ABSTRACT
The purpose of this current study was to examine the impact of interest margin on the profitability of banks in Ghana with the focus on Fidelity Bank Ghana. Purposive sampling technique was use to select Fidelity Bank for the study. Secondary data (Annual reports of Fidelity Bank Ghana Limited for 2013-2017) was analyzed. Data was analyzed with Pearson Correlation. The findings revealed that positive relationship exist between interest rate margin and bank profitability (ROA and ROE). The study concluded that for banks to make more profit there is the need to raise net interest margin through effective and efficient means of decreasing interest expense and increasing interest income. Also, banks need to put measures in place to ensure they grow their banks by increasing the size and also ensuring they get more customers to deposit with them.
CHAPTER ONE INTRODUCTION
Background
Interest rate is one of the critical factors that determine the financial performance of banks (Maigua & Mouni, 2016). According to Crowley (2007), interest rate is the “price paid by a borrower on the money they borrow from a particular financial institution or a lender”. In other words, it is a fee that one is expected to pay on a borrowed asset. Interest rate is a major factor in an economy that determines a country’s economic growth (Corb, 2012). It is argued that instabilities in the market interest rates put a lot of pressure on banks performance (Maigua & Mouni, 2016). Generally, the rise of interest rates correspondingly increases banks’ profits. According to Claessens, Coleman and Donnelly (2018), banks make profit whenever there is a rise in interest rate. They further argued that one of the determinants of a performing bank is in terms of its profitability. According to Buffett (2005), profitability is “a company’s ability to earn a reasonable profit margin on the owner’s investment”. The financial performance of a bank is a key determinant of the success or otherwise of its future activities. Some of the most famous ways of measuring profitability comprise Return on Equity, Return on Investment Ratio, and Profit margin on sale (Noman, Chowdhury, Chowdhury, Kabir & Pervin, 2015).
To Almarzoqi and Naceur (2015), the impact of interest margin on the profitability of banks cannot be overemphasized. Therefore, understanding the significant relationship between the two determines how they are able to attract investors. Researchers have identified that high lending rate by banks has the tendency to discourage people from investing which affects savings, hence, hindering economic growth (Scheiber, Silgoner & Stern, 2016). Interest margin is measured with net interest margin (NIM). According to Almarzoqi and Naceur (2015, p. 135), “net interest
margin is a measure of the difference between interest income and interest expenses and is extensively seen as an intermediation efficiency indicator”. Efficient intermediation has been identified as very effective and efficient in the banking sector especially in terms of economic growth (Krakah & Ameyaw, 2010). With this regard, scholars in the field have suggested that banks need to be effective and efficient to avoid high net interest margin (NIM) for them to compete favourably in the competitive business environment (Musah, Anokye & Gakpetor, 2018).
The Ghanaian banking sector plays an important role in the financial groth in terms of mobilizing savings and provision of credit facilities to the different areas of the economy (Boadi, 2015). They further indicated that interest rate determines the profitability of the bank. According to Owusu-Antwi et al. (2017), interest rate contributes about 45% to the profits of the banks in Ghana. However, Kalsoom and Khurshid (2016) were of the view that interest rate risk is the main component of risk confronting Ghanaian banks. Literature has identified that the profitability of a bank is a factor of changes in its interest rates (Boadi, 2015). (Nkegbe & Ustarz, 2015) were of the view that the high interest rate regime is the worry of most private business as they find it difficult borrowing at such high interest rate level for their operations and still compete favourably in the competitive business environment. This serves as a disincentive for investors to borrow from the banks and other net lenders. Conversley, one can also argue that during high interest rates, people are encouraged to save in financial institutions in order to enjoy high returns on their deposits.
Following the recent collapse and consolidation of some banks and also considering the crucial role of the banking sector to the economic growth of Ghana, it has become necessary to investigate the “impact of profit margin on the profitability of banks” in a Ghanaian context.
Statement of the Problem
According to Ntow-Gyamfi and Laryea (2012), the financial sector plays a critical role in economies around the world and banks continue to be relevant in most developing economies where capital market is still emerging. Munyamboera (2013) was of the view that it is imperative to study the profitability of banks since their profits are crucial to the political, social and economic growth of many developing countries. Ayanda, Christopher and Mudashiru (2013) also indicated that changes in profitability of banks are key contributors to the economic progress which also determines the saving and investment decisions of businesses. This is because when banks experience rise in profit, it in turn expands the cash flow status of firms which gives more flexibility to the financial sources of corporate investment (Altavilla, Boucinha & Peydro, 2018). Some researchers also argue that, the performance and survival of banks is of a greater concern to researchers, shareholders and policy makers.
According to Musah et al. (2018), in Ghana, banks charge higher interest rates on loans regardless of macroeconomic conditions pointing to positive direction, for instance, lower policy rates and decreasing of inflation rates have an influence on interest rates charges by the banks. The unfavourable interest rate becomes a major challenge to access capital and limits economic growth. The consequence of inefficiency in the banking sector has brought about debates on factors that actually hinder the profit margins of banks in the developing countries.
There are studies that examined the determinants of profitability in the banking sector but most of these studies were conducted in other regions such as United States of America, Europe and Asia (Sherif & Amoako, 2014). Few studies have examined this issue in the Ghanaian context (Mensah and Abor, 2014). For instance, Owusu-Antwi (2017) examined “the interest rate spread on bank profitability in Ghana”. Likewise, Boadi (2015) also examined “the profitability
determinants of the Ghanaian banking sector in ongoing wave of consolidation”. Therefore, this present study also seeks to examine “the impact of interest margin on banks profitability in the Ghanaian context”.
The Purpose of the Study
The purpose of this current study is to “examine the impact of interest margin on the profitability of banks in Ghana with the focus on Fidelity Bank Ghana”.
Research Objectives
- To assess the relationship between interest margin and the profitability of the banks in Ghana”.
Research Questions
- What is the relationship between interest margin and the profitability of the banks in Ghana?”
Significance of the Study
This current study will make significant contributions in the following areas; literature, practice and policy. As there are few studies in this area which examines the issue in the Ghanaian context, this study will be one of the few studies in the area to impact on the banking sector in Ghana and beyond. The findings will also aid managers of banks to be abreast with the relationship that exist between interest margin and profitability of banks. This will further help the managers to formulate and implement strategies to help increase the profit margin of their banks. Finally, the findings of this study will help stakeholders of the financial sector such as Bank of Ghana (BoG), Ghana Bankers Association etc. to formulate appropriate policies to
regulate the activities of the banks and ensure the interest margin positively impacts on banks profitability.
Organisation of the Study
The present study is structured into five (5) chapters. The Chapter presents the “background of the study”. The chapter also presents the “research problem, the purpose of the study, the objectives of the study, the research questions, the significance of the study, and the organisation of the study”. Chapter two presents the systematic “review of both theoretical and empirical previous works from books, scholarly journals” etc. Chapter three discusses the “research design and approach of the study as well as the research setting, population, sampling technique and sample size, data collection instruments, procedure for data collection, method of data analysis and ethical consideration”. Chapter four displays the results and analysis of the study. Finally, chapter five presents the “summary of the findings, conclusions and recommendations of the study”.
