The Nigerian And Ghanaian Banking Industry Finance Essay

The banking sector is the engine growing of every economic system, given its map of fiscal intermediation. There is demand for a strong and dependable banking system in order to ease capital formation, lubricate the production engine turbines and advance economic growing. ( Balogun, 2007, pg6 ) . The banking system is the cardinal component of the modern market economic system ; hence, an efficient banking system is an effectual force for fiscal intermediation, which channels nest eggs into investing, thereby furthering higher economic growing. Merten and Urga ( 2001, pg293 )

Banks can non assist advance economic growing if they are non cost effectual. Cost inefficiencies occur when a bank fails to work economic systems of graduated table and range to the full. Scale and range economic systems provide steps of the extent to which unit costs could be lowered by offering the entire volume of production or scope of merchandises. Heffernan, S. ( 2009, pg478 ) . This brings the demand to prove for the being of economic systems and graduated table and range in the Nigerian and Ghanese banking sectors.

The first portion of this survey focuses on the intent and aim of the undertaking, the 2nd portion is the theoretical foundation/literature reappraisal. The 3rd portion focuses on the steps and appraisal of the undertaking. The last portion is the decision.


Regulators, and directors and policy shapers have been concerned with how Bankss transform their assorted inputs into multiple fiscal merchandises expeditiously. Efficiency in the banking sector is considered as a stipulation for macroeconomic stableness. ( Ngalande, 2003, pg ) .

Flamini, McDonald and Schumpeter, ( 2009, pg16 ) , in their work on the determiners of profitableness in sub-Saharan Africa discovery that Bankss are really profitable in these sectors. Advancement has been achieved by many sub-Saharan states in banking, supervisory and regulative reforms every bit good as the execution of structural reforms to cut down fiscal hazards and promote fiscal development. Some of the states in sub-Saharan Africa includes Nigeria, Ghana, Liberia, Gambia etc. Soyibo ( 2008, pg56 )

Financial sector reforms are used by the authorities of many states in order to do the fiscal system more competitory and transparent. ( Limi, 2004, pg504 ) . Fiscal reforms can besides beef up the cardinal bank ‘s supervisory capacity and scrutinizing systems. Limi ( 2004, pg 509 ) . Nigeria and Ghana are developing states that have used different reforms in the command of sharpening their fiscal constructions. The Nigerian banking industry has undergone singular alterations over the old ages, in footings of the figure of establishments, ownership construction and in operations. The alterations have been influenced through the deregulating of the fiscal sector, technological inventions, supervisory and prudential criterions. Soyibo ( 2008, pg 58 ) . Government policies had a major influence on the development of the Nigerian banking industry. Balogun ( 2007, pg5 ) . The Ghanese banking sector emerged from terrible fiscal and reputational harm ensuing from economic recession and authorities debt in the 1980 ‘s and 90 ‘s when the Ghanese Bankss and other fiscal establishments stopped imparting to the private sector. Aryeetey ( 1996, pg8 ) . The banking sector has seen major capital injection partially because of the political stableness, attainment of micro and macroeconomic stableness and the authorities ‘s desire to do Ghana ‘s fiscal sector a function theoretical account for all African states. More rigorous supervising and addition in capital demands has promoted the banking industry. ( Soyibo, pg 59 ) .

There have been dramatic alterations in the Ghanaian and Nigeria banking industry over the old ages as a consequence of different fiscal reforms, the aim of this survey is to research the being of cost efficiencies in signifier of economic systems of graduated table and range in the Ghanaian and Nigerian banking industry over the period 2003-2009. This survey seeks to detect beginnings of economic systems and diseconomies of graduated table and range in the banking sectors and formulate policy recommendations on how to better the banking industries.

Research Questions

Does the banking industry have scale and scope economic sciences?

Does graduated table and range economic sciences exist in the Nigerian and Ghanese banking sector?

Does diseconomies of graduated table and range exist in the Nigerian and Ghanese banking sector


Baumol, Panzar and Willing, ( 1982 ) indicated that there are two types of production economic systems that may be achieved by any house in any industry ; they are economic systems of graduated table and range. Economies of graduated table are the cost advantages that a house obtains through its enlargement. Scale economic systems means that a proportionate addition in factor inputs will do more than proportionate addition in end product or will do the Bankss average cost curve to fall. Economies of graduated table are associated with the house size and be if mean production cost diminutions as end product rises. Baumol, Panzar and Willing, ( 1982 ) . Economies of range refer to efficiencies chiefly associated with additions of the range of concern procedures. Economies of range exists if the joint production cost of bring forthing two or more end products is lower than if the merchandises are produced individually. There are two chief beginnings of economic systems of range ; they are cost complementarities and common assets. Cost complementarities exist when the cost of bring forthing extra goods falls. A common plus used in the production of different goods or services besides promotes economic systems of range. ( Besanko et al, 2004 ) . Scale economic systems is a long tally construct, it is applicable when the inputs used in doing up a house ‘s production can be varied. A steadfast Cam exhibit increasing return to scale, diminishing returns to scale, changeless return to graduated table and merchandise specific economic systems of graduated table ( Heffernan, S, pg483 ) . The grounds of economic systems of graduated table in the banking industry means big Bankss have a cost advantage over smaller 1s, and if economic systems of range exists, a bank that produces different merchandises will be more efficient than the bank that produces a individual merchandise ( Heffernan, S, pg484 ) . , while the grounds of economic systems of range implies multi-product Bankss are more efficient than the individual merchandise Bankss. If there are diseconomies of range, the cost of joint production is higher. ( Fu and Heffernan, 2008 ) .

