ASSESSING THE PERFORMANCE OF GHANAIAN-

OWNED BANKS USING CAMEL MODEL

MBA Project Report
By
Dromor Tackie-Yaoboi
(531110332)
under the Guidance of
Mr. Francis Brobbey
EXECUTIVE SUMMARY
Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over
this period, the banking sector has experienced a paradigm shift. Hence, it is high time to
make performance appraisal of this sector. Accordingly, a framework for the evaluation of
the current strength of the system, and of operations and the performance of the banks
has been provided by Central Banks measuring rod of CAMELS

Data was collated and analysed from case study banks from 2000 to 2005 using
CAMEL's framework and the findings from the study indicated that Domestic banks in
Ghana are well-capitalised, profitable, liquid, sound and stable but less efficient; staff and
infrastructural costs account for the high operational costs; reduction in reserve
requirements have lead to improvement in the loans portfolio; and that size is not an
indication of profit performance.

It is recommended that there is the need to reduce transactional cost and reserve
requirements, charges and rates; address the occurrences of losses on the loan portfolio;
develop a common IT infrastructure compatible for the industry; encourage the culture of
savings and merger and consolidation among smaller banks.

CHAPTER ONE
INTRODUCTION
Background to the Study
A sound financial system is indispensable for a healthy and vibrant economy. The banking sector
constitutes a predominant component of the financial services industry. The performance of any
economy to a large extent is dependent on the performance of the banking sector. The banking sectors
performance is seen as the replica of economic activities of the nation as a healthy banking system acts
as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our
country have been assigned a significant role in financing the process of planned economic growth.
Significant changes that have occurred in the banking sector in the past five decades since
independence:
Reduction of government ownership during early 1950s to the advent of liberalization, privatization
and globalization, in the post-1983 era.
Banks in Ghana have undergone restructuring during 1988-2012 and still on-going. There have been
some improvements in the restructuring.
Profitability has soared in recent years with return on equity (ROE) between 16% and 24%, averaging
20% over the last 16 years.
Capital adequacy ratios have seen improvement outpaced the statutory requirement of 10%.
In real terms, bad debts have been falling, and the problem of non-performing assets seems to have
been tackled.
CHAPTER ONE
INTRODUCTION (CONT..)
It could however be argued that all is not well with the banking industry.
The high profitability could be said to owe less to efficiency and competitiveness than to the structure
of the industry that enables most banks to reap supernormal profits (Ziorklui and Gockel, 2000).
Also, a carefully review of the balance sheets of banks in Ghana suggests that the banks in Ghana have
generated extra returns by taking greater risks.
The flurry of reforms witnessed over the last one and half decade has brought about significant
changes in the banking arena in the country.

Statement of the Problem
Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over this
period, the banking sector has experienced a paradigm shift. Hence, it is high time to make
performance appraisal of this sector. Accordingly, a framework for the evaluation of the current
strength of the system, and of operations and the performance of the banks has been provided
by Central Banks measuring rod of CAMELS which stands for capital adequacy, assets quality,
management efficiency, earning quality, liquidity and internal control systems.
There are currently two major supervisory tools for rating Banks used by the Bank of Ghana and
these are in line with the BASEL core principles for effective banking supervision
CAMELS and;
CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls)

CHAPTER ONE
INTRODUCTION (CONT)
Objectives of the study
The general objective of the study is to analyse performance of domestic banks in Ghana.
The specific objectives of the study include:
To analyse the capital adequacy of domestic banks.
To test for asset quality of domestic banks.
To assess the profitability of domestic banks.
To analyse the cost efficiency of domestic banks

Hypothesis Testing
The study tested the following hypothesis:
H1: The profit growth of banks is not related to their size
H2: The profit growth of banks is related to their size
The hypothesis is be tested at 5% level of significance (95% confidence level)

CHAPTER ONE
INTRODUCTION (CONT)
Justification for the Study
The functions of the banking system including providing payments and settlements systems,
mechanism for borrowing and lending, and pooling and allocation of funds, among others
impinge on all aspects of the economy and are central to the overall performance of the
economy. The efficacy of the financial systems in performing these functions is a major
ingredient of the efficacy of the economy as a whole. Given the pivotal role of banking in an
economy, the role of competition in this industry is particularly important.
Survival in today competitive environment depends on performance and growth. Competition
has implications for efficiency, innovation, pricing, and availability of choice, consumer welfare,
and the allocation of resources in the economy. If competition is weak, these advantages may be
lost and there is likely to be a transfer of welfare from consumers to both the producers of goods
and services and the shareholders of these firms.
Two decades have elapsed since the initiation of banking sector reforms in Ghana. Over this
period, the banking sector has experienced a paradigm shift. Hence, it is high time to make
performance appraisal of this sector. Accordingly, a framework for the evaluation of the current
strength of the system, and of operations and the performance of the banks has been provided
by Central Banks measuring rod of CAMELS which stands for capital adequacy, assets quality,
management efficiency, earning quality, liquidity and internal control systems.
The main endeavour of CAMEL system is to detect problems before they manifest themselves.
The Bank of Ghana has instituted this mechanism for critical analysis of the balance-sheet of
banks by themselves and presentation of such analysis to provide for internal assessment of the
health of banks. The analysis, which is made available to the Ghana, forms a supplement to the
system of off-site monitoring of banks. The prime objective of the CAMEL model of rating
banking institutions is to catch up the comparative performance of various banks (Bodla and
Verma, 2006).

