The Effect of Financial Sector Reforms on Bank Net Interest Margins in Ghana

Abstract

This paper examines the effect of financial sector reforms on net interest margin of Ghanaian banks during the period 1997-2006. Changes have taken place in Ghana as in other countries. However, net interest margins have not declined as much in Ghana as they have elsewhere due to the influence of the degree of risk aversion, high operating costs and uncompetitive nature of the market structure. Although banks have relied heavily on fee- and commission-based services as additional sources of income to lower margins, this paper argues that despite recent developments in the Ghanaian financial landscape, financial sector reforms have not yet succeeded in bringing about a major reduction in the operating costs of banks that would translate into substantially narrower margins. This is by far the major significant effect of relatively wide net interest margin in Ghana.