In good working economic systems, Bankss Acts of the Apostless as quality accountants for capital seeking successful undertakings, guaranting higher returns and speed uping end product growing. Fiscal systems tend to accomplish economic systems of graduated table and range to countervail costs, which thereby facilitates a more efficient allotment of resources.

There have been a batch of surveies to prove economic systems of graduated table and range in developed and emerging states, but at that place have been few or no survey on African states. The literatures specifies the surveies, the methods used and the consequence of graduated table and range economic systems in developed, emerging and developing economic systems.

Some of the surveies in developed states includes ; Cavallo and Rossi ( 2001 ) used an imbalanced panel informations 0f 442 Bankss dwelling of 2516 observations from 1992-1997 to prove for the being of economic systems of graduated table and range in some European states ( United Kingdom, Germany, France, Italy, Netherlands and Spain ) . The survey consequences shows that smaller Bankss particularly those that engage in traditional activities are more efficient than big Bankss. The grounds of scale economic systems is present in the banking systems, but more pronounced for little European Bankss. Scope economic systems is non excessively important in the overall banking system, but more dominant in big European Banks. Berger and Humphrey ( 1991 ) applied both the traditional non frontier and the stochastic frontier attack to prove for economic systems of graduated table and range in all US bank, where he employed merely 1984 informations. Each appraisal attack showed grounds of scale economic systems for little Bankss and little diseconomies of graduated table for big Bankss. The consequence found range diseconomies utilizing the frontier attack for the largest Bankss particularly, but range economic systems was found for the largest Bankss utilizing the traditional non frontier attack. Their consequence indicates that the stochastic frontier attack is more restrictive than the traditional frontier attack. Goisis et Al ( 2009 ) accessed economic systems of graduated table and range in the European banking sector utilizing the translog cost map, their consequence on the grounds of economic systems of graduated table in European states was non clear, but economic systems of range was significant.. Berger and Humphrey ( 2004 ) , utilizing the trans-log cost map to prove for economic systems of graduated table and range in the U.S Bankss found economic systems of graduated table to be in the smallest U.S Bankss and little diseconomies of graduated table in big Bankss. Economies of range was found in both little and big U.S Bankss.

The surveies in emerging economic systems includes ; Rezvanian, R and Mehdian, S. ( 2002, pg 83 ; 95 ) tested the existed of graduated table and range economic systems in Singaporean Bankss utilizing the parametric translog frontier attack for 10 commercial Bankss from 1991-1997 discovered the presence of economic systems of graduated table and range for medium term Bankss and economic systems of range economic systems for all Bankss irrespective of their sizes. Mertens and Urga, ( 2001 ) , in their survey ; efficiency, graduated table and range economic systems of 79 from 168 Ukrainian commercial Bankss in 1998 used the stochastic frontier attack. They found out that big Bankss show important diseconomies of graduated table while big Bankss shows important economic systems of graduated table. When proving for range economic systems in these Bankss it was discovered that both big and little Bankss have economic systems of range, but one time more the smaller Bankss had more scope economic systems compared to big Bankss. Limi, ( 2004, pg 507 ) in his research work ; economic systems of graduated table, range and cost complementarities in the Pakistan banking sector. Data was collected for 41 establishments runing in Pakistan for 1998-2000 periods. The survey consequence shows greater economic systems of range for little and medium sized Bankss than big Bankss, while scale economic systems is decreasing as bank sizes additions.

The survey of efficiency for sub-Saharan economic systems includes Kirkpatrik, Murinde and Tefula ( 2008 ) used the translog stochastic cost and net income frontier attack to prove the determiners of X-inefficiency in nine sub- Saharan states ( Ghana, Nigeria, Swaziland, Zambia, Lesotho, Kenya, Botswana, Malawi and Namibia ) utilizing 89 commercial Bankss from the sample states for the period 1992-99. The consequence shows that larger Bankss are more efficient than smaller 1s. The grade of net income X-inefficiency is somewhat higher than cost X-inefficiency. The grade of inefficiency is characterized by bad loans and high capital ratio.


