The Relationship between Net Interest Margin and Return on Assets of Listed Banks in Ghana

Abstract

The purpose of the study was to find out the trends of Net Interest Margin (NIM) and Return on Assets (ROA).  It also sought to find out the relationship between the NIM and the ROA of the listed banks in Ghana, considering the period 2005-2011. Seven out of the nine listed banks were considered for the study. The main sources of data were from the annual reports of the selected listed banks, as well as other relevant scholarly journals. Trend analysis was used to find the trend of NIM and ROA of the listed banks. Regression and correlation analyses were used to find the relationship and the strength thereof between NIM and the ROA. The dependent variable was Profitability (ROA); while the independent variable was Net Interest Margin (NIM). The study revealed that there is a strong positive correlation between the NIM and the ROA (Profitability) of the listed banks. The regression equation between NIM (X - Axis) and ROA (Y - Axis) is Y = 0.577X – 1.427. The correlation co-efficient, R² is 0.826. This means that 82.6% of ROA is explained by the NIM. When Net Interest Margin decreases, Return on Assets (Profitability) decreases; and vice versa.

Keywords: Net interest margin, return on assets, profitability, relationship, regression, correlation