CHAPTER ONE
INTRODUCTION (CONT)
Methodology
Methodology will be fully discussed under chapter four ( Methodology chapter)

Organisation of the study
This study has being organised as follows: Chapter One- Introduction, Chapter Two-
Literature Review, Chapter Three Profile of Domestic Banks, Chapter Four-
Methodology, Chapter Five - Results and Analyse of data, and Chapter Six-
Conclusion and Recommendation.

CHAPTER TWO
LITERATURE SURVEY
Overview of Banking in Ghana
Primary Banking activities in Ghana was usshered in by the then British West
African Bank now Stanchart in 1896 in Accra. It was followed by Barclays Bank in
1917.
The banking industry in Ghana witnessed some interventional policies aimed at
controlling the cost and direction of finance in order to facilitate economic
development soon after Ghana had attained political independence. Notable
among these policies were:
the establishment of public sector banks
the imposition of administrative controls on interest rates; and
sectoral allocation of bank credits.
The financial crisis which plagued Ghana from 1983 to 1988 moved the Bank of
Ghana (Central Bank) to embark on the Financial Sector Structural Adjustment
Program (FINSAP) to address it. Notable among the major objectives of
FINSAP were:
the restructuring of the financial sector and
the creation of new institutions including Ghana Stock Exchange (GSE) to
revitalize the financial sector (Frimpong, 2008)
CHAPTER TWO
LITERATURE SURVEY( CONT..)
Overview of Banking in Ghana (cont..)
One notable success of the Structural Adjustment Progamme is that, it has revived the sector by improving
customer service and management procedures. (Blankson et al. (2009))
Key Developments in the Ghanaian Banking Industry since 1988 are:
Regulations
the promulgation of the following acts: Banking Act 2004 (Act 673) which replaced the Banking Law 1989
(PNDCL 225); Foreign Exchange Act 2006 (Act 723); Credit Reporting Act 2007 (Act 726); Banking
(Amendment) Act 2007(Act 738); Borrowers and Lenders Act 2008 (Act 773); Home Mortgage Finance Act
2008 (Act 770) and Anti-money laundering Act 2008 (Act 749).
Directives
the Bank of Ghana has lifted restrictions on the scope of operations of commercial banks. Thus, commercial
banks in Ghana are now universal banks with new minimum capital requirement of GH60 million for all
foreign banks (banks with foreign majority ownership) and GH25 million for local/indigenous banks (banks
with local majority ownership).
The bank has since 2006 abolished the secondary deposits reserves requirement of 15%.
Collapses
Notwithstanding the indefatigable efforts of Bank of Ghana to sanitize the banking sector for economic
growth, in 2000 the sector saw the demise of three major banks: Bank for Housing and Construction; Ghana
Co-operative Bank; and Bank for Credit and Commerce. The extinction of these banks brought to the fore
the need for pragmatic approaches in capital adequacy, including holding a capital buffer of sufficient size,
enough liquid assets, and engaging in efficient risk management (Amidu, 2007).

CHAPTER TWO
LITERATURE SURVEY( CONT..)
Overview of Banking in Ghana (cont..)
Performance
Over the years, the performance of the industry has been impressive. Its total operating
assets grew by approximately 82% from about GH6.85 million in 2007 to approximately
GH12.42 million in 2009.
Its gross loan grew from GH5.7 billion in 2008 to GH6.3 billion in 2009.
The total shareholders funds skyrocketed from GH1.1 billion in 2008 to GH1.8 billion in
2009.
The return on equity (ROE) of the industry declined from 22% in 2008 to 12.1% in
2009(Banking Survey, 2010).

