRETATION

Profitability/ Earning Quality

ROA = PAT/Total Assets (%)


Case

study

Banks

2000 2001 2002 2003 2004 2005 Average

GCB 6.1 4.4 3.8 1.8 2.9 2.2 3.5

ADB 7.8 7.2 3.5 2.6 3.6 2.2 4.5

CAL 45.1 22.4 32.8 29.0 21.0 14.6 27.5

MBG 15.3 24.2 12.3 16.2 32.0 24.4 20.7

NIB 55.9 15.7 19.0 25.0 30.3 25.8 28.6

Industrial

Average

50.0 41.7 32.6 30.3 32.1 25.3

CHAPTER FIVE


34/41

CHAPTER FIVE

DATA ANALYSIS AND INTERPRETATION ROE = PAT/Equity (%)


Case study

Banks

2000 2001 2002 2003 2004 2005 Average

GCB 61.0 51.0 39.9 19.8 27.4 17.8 36.2

ADB 43.0 32.0 16.7 17.0 19.7 12.1 23.4

CAL 45.1 22.4 32.8 29.0 21.0 14.6 27.5

MBG 15.3 24.2 12.3 16.2 32.0 24.4 20.7

NIB 55.9 15.7 19.0 25.0 30.3 25.8 28.6

Industrial

Average

50.0 41.7 32.6 30.3 32.1 25.3

CHAPT R F V


35/41

CHAPTER FIVE

DATA ANALYSIS AND INTERPRETATION Cost Efficiency

Cost Efficiency = Tot. Op. Exp/Tot. Op. Income (%)


Case study

Banks

2000 2001 2002 2003 2004 2005 Average

GCB 30.4 30.5 42.0 57.4 63.8 76.9 50.2

ADB 37.8 37.9 45.2 44.5 47.8 63.6 46.1

CAL 42.0 56.6 50.3 47.3 48.1 53.4 49.6

MBG 30.5 48.3 48.6 46.4 38.9 48.2 43.5

NIB 23.3 56.8 57.7 46.8 50.3 76.0 51.8

Industrial

Average

35.5 38.7 46.2 49.5 50.9 59.1

CHAPTER SIX


36/41

CHAPTER SIXFINDINGS, CONCLUSIONS AND RECOMMENDATION

Findings

The improvement in the quality of the loan portfolio was largely due to the expansion in the credit baseof the banking industry as a result of reduction in reserve requirement.

Staff Cost and infrastructural cost (technology) are the main sources of high operating costs.

Merchant Bank Ghana is the most efficient bank using the cost efficiency measure among the domestic

banks.

Domestic banks in Ghana are well-capitalised, profitable, liquid, sound and stable but less efficient.

Profit performance is independent of bank size.

National Investment Bank is the most Profitable domestic bank.

CAL bank is the best domestic bank in terms of Asset Quality.

National Investment Bank and Agricultural Development Bank are the best in terms of Capitalisation.


37/41

CHAPTER SIXFINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Conclusions

The main conclusion of this paper which follows the same conclusion of Buchsand Mathisen (2005) and Aboagye-Debrah (2007), is that banks in Ghana appearto behave in a noncompetitive manner that could hamper financial intermediation.High Profitability of banks in Ghana due to the wider interest rate spread accountfor this uncompetitive behaviour of banks.

One other key conclusion from this research is, bank size in terms of assetsgrowth and profit performance are statistically insignificant at 5% level ofsignificant and that size does not matter in profit performance. It is rather growthin equity which matter for profit performance. The results of this researchunderline the utmost importance of bank soundness rather than asset size, forsustainable bank performance. The results clearly confirm the relevance ofindividual bank characteristics for profit growth.


38/41

CHAPTER SIX

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Recommendations

Based on above findings and conclusions the following recommended as a policy for banksstrategic direction:

The need to reduce the transaction cost (particularly staff cost and investment cost-telecommunication)

Addressing the occurrence of losses on the loan portfolio particularly in the local banks The regression results clearly confirm the relevance of individual bank characteristics for

profit growth which is size of banks tier-one capital. Bank size is irrelevant for profit

growth as per Ghana Commercial Bank profit performance. Appropriate strategy is the keydetermining factor of profitability. Encouraging the development of compatible IT infrastructure so that banks can pool

resources and lower technological cost in the industry to enhance efficiency There is the need for promotion and development of savings culture. This calls the

introduction of innovative and attractive products and stepping up savings mobilisationdrive as well as ensuring confidence and credibility in the banking system to attract

prospective depositors. There is the need for progressive reduction in reserve requirements, tariffs and charges and

lending rates as macroeconomic stability is entrenched to reduce the cost of bankingservices and increase competition.

