Determinants of Financial Sector Development in Ghana

Abstract

The paper aims at investigating the determinants of financial development in Ghana using the Autoregressive Distributed Lag (ARDL) approach. Using quarterly data from 1988 to 2010, the study found a unique cointegrating relationship between financial development trade openness, inflation, per capita income, reserve requirement and government borrowing. The regression results show that trade openness and per capita income are important determinants of financial development in Ghana. Further, inflation, interest rate, and reserve requirement exerted negative and statistically significant effects on financial development both in the short-run and long-run suggesting that these variables adversely influence financial development in Ghana. However, government borrowing did not have any significant effect on financial development both in the long-run and short-run suggesting that higher government borrowing from banking sector will not have any significant effect on private credit or even crowd in private sector credit. It is therefore recommended that Government of Ghana ensures an accommodative openness to trade; maintain low inflationary rate and high economic growth in order to stimulate financial development in Ghana. Moreover, Bank of Ghana should consider adjusting the cash reserve ratio of banks downwards while financial institutions are to also reduce their interest rate on lending.