Structure of the Ghanaian Banking Sector
As at the end of June 2009, Ghana boasted of twenty-six (26) universal banks with ten (10)
foreign banks and sixteen (16) local banks and 120 rural banks.
Among these banks, Barclays Bank (Ghana) Limited is the only bank licensed to undertake
offshore banking (Banking Survey, 2010).
The banking industry in Ghana is undergoing rapid change driven partly by technological change
and the rapid growth of competing non-bank financial institutions.
CHAPTER TWO
LITERATURE SURVEY( CONT..)
Characteristics of the Ghanaian Banking Sector
Key features of the banking industry are as follows:
- A general lack of financial innovation;
- High spreads between deposit and lending rates;
- A re-emergence of non-performing loans assets portfolios.
- Limited credit facilities for private sector;
- A high rate of investment in government securities compared to loans
and advances to the private sector;
- Low savings rate reflected in a high level of currency outside the
banking system; and
- Efficient credit operations are constrained by the lack of a credit
information system.

CHAPTER TWO
LITERATURE SURVEY( CONT..)
Theoretical Prescription of CAMELS Framework
The Basel Committee on Banking Supervision of the Bank of International
Settlements (BIS) has recommended using capital adequacy, assets quality, management
quality, earnings and liquidity (CAMEL) as criteria for assessing a Financial Institution
in 1988 (ADB 2002). The sixth component, market risk (S) was added to CAMEL in
1997 (Gilbert, Meyer and Vaughan 2000). However, most of the developing countries
are using CAMEL instead of CAMELS in the performance evaluation of the Financial
Institutions. The central banks in some of the countries like Nepal, Kenya use CAEL
instead of CAMELS.
CAMELS framework is a common method for evaluating the soundness of Financial
Institutions. This system was developed by regulatory authorities of the U.S banks. The
Federal Reserve Bank, the Comptroller of the Currency and the Federal Deposit
Insurance Corporation all use this system (McNally 1996).
The main endeavour of CAMEL system is to detect problems before they manifest
themselves. The Bank of Ghana has instituted this mechanism for critical analysis of
the balance-sheet of banks by themselves and presentation of such analysis to provide
for internal assessment of the health of banks. The analysis, which is made available to
the Bank of Ghana, forms a supplement to the system of off-site monitoring of
banks. The prime objective of the CAMEL model of rating banking institutions is to
catch up the comparative performance of various banks (Bodla and Verma, 2006).
CAMEL is, basically, a ratio-based model for evaluating the performance of banks.
CHAPTER TWO
LITERATURE SURVEY( CONT..)
Capital Adequacy
Capital adequacy has emerged as one of the major indicators of the financial health of a
banking entity. It is important for a bank to maintain depositors confidence and preventing
the bank from going bankrupt. Capital is seen as a cushion to protect depositors and
promote the stability and efficiency of financial system around the world. Capital Adequacy
reflects the overall financial condition of the banks and also the ability of management to
meet the need for additional capital. It also indicates whether the bank has enough capital to
absorb unexpected losses. Capital Adequacy Ratio acts as an indicator of bank leverage.
The following ratios measure Capital Adequacy:

Capital Adequacy Ratio (CAR)
The banks are required to maintain the capital adequacy ratio (CAR) as specified by Bank
of Ghana from time to time. As per the latest Bank of Ghana norms, the banks in Ghana
should have a CAR of 10%. It is arrived at by dividing the sum of Tier-I, Tier-II and Tier-
III capital by aggregate of risk weighted assets (RWA). Symbolically,
CAR= (Tier-I + Tier-II + Tier-III)/RWA
Tier-I capital includes equity capital and free reserves.
Tier-II capital comprises of subordinate debt of 5-7 years tenure, revaluation reserves,
hybrid debt capital instruments and undisclosed reserves and cumulative perpetual
preference shares.
Tier-III capital comprises of short-term subordinate debt. The higher the CAR, the
stronger the banks solvency position.



CHAPTER TWO
LITERATURE SURVEY( CONT..)
Debt-Equity Ratio
This ratio indicates the degree of leverage of a bank. It indicates how much of the
bank business is financed through debt and how much through equity. Debt-
Equity ratio is arrived at by dividing total borrowings and deposits by
shareholders net worth, which includes equity capital, and reserves and surpluses.
Higher ratio indicates less protection for the creditors and depositors in the
banking system.
Advances to Assets
This is a ratio of the Total Advances to Total Assets. This ratio indicates a banks
aggressiveness in lending which ultimately results in better profitability. Total
advances also include receivables. The value of Total Assets excludes the
revaluation of all the assets.
Government Securities to Total Investments
This ratio shows the risk involved in a banks investment. Government
Securities, are generally, considered as the most safe debt instrument, which, as a
result, carries the lowest return. Since government securities are risk-free, the
higher the Government Securities to investment ratio, the lower the risk involved
in a banks investment. It is arrived at by dividing the amount invested in
government securities by total investment.


