Factors Determing Interest Rate Variations in Ghanaian Banks

Abstract

This study examined interest rate variations among banks in Ghana. The objective of the study was to estimate the key driving factor(s) that influences interest rate spreads in Ghana. It was also the aim of this study to examine the impact of the 2008/2009 financial crises on this relationship, to know whether ownership (foreign and local banks) differences in this relationship is significant and to know whether age of the bank determines their interest rate spread. The study used an unbalanced panel of all 28 banks from 2000 to 2011. The fixed effect estimation technique was employed throughout the analysis of data. The study found that, for bank specific variables, age of a bank was significant and a positive determinant of net interest margin while ownership structure had a significant negative impact on net interest margin. This suggests that banks that have been in operations in the country for a long time seem to enjoy higher interest margins while generally most of the foreign banks seem to have narrower margins. The size of the banks and the operational cost did not show any significance.The industry variable measured by the HHI of loans showed strong positive impact on net interest margin suggesting that indicates that when advances in loans are concentrated among few banks, they tend to enjoy wider spreads. Moreover, for the macroeconomic variables (Inflation, monetary policy rate and exchange rate) none of them was a significant determinant of banks’ net interest margins. The dummy variable for the 2007/2009 banking crises showed a significant negative impact on the interest rate spread of banks in Ghana.