Introduction

Financial systems tend to evolve around a banking sector seeking to achieve economies of scale in order to offset the costs of collecting and processing information designed to reduce uncertainty, thereby facilitating a more efficient allocation of financial resources. However, a competitive banking system is required to ensure that banks are effective forces for financial intermediation, channelling savings into investment fostering higher economic growth.

This paper assesses the level of competition in the Ghanaian banking sector. At first sight, the very high profit ratios and high cost structure of Ghanaian banks could indicate a monopolistic banking structure. This is partly corroborated by the findings of this study. By deriving variables from a theoretical model and using a 1998-2003 panel data set, we find evidence for a non-competitive market structure in the Ghanaian banking system, possibly hampering financial intermediation. The study argues that the structure, as well as the other market characteristics, constitute an indirect barrier to entry, shielding the large profits in the Ghanaian banking system.

Overview of the Ghanaian Banking System

Structure of the Banking Sector

The Ghanaian banking system is rather diverse. Of the 17 banks operating in the country, there are 9 commercial banks, 5 merchant banks, and 3 development banks (Table 9.1). The three largest commercial banks account for 55% of the total assets of the banking sector, which is relatively moderate compared with other countries in the region.