CHAPTER TWO
LITERATURE SURVEY( CONT..)
Assets Quality
The quality of assets is an important parameter to gauge the degree of financial strength.
The prime motto behind measuring the assets quality is to ascertain the component of
Non-Performing Assets (NPAs) as a percentage of the total assets. This indicates what
types of advances the bank has made to generate interest income. Thus, assets quality
indicates the type of the debtors the bank is having. The following ratios are necessary to
assess assets quality:


Gross NPAs to Net Advance
It is a measure of the quality of assets in a situation, where the management has not
provided for loss on NPAs. The Gross NPAs are measured as a percentage of Net
Advances. The lower the ratio, the better is the quality of advances.


Net NPAs to Net Advances
It is a measure of the quality of assets in a situation where the management has not
provided for loss on NPAs. Net NPAs are Gross NPAs net of provisions on NPAs and
interest in suspense account. In this ratio, Net NPAs are measured as a percentage of net
advances.


CHAPTER TWO
LITERATURE SURVEY( CONT..)
Total Investments to Total Assets Ratio
Total investments to total assets indicate the extent of deployment of assets in investment
as against advances. This ratio is used as a tool to measure the percentage of total assets
locked up in investments, which, by conventional definition, does not form part of the core
income of a bank. It is arrived at by dividing total investments by total assets. A higher ratio
means that the bank has conservatively kept a high cushion of investments to guard against
NPAs.

Net NPAs to Total Assets
It is a measure of the quality of assets in a situation where the management has not
provided for loss on NPAs. Here, the Net NPAs are measured as a percentage of Total
Assets. The lower the ratio, the better is the quality of advances.

Percentage Change in Net NPAs
This measure gives the movement in Net NPAs in relation to Net NPAs in the previous
year. The higher the reduction in Net NPAs levels, the better is for the bank. It is given by
the formula: %Change in Net NPAs = (Net NPAs at the end of the year Net NPAs at the
beginning of the year)/Net NPAs at the beginning of the year.


CHAPTER TWO
LITERATURE SURVEY( CONT..)
Management Efficiency
Management efficiency is another vital component of the CAMEL Model that ensures the
survival and growth of a bank. The ratios in this segment involve subjective analysis
and efficiency of management. The management of the bank takes crucial decisions
depending on the risk perception. It sets vision and goals for the organization and sees
that it achieves them. This parameter is used to evaluate management efficiency as to
assign premium to better quality banks and discount poorly managed ones. The ratios
used to evaluate management efficiency are described as under:

Total advances to Total Deposits
The ratio measures the efficiency of management in converting the deposits available with
the bank (excluding other funds like equity capital, etc.) into high earning advances.
Total deposits include demand deposits, savings deposits, term deposits and deposits
of other banks. Total advances also include the receivables.

Return on Net Worth
It is a measure of the profitability of a bank. Here, Profit After Tax is expressed as a
percentage of Average Net Worth.


CHAPTER TWO
LITERATURE SURVEY( CONT..)
Earning Quality
Earning quality reflects quality of a banks profitability and its ability to earn consistently. The quality of
earning is a very important criterion that determines the ability of a bank to earn consistently, going
into the future. It basically determines the profitability of the bank. It also explains the sustainability
and growth in earnings in the future. This parameter gains importance in the light of the argument that
much of banks income is earned through non-core activities like investments, treasury operation, and
corporate advisory service and so on. The following ratios try to assess the quality of income in terms
of income generated by core activity-income from lending operation.
Operating Profit to Average Working Funds Ratio
This ratio indicates how much a bank can earn from its operations net of the operating expenses for
every cedi spent on working funds. This is arrived at by dividing the operating profit by average working
funds. Average Working Funds (AWF) are the total resources (total assets or liabilities) employed by a
bank. It is daily average of total assets / liabilities during a year. The better utilization of funds will
result in higher operating profit. Thus, this ratio will indicate how a bank has employed its working
funds in generating profit.
Spread or Net Interest Margin (NIM) to Total Assets
NIM, is the difference between the interest income and the interest expended as a percentage of total
assets. It is an important measure of a banks core income (income from lending operations). A higher
spread indicates the better earnings given the total assets. Interest income includes dividend income and
interest expended included interest paid on deposits, loan from the Bank of Ghana, and other short-
term and long term loans.
CHAPTER TWO
LITERATURE SURVEY( CONT..)

Net Profit to Average Assets / Return on Average Capital Employed
This ratio measures return on assets employed or the efficiency in utilization of assets. It is
arrived at by dividing the net profit by average assets, which are the average of total assets in
the current year and previous year. Thus, this ratio measures the return on assets employed.
Higher ratio indicates better earning potential in the future.

Interest Income to Total Income
Interest income is a basic source of revenue for banks. The interest income to total income
indicates the ability of the bank in generating income from its lending. This ratio measures
the income from lending operations as a percentage of the total income generated by the
bank in a year. Interest income includes income on advances, interest on deposits with the
Bank of Ghana, and dividend income.

