Determinants of wide interest margins in Ghana: panel EGLS analysis

Abstract

Government, institutional investor, investors and the ordinary Ghanaian believe that the interest rate spread in Ghana is on the higher side. Financial institutions also on the other side claim the opposite. The perceived wide interest spread charged by banks in Ghana continues to ignite many debates as to whether the commercial banks are taking advantage of Ghana's trade liberalization to make excessive profits or such banks are constrained to charge significant spreads due to economic variables that affect their operations. This study identifies the key factors affecting interest margins in Ghana and examines how such factors impact on the spread, using panel EGLS with a cross-section weights. The results show that operating cost, market share and previous year's non-performing loans are sensitive to the definition of interest rate spreads. Concentration of the banking industry, GDP, inflation, treasury bills and exchange rate however do not have statistically significant influence on spread. It also came out that commercial banks respond to increases in reserve requirements by increasing the margin between lending and deposits rates.