There is the need for consolidation and mergers particularly among the small banks toexpand their capital base in order to make them stronger and competitive.


39/41

REFERENCE

Aboagye-Debrah, K. (2007). Competition, Growth and Performance in the Banking Industry in Ghana. PHD thesis, St

Clements University

ADB. 2002.Guidelines for the Financial Governance and Management of Investment Projects Financed by the ADB.

Manila: ADB.

Amidu, M. (2007). Determinants of Capital Structure of Banks in Ghana: An Empirical Approach, Baltic Journal of

Management 2(1), 67-79.

Banking Survey (2010) PricewaterhouseCoopers (Ghana) Limited retrieved on 10th January 2013 from

www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtml

Bodla, B.S.; and Verma, R. (2006), Evaluating Performance of Banks through CAMEL Model: A Case Study of SBI and

ICICI, The ICFAI Journal of Bank Management, Vol.5, No.3, pp. 49-63.

Buchs, T and Mathisen, J, Competition and Efficiency in Banking: Behavioural Evidence from Ghana, IMF Working Paper

WP/05/17, 2005.

Frimpong, J.M. (2008). Capital Market Efficiency: An Analysis of Weak-form Efficiency on the Ghana Stock Exchange,Journal of Money, Investment and Banking 5, 1-8

Gilbert, R. Alton, Andrew P. Meyer and Mark D.Vaughan. 2000. "The Role of aCAMEL Downgrade Model in Bank

Surveillance." Working Paper 2000-021A, The Federal Reserve Bank of St. Louis. Nov. 1, 2012(

http://research.stlouisfed.org/wp/2000/2000-021.pdf).
http://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://research.stlouisfed.org/wp/2000/2000-021.pdfhttp://research.stlouisfed.org/wp/2000/2000-021.pdfhttp://research.stlouisfed.org/wp/2000/2000-021.pdfhttp://research.stlouisfed.org/wp/2000/2000-021.pdfhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtmlhttp://www.pwc.com/gh/en/publications/ghana-banking-survey-2010.jhtml


40/41

REFERENCE Hilbers, Paul, Russell Krueger, and Marina Moretti. 2000. New Tools for Assessing Financial System

Soundness.Finance and Development 37 :8-12

Joshi and Joshi (2002),Managing Indian Banks: The Challenges Ahead, Second Edition, Response Books, A

Division of Sage Publications- New Delhi,pp.109-110

McNally, Edward A. 1996. "Basic Topics in Sound Bank Management." EDI Working Paper, Washington DC:

The World Bank.

Sisodiya, A. S.; Bharathi, Y. Bala.; and Moghal, I. (2008), Indian Banking Industry:Sustaining the Growth

Momentum, Chartered Financial Analyst, Special Issue, October, pp.34-61

Ziorklui, S and Gockel, A.F, May 2000 The Impact of Financial Sector Reform on Bank Efficiency and

Financial Deepening for Savings Mobilisation in Ghana Project EAGER/PSCE Discussion Paper presented

at Novotel, Accra under the auspices of CEPA.

(http://www.gcb.com.gh/company-information/history) retrieved on 30th January 2013.

(http://www.merchantbank.com.gh/subcat_select.cfm?tblNewsCatID=1&prodcatID=1) retrieved on 30th

January 2013.

(http://www.nib-ghana.com/en/about-us/corporate-profile.php)retrieved on 30th January2013

(http://www.agricbank.com/en/get-to-know-adb/historical-milestones.php) retrieved on 30th January 2013

(http://www.calbank.net/calbank/en/about-us.php) retrieved on 30th January 2013
http://www.gcb.com.gh/company-information/historyhttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.calbank.net/calbank/en/about-us.phphttp://www.calbank.net/calbank/en/about-us.phphttp://www.calbank.net/calbank/en/about-us.phphttp://www.calbank.net/calbank/en/about-us.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.agricbank.com/en/get-to-know-adb/historical-milestones.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.nib-ghana.com/en/about-us/corporate-profile.phphttp://www.gcb.com.gh/company-information/historyhttp://www.gcb.com.gh/company-information/historyhttp://www.gcb.com.gh/company-information/history


41/41

THE END OF PRESENTATION

assessing the performance of ghanaian- owned banks

Documents