Non- interest Income to Total Income
This measures the income from operations other than lending as a percentage of the total
income. A fee-based income account for a major portion of a banks other incomes. The
bank generates higher fee income through innovative products and adapting the technology
for sustained service levels. Non-interest income is the income earned by the banks
excluding income on advances and deposits with the Bank of Ghana.


CHAPTER TWO
LITERATURE SURVEY( CONT..)
Liquidity
Liquidity is very important for any organization dealing with money. For a bank, liquidity is a crucial
aspect which represents its ability to meet its financial obligations. It is of utmost importance for a bank
to maintain correct level of liquidity, which will otherwise lead to declined earnings. Banks have to take
proper care in hedging liquidity risk, while at the same time ensuring that a good percentage of funds
are invested in higher return generating investments, so that banks can generate profit while at the same
time provide liquidity to the depositors. Among a banks assets, cash investments are the most liquid. A
high liquidity ratio indicates that the bank is more affluent. The ratios suggested to measure liquidity
under CAMEL Model are as follows:

Liquid Assets to Total Assets
Liquid Assets include cash in hand, balance with the Bank of Ghana, balance with other banks (both in
Ghana and abroad), and money at call and short notice. This ratio is arrived by dividing liquid assets by
total assets. The proportion of liquid assets to total assets indicates the overall liquidity position of the
bank.
Government Securities to Total Assets
Government securities are the most liquid and safe investment. This ratio measures the proportion of
risk-free liquid assets invested in government securities as a percentage of the assets held by the bank
and is arrived by dividing investment in government securities by the total assets. This ratio measures
the risk involved in the assets held by a bank.



CHAPTER TWO
LITERATURE SURVEY( CONT..)
Liquid Assets to Demand Deposits
This ratio measures the ability of a bank to meet the demand from demand deposits in a
particular year. It is arrived at by dividing the liquid assets by total demand deposits. The
liquid assets include cash in hand, balance with the Bank of Ghana, balance with other
banks (both in Ghana and abroad), and money at call and short notice.

Liquid Assets to Total Deposits
This ratio measures the liquidity available to the depositors of a bank. Liquid assets include
cash in hand, balance with the Bank of Ghana, balance with other banks (both in Ghana
and abroad), and money at call and short notice. Total deposits include demand deposits,
savings deposits, term deposits and deposits of other financial institutions.

Approved Securities to Total Assets
This is arrived at by dividing the total amount invested in approved securities by total assets.
Approved securities are investments made in the state-associated bodies like electricity
boards, housing boards, corporation bonds, share of regional rural banks(Joshi and
joshi,2002; Bodla and Verma, 2006; Sisdiya et al.,2008)
CHAPTER TWO
LITERATURE SURVEY( CONT..)
Summary of Literature Survey
Banking activities officially started in Ghana in 1896 by the then British Bank for West
Africa, however, not until a little before political independence, the banking industry was in
the hands of foreigners. The Then Gold Coast administration made some policy
interventions that saw the establishment of Pubic Owned banks and the reduction of cost
of borrowing and general direction of finance in the country
o However, the crisis of 1983 led to some structural adjustments of the financial sector by
the Bank of Ghana but that didn't stop the collapse of three eminent banks in the country
in the late 1990s. The banking industry in Ghana today have gone under a lot of
developments including the enactment of the banking acts, Foreign Exchange Act, Credit
Reporting Act, Borrowers and Lenders Act, Home Mortgage Finance Act, Anti-money
laundering Act and it has witness directives from the Bank of Ghana that have changed the
face of banking in the country. Ghana currently has 26 banks and 120 rural banks with the
majority in Ghanaian hands. Despite the gains made, the banking industry is still saddled
with challenges.
o Finally, there were no uniform means of assessing the performances of banks so The Basel
Committee on Banking Supervision of the Bank of International Settlements (BIS) has
recommended using capital adequacy, assets quality, management quality, earnings and
liquidity (CAMEL) as criteria for assessing a Financial Institution.

CHAPTER THREE
PROFILE OF SELECTED BANKS
Merchant Bank Ghana Limited (MBG)
Merchant Bank Ghana Limited (MBG) provides a comprehensive range of banking services to its
customers and clients. The range of MBG's banking services includes:
Domestic and International Banking Operations for Corporate Customers, Small & Medium
Enterprises (SMEs) and, High Net-worth Individuals;
Treasury Services , Money and Capital Market Operations, Foreign Remittances
The branch network of Merchant Bank currently stands at 21 .
o Mission
As a universal Bank in Ghana, Merchant Bank (Ghana) limited is committed to providing quality
financial products and services to our customers across our chosen market and maintaining our place as
a leading and preferred financial institution in Ghana.
o Vision
To become the leading, the most influential and best performing financial service provider in Ghana by
2012 and one of the leading banks in West Africa by 2015
o Our Core Values
Performance-oriented organization
All decisions and actions must be based on Unshakeable Facts.
We must at all times conduct our business with a sense of Competitive Urgency.
We must maintain High Ethical Standards in all our internal and external relationships