There two attacks used to prove whether a bank enjoys economic systems of graduated table and range is the measuring and appraisal attack. There are two types of measuring ; the criterion and the enlargement way. The premises associated with the standard steps are really restrictive, because Bankss must it limits Bankss to hold indistinguishable merchandise mixes, nevertheless Bankss seldom of all time fulfill these standards. ( Fu and Heffernan, 2008 pg 346 ) Since the enlargement portion does non hold these limitations, the enlargement way appraisal will be used in this survey. It captures the impact of altering graduated table and merchandise mix at the same time. ( Berger et al, 1987 ) .

Appraisal Measures

To gauge graduated table and range economic systems, a multi merchandise cost map known as the trans-logarithmic cost map will be used. It ensures prompt focal point and reading in economic footings. In this survey, Bankss are assumed to be multi-product houses using a vector of inputs to bring forth a vector of end products. The traditional non- frontier trans-log cost map is defined as ;

Where C= sum cost

Y= end products


vitamin E = usually distributed random mistake

The stochastic frontier translog map

Where is an X- inefficiency factor

Where is the random mistake

The translog cost map is a widely used functional signifier. There are two chief attacks used in gauging the translog cost map. The first is the traditional non- frontier, where the parametric quantities of the translog cost map are obtained from the coincident appraisal of the cost map and the input portion equations. Cavallo and Rossi ( pg 519 ) . The 2nd is the stochastic cost frontier attack, where the cost portion equations are dropped and the additive conditions are imposed. Cavallo and Rossi ( pg519 )

To gauge graduated table and range economic systems the stochastic translog frontier attack will be used. It overcomes the jobs associated with the nonfrontier attack ( Heffernan, 2009, pg ) . There are a batch of surveies that has used similar measuring and appraisal attack in proving for the being of economic systems of graduated table and range. The ground why it is being used is because it incorporates the ability to besides look into the efficiencies of the Bankss in the Nigerian and Ghanese Economy. It ensures prompt focal point and a good reading of findings in economic footings. ( Limi, 2004 ) . This methodological analysis have been used by many writers, few of them are Berger and Humphrey, ( 2004 ) ; Fu and Heffernan, ( 2008 ) ; Limi, A. ( 2004 ) ; Cavallo and Rossi, ( 2001 ) .

Measurement steps

The enlargement way steps was proposed by Berger et Al ( 1987 ) and has been used in a batch of surveies since it overcomes the job of non being able to alter the end product of one merchandise while others merchandises changeless i.e. non really suited for a multi-product house ( Fu and Hefferman, pg348 ) . The enlargement way graduated table economic systems ( EPSCE ) and the enlargement way bomber additivity ( EPSUB ) will be used. The EPSCE is defined as the snap of incremental cost with regard to incremental end product along the ascertained enlargement way from the little bank A to the big bank B.


The measures of the pth end product at bank A is

The measures of pth end product of bank B is

C ( YB ) : entire cost at bank B

C ( YA ) : entire cost at bank Angstrom

The EPSCE measures the relative alterations in the costs as Bankss move along the ascertained enlargement way from a little to a big bank. There is economic systems of graduated table if EPSCE & A ; gt ; 1, because it means cost is increasing proportionately less than inputs. Whereas there is diseconomies of graduated table if EPSCE & A ; lt ; 1. ( berger, 1987 ) ( herffernan )

Berger besides developed the enlargement way subadditivity ( EPSUB ) . It gives the relative cost addition fron two- bank production of YB.

EPSUB is estimated along the enlargement way from the average end product degree of one size category to the mean of the following size category. If EPSUB is greater than zero, so it means larger Bankss can prosecute in the joint production of two or more goods and services at lower cost than if they are individually produced by smaller Bankss. If EPSUB & A ; lt ; 0 it implies that two or more smaller Bankss can bring forth each service individually at a lower entire cost.

End products and Inputs

In order to place end product and inputs mention was made to those used in ( Cavallo and Rossi, 2001 ; Fu and Heffernan, 2008 and Goisis et Al, 2009 ) . Four end products and three inputs will be used. The end products are non involvement income, entire sedimentations, entire loans and entire investing. The inputs are cost of financess, cost of labour and cost of fixed plus.

The end products ;

Entire cost ( C ) : operating disbursals plus involvement cost

Entire sedimentations ( Y1 ) : it made up of all short term and long term sedimentations from clients and other Bankss

Entire loans ( Y2 ) : made up of all short term and long term loans excepting loan militias

Entire investings ( Y3 ) : composed of short term investings, securities and long term investings excepting investing loss.

Noninterest income ( Y4 ) : made of runing income less involvement income.

