Banking sector efficiency: Consolidation brings scale gains but governance remains key

…Study finds efficiency improved post-reforms, but mergers alone do not guarantee stronger banks

By Philip Ayagre ATIMBIRE (Dr)

A recent empirical study has evaluated the efficiency performance of Ghana’s banking sector over the period 2013–2020, focusing on the regulatory reforms of 2017 which consolidated the sector from 36 to 23 banks.

The study deliberately excluded the years 2021–2024 to avoid the influence of confounding shocks such as the COVID-19 pandemic and the Domestic Debt Exchange Programme (DDEP), ensuring that the analysis captured only the direct effects of the reforms.

The reforms, driven by higher minimum capital requirements set by the Bank of Ghana, provide a critical context for assessing both pre- and post-consolidation efficiency dynamics.

Using Data Envelopment Analysis (DEA) alongside Tobit regression techniques, the study examined overall technical efficiency (OTE), pure technical efficiency (PTE), and scale efficiency (SE) for 20 banks. Findings indicate that average efficiency levels fluctuated between 60percent and 80percent, suggesting considerable potential for improvement in resource allocation and operational performance.

Prior to the reforms, most banks operated under decreasing returns to scale, reflecting diseconomies of scale. Post-consolidation, however, a larger proportion of banks exhibited increasing returns to scale, indicating the potential to benefit from expanded operations. Notably, the study highlights that managerial inefficiency, bank profitability, income diversification, and deposit utilization are the primary determinants of efficiency in the sector.

Importantly, the research finds no evidence that mergers and acquisitions (M&As) directly improve bank efficiency. On the contrary, the results suggest that merged banks operated sub-optimally during the study period, raising questions about the effectiveness of forced consolidation as a regulatory strategy.

The study concludes by underscoring the critical role of governance and managerial quality in driving efficiency. It recommends that the Bank of Ghana strengthen corporate governance frameworks and avoid compelling banks into M&As during crises, as such measures may inadvertently harm efficiency. For bank executives, the study emphasizes the need to diversify income sources, particularly through non-interest revenue streams to enhance long-term performance.

Overall, the findings suggest that while consolidation has improved scale efficiency, the sustained growth and resilience of Ghana’s banking sector will ultimately depend on sound management practices and strategic innovation rather than structural mergers alone.

>>>This write up is an excerpt from a forthcoming article in African Journal of Economic and Management studies. The writer is with the Central Business School at Central University

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