CHAPTER THREE
PROFILE OF SELECTED BANKS
Ghana Commercial Bank Ltd
Ghana Commercial Bank Ltd. started in 1953 as the Bank of the Gold Coast to provide banking services to the
emerging nation for socio-economic development. The Bank was to provide special attention to Ghanaian traders,
business people and farmers who could not elicit support from the expatriate banks. The Bank had been wholly
government owned until 1996 but today, government ownership stands at 21.36% while institutional and individual
holdings add up to 78.64%.
From the one branch of the 1950s, GCB now has over 150 branches and 11 agencies throughout the country.
GCB provides a wide range of products and services for the benefit. of its customers. From the traditional products
of the Current/Savings Accounts, GCB now offers specialized products and services including Link2Home for
Ghanaians resident abroad, doorstep cash collection, loans and overdrafts. There are also investment products like
treasury bills as well as fixed and call deposits.
Today we can boast of being the widest networked Bank in Ghana.
The Bank's Mission
o To be the established leader in banking, satisfying the expectations of customers and shareholders, providing a full
range of cost efficient and high quality services through the optimization of information technology and efficient
branch network.
o For the achievement of this mission, the Bank is committed to:
o The provision of first class customer service.
o Focusing on our core business/competencies-commercial banking.
o Constant improvements in the use of information technology.
o Recruiting and retaining the best human resource to carry out the Bank's mandate.
o Applying best practices in internal policies, procedures, processes and service delivery.
o Constant improvement in shareholder value
CHAPTER THREE
PROFILE OF SELECTED BANKS
National Investment Bank Ltd
Established in March 22, 1963, the National Investment Bank Ltd. was the first development bank in Ghana to
promote and strengthen rapid industrialization in all sectors of the Ghanaian economy. NIB Ltd. now operates as a
universal bank in focusing on development/commercial banking activities.
NIB Ltd. has undergone management, institutional and financial restructuring, which has strengthened the
organization and now has 27 branches nationwide.
NIB Ltd. has in the past participated in foreign lines of credit, which were administered by Bank of Ghana to meet
term loan and working capital needs of the Bank's customers.
We are also one of the designated financial institutions, which sources funds from Export Development and
Investment Fund (EDIF) for on lending to exporters as Term and Working capital loans.
o Products and Services
Apart from its development banking activities, NIB Ltd. also provides corporate and commercial banking facilities
involving both domestic and foreign transactions at very competitive rates and on flexible terms. They include,
Current and Savings Account, Call Deposits, Fixed Deposits, Loans and Advances, Personal Loans, Overdrafts,
Western Union Money Transfer, Mobile Cash Management Services and Warehousing.
o VISION
To be the most renowned Ghanaian bank for growth and efficiency
o MISSION
Our mission is to offer the highest-quality, customer-focused banking services to our clients and to create value for our
shareholders.
o CORE VALUES
Competence, Creativity, Candour, Collaboration, Community, Commitment, and Customer Service Excellence

CHAPTER THREE
PROFILE OF SELECTED BANKS
Agricultural Development Bank
In 1964, Bank of Ghana set up a Rural Credit Department to prepare the necessary
legislation, plans and procedures for the establishment of a specialized bank for the
provision and administration of credit and other banking facilities in the agricultural sector.
In 1970, The Agricultural Development Bank Act, 1970 (Act 352) was passed to broaden
the Banks functions. ADB was granted a full banking licence in that year under the Banking
Act, 1970 (Act 339).
In 2004, ADB gained a Universal banking licence under Banking Act 2004 (Act 673) which
removed restrictions on banking activity.
ADB is a universal bank offering full range of banking products and services in retail,
commercial, corporate and investment banking. Its business focus is universal banking with
development focus.
Set up in 1965 by Act 286, ADB is wholly publicly-owned. The Government owns 52% of
the shareholding, with the remaining 48% held by the Financial Investment Trust on behalf
of the Bank of Ghana.
o Vision
To be among the Top 3 performing banks in Ghana by 2012, balancing market orientation
with a development focus on Agric and more
o Mission
ADB is committed to building a strong customer-oriented Bank, run by knowledgeable and
well-motivated staff, providing profitable financial intermediation and related services for a
sustained and diversified agricultural and rural development.