The inputs ;

Cost of financess ( W1 ) : The ratio of entire involvement disbursal and entire borrowed financess

Labour ( W2 ) : The ratio of forces disbursals and entire assets

Cost of fixed plus ( W3 ) : The ratio of entire disbursals on fixed plus and fixed plus.

The undertaking will concentrate on few selected commercial Bankss in Nigeria and Ghana. The information was obtained from the income and balance sheets statements of the sample Bankss through the bankscope database ( a universe banking information beginning ) . The information was collected for 11 commercial Bankss in Nigeria and Ghana for 2003-2009 period.


Nigerian BANKS
























TOTAL = 11

TOTAL = 11

Table 2: Sample Bankss statistics

Ghanaian BANKS ( 2003-2009 )

Number of observation ( 77 )

MEAN ( in million dollars )

Standard DEVIATION ( in million dollars )

Sum COST ( C )






Entire LOANS ( Y2 )



Entire INVESTMENT ( Y3 )






Cost OF FUNDS ( W1 )






Nigerian BANKS ( 2003-2009 )

Number of observation ( 77 )

MEAN ( in million dollars )

Standard DEVIATION ( in million dollars )

Sum COST ( C )






Entire LOANS ( Y2 )



Entire INVESTMENT ( Y3 )






Cost OF FUNDS ( W1 )






Beginning: Bankscope database

From the consequence of the mean of the entire cost, entire sedimentations, , entire loans and non involvement income, it is observed that the Nigerian banking construction as a whole for the 2003-2009 period is much more larger than the Ghanese banking construction. One of the grounds is due to the fact that Nigeria is the most thickly settled black African state. These sample Bankss statistics are the input and end product needed in the translog cost map. The consequence of the appraisal will assist demo the degree and extent of economic systems of graduated table and range. The consequence will besides demo some diseconomies of graduated table and range if there is any.

The Growth Trend in Nigerian and Ghanese Banks

The growing tendency for the entire plus, entire sedimentations, entire loans and investing for the period of 2003-2009 is explored utilizing the largest and the smallest Bankss of each state ( Nigeria and Ghana ) . The largest and smallest Bankss for the states are chosen from the sample Bankss, utilizing their entire assets.

The chosen largest bank in Ghana is the Ghana commercial bank. Entire assets, investings, entire sedimentations, and entire loan were increasing steadily over the period 2003-2007. The entire assets of the Bankss continued to increase steadily from 2007-2009. The entire investing of the bank became rather irregular from 2007-2009, increasing easy from 2007 to 2008 and diminishing in 2009. Entire sedimentations is diminishing decelerating from 2007-2009. Entire loans is increasing steadily from 2007-2009.

Figure 1

The steady addition in the loans Ghana commercial signifies that the Bankss is presuming more hazard.

Figure 1

The steady addition in the entire loans that Ghana commercial bank is giving out from 2008-2009, signifies that the bank is presuming more hazard.

Fidelity bank of Ghana, the smallest sample bank has its entire assets, entire sedimentations, entire loans and investings increasing aggressively from 2003-2009.

Figure 2

The crisp addition in the entire loans, entire sedimentations, entire assets and investing of fidelity bank Ghana indicates that the bank is still turning.

The first bank of Nigeria is one of the largest Bankss in Nigeria. The consequence shows that the entire plus and entire loans of the bank is turning at the same gait over the 2003-2009 period. The entire loans and investings are besides turning at increasing rates, but the entire sedimentations are increasing more aggressively.

Figure 3

The tendency growing for the entire assets, investings, loans and sedimentations over 2003-2009 period is really irregular particularly the entire assets and investings. The entire plus fell aggressively from 2005-2006 increased excessively fast from 2006-2007, and so started steady growing from 2008-2009. The entire investing of standard hired bank increased and decreased steadily from 2003-2008, and so is increasing really fast from 2008-2009. The bank ‘s loans increased steadily from 2003-2008, and is diminishing from 2008-2009. The Bankss sedimentation is besides increasing steadily throughout the 2003-2009 period.

Figure 4

The bank is risk adverse because it does n’t give out excessively much loans.

The overall consequence of the tendency growing of the in Nigeria and Ghana Bankss severally indicates that the size of the Nigerian banking system is larger than that of the Ghanaian banking system. The little Bankss in both states are risk averse. The consequence besides shows that the entire assets, sedimentations, liabilities and loans of the Bankss of these states is increasing in most instances.



Heffernan, S ( 2009 ) . Mordern Banking. West Sussex: Wiley.

Soyibo, A. ( 2008 ) . Banking Sector Reforms in Africa ; Effectss on Savingss, Investment and Financial Development. African Development Review, 9 ( 1 ) , 52-76.

Kirkpatrik, C. , Murinde, V. , and Tefula. , M ( 2008 ) . The Measurement and Determinants of X-inefficiency in Commercial Banks in Sub-saharan Africa. 14 ( 7 ) , 625-639.