CHAPTER THREE
PROFILE OF SELECTED BANKS
CAL Bank
CAL Bank commenced operations in July 1990, and is considered to be one of the
most innovative banks in Ghana.
o The Bank mobilizes resources in world financial markets, and channels them to
the Ghanaian market. In this way, CAL Bank supports the development of the
national economy, focusing particularly on the manufacturing and export sectors.
o significantly developed its retail banking operations with specialized products and
services to cater for the retail market. To complement retail banking and in line
with its expansion programme, CAL Bank has developed a network of over 48
ATM's and 18 branches and is in the process of opening several branches in major
cities and business districts in Ghana
Mission
We aspire to be a financial services institution of preference through delivery of
quality service, using innovative technology and skilled personnel to achieve
sustainable growth and enhanced stakeholder value. The Bank's vision is to be a
leading financial services group creating sustainable value for our stakeholders.

CHAPTER FOUR
METHODOLOGY
Methodology
The general objective of the study is to analyse performance of domestic
banks in Ghana. The specific objectives of the study include:
To analyse the capital adequacy of domestic banks.
To test for asset quality of domestic banks.
To assess the profitability of domestic banks.
To analyse the cost efficiency of domestic banks.

Based on these objectives, the following can be hypothesize as:
H1: The profit growth of banks is not related to their size
H2: The profit growth of banks is related to their size
To achieve the above objectives we made use of the following methods:

CHAPTER FOUR
METHODOLOGY (CONT)
CAMEL Framework
This study will use the CAMEL approach to analyse capitalization, asset quality, solvency,
profitability, efficiency and liquidity in the banking industry; Where C=capital adequacy,
A=Asset Quality, M=Management Efficiency, E=Earnings/profitability and L=Liquidity.
(Bank of Ghanas uses this approach to measure soundness, asset quality, efficiency,
solvency, profitability and liquidity of Banks in Ghana).
Alhadeff and Alhadeff (1964) compared the growth of the top 200 banks in the US over
the period 1930-60 to the growth of total bank assets. They found that the top 200 banks
grew more slowly than the total did. Within the top 200, the bottom segment grew more
rapidly than the top, but showed greater variance in growth rates. Rhoades and Yeats (1984)
replicated this study for the period 1960-71. They too found that the largest banks grew less
than the system as a whole. This points to de-concentration in banking. Scholtens (2000)
also confirms that profit growth is inversely related to size when bank size is measured by
assets. Scholtens (2000) findings saw profit growth positively correlated with equity. His
findings indicated the utmost importance of bank soundness, rather than asset size, for
sustainable bank performance. In this research work I follow the same hypothesis of
Scholtens (2000) for the banking industry in Ghana as we want to find out whether profit
(performance of banks in Ghana) is related to bank size.
o H1: The profit growth of banks is not related to the size
o H2: The profit of banks is related to their size.

CHAPTER FOUR
METHODOLOGY (CONT)
Data
The data cover the period from 2000 to 2005. The main data
sources are the annual reports and accounts for the financial
institutions particularly the 5 selected domestic banks in Ghana.
The financial sector reforms in Ghana started in 1998. This is why
we decided to use the period 2000 to 2005. The pre reforms
period data is scarcely available. These financial institutions are
Ghana commercial Bank (GCB), Merchant Bank Ghana (MBG),
Agricultural Development Bank (ADB), National Investment
Bank (NIB), and CAL Bank (CAL).
With respect to the characteristics that might affect profit growth
(GPAT) with a bank, we investigate bank assets and bank capital
(equity or shareholders fund which indicates the strength of a
bank). Bank assets are the traditional size indicator of a bank and
this forms the basis of our hypothesis while the equity indicates
the strength of a bank.

CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATION

Capital Adequacy Ratio (CAR)
Capital Adequacy Ratio = Equity/ Total Assets %












Source: Calculated from Audited Accounts of Banks



Case study
Banks
2000 2001 2002 2003 2004 2005 Average
GCB 10.0 8.7 9.4 9.3 10.7 12.3 10.1
ADB 18.1 22.6 21.1 15.5 18.1 18.1 18.9
CAL 14.8 14.6 13.7 12.6 20.1 18.9 15.8
MBG 16.5 15.5 11.8 10.2 13.2 13.5 13.5
NIB 27.5 30.9 19.9 12.6 11.5 12.0 18.9
Industrial
Average
11.1 12.5 11.6 11.0 11.9 12.5
CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATION
Asset Quality
Asset Quality = Provision/Net Advances (%)












Source: Calculated from Audited Accounts of Banks'

Case study
Banks
2000 2001 2002 2003 2004 2005 Average
GCB 9.7 9.8 13.9 6.4 4.7 2.9 7.9
ADB 8.2 10.9 13.4 11.0 12.2 5.0 10.1
CAL 0.3 1.2 2.6 3.4 2.6 4.2 2.4
MBG 11.7 6.0 13.8 9.9 5.7 3.2 8.4
NIB 21.5 5.5 5.8 8.9 4.6 8.2 9.1
Industrial
Average
6.9 7.2 6.0 4.9 3.8 3.0
CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATION
Profitability/ Earning Quality

ROA = PAT/Total Assets (%)







Source: Calculated from Audited Accounts of Banks'

Case
study
Banks
2000 2001 2002 2003 2004 2005 Average
GCB 6.1 4.4 3.8 1.8 2.9 2.2 3.5
ADB 7.8 7.2 3.5 2.6 3.6 2.2 4.5
CAL 45.1 22.4 32.8 29.0 21.0 14.6 27.5
MBG 15.3 24.2 12.3 16.2 32.0 24.4 20.7
NIB 55.9 15.7 19.0 25.0 30.3 25.8 28.6
Industrial
Average
50.0 41.7 32.6 30.3 32.1 25.3
CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATION
ROE = PAT/Equity (%)












Source: Calculated from Audited Accounts of Banks'







Case study
Banks
2000 2001 2002 2003 2004 2005 Average
GCB 61.0 51.0 39.9 19.8 27.4 17.8 36.2
ADB 43.0 32.0 16.7 17.0 19.7 12.1 23.4
CAL 45.1 22.4 32.8 29.0 21.0 14.6 27.5
MBG 15.3 24.2 12.3 16.2 32.0 24.4 20.7
NIB 55.9 15.7 19.0 25.0 30.3 25.8 28.6
Industrial
Average
50.0 41.7 32.6 30.3 32.1 25.3
CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATION
Cost Efficiency
Cost Efficiency = Tot. Op. Exp/Tot. Op. Income (%)











Source: Calculated from Audited Accounts of Banks'






Case study
Banks
2000 2001 2002 2003 2004 2005 Average
GCB 30.4 30.5 42.0 57.4 63.8 76.9 50.2
ADB 37.8 37.9 45.2 44.5 47.8 63.6 46.1
CAL 42.0 56.6 50.3 47.3 48.1 53.4 49.6
MBG 30.5 48.3 48.6 46.4 38.9 48.2 43.5
NIB 23.3 56.8 57.7 46.8 50.3 76.0 51.8
Industrial
Average
35.5 38.7 46.2 49.5 50.9 59.1
CHAPTER SIX
FINDINGS, CONCLUSIONS AND RECOMMENDATION
Findings
The improvement in the quality of the loan portfolio was largely due to the expansion in the credit base
of the banking industry as a result of reduction in reserve requirement.

Staff Cost and infrastructural cost (technology) are the main sources of high operating costs.

Merchant Bank Ghana is the most efficient bank using the cost efficiency measure among the domestic
banks.

Domestic banks in Ghana are well-capitalised, profitable, liquid, sound and stable but less efficient.

Profit performance is independent of bank size.

National Investment Bank is the most Profitable domestic bank.

CAL bank is the best domestic bank in terms of Asset Quality.

National Investment Bank and Agricultural Development Bank are the best in terms of Capitalisation.

CHAPTER SIX
FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The main conclusion of this paper which follows the same conclusion of Buchs
and Mathisen (2005) and Aboagye-Debrah (2007), is that banks in Ghana appear
to behave in a noncompetitive manner that could hamper financial intermediation.
High Profitability of banks in Ghana due to the wider interest rate spread account
for this uncompetitive behaviour of banks.


One other key conclusion from this research is, bank size in terms of assets
growth and profit performance are statistically insignificant at 5% level of
significant and that size does not matter in profit performance. It is rather growth
in equity which matter for profit performance. The results of this research
underline the utmost importance of bank soundness rather than asset size, for
sustainable bank performance. The results clearly confirm the relevance of
individual bank characteristics for profit growth.

CHAPTER SIX
FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
Recommendations
Based on above findings and conclusions the following recommended as a policy for banks
strategic direction:
The need to reduce the transaction cost (particularly staff cost and investment cost-
telecommunication)
Addressing the occurrence of losses on the loan portfolio particularly in the local banks
The regression results clearly confirm the relevance of individual bank characteristics for
profit growth which is size of banks tier-one capital. Bank size is irrelevant for profit
growth as per Ghana Commercial Bank profit performance. Appropriate strategy is the key
determining factor of profitability.
Encouraging the development of compatible IT infrastructure so that banks can pool
resources and lower technological cost in the industry to enhance efficiency
There is the need for promotion and development of savings culture. This calls the
introduction of innovative and attractive products and stepping up savings mobilisation
drive as well as ensuring confidence and credibility in the banking system to attract
prospective depositors.
There is the need for progressive reduction in reserve requirements, tariffs and charges and
lending rates as macroeconomic stability is entrenched to reduce the cost of banking
services and increase competition.
There is the need for consolidation and mergers particularly among the small banks to
expand their capital base in order to make them stronger and competitive.

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