The determinants of scale economies in the Ghanaian banking industry

The study analyses the presence and determinants of economies of scale in Ghana's Banking sector, using 366 unbalanced annual panel data observations from 29 banks in Ghana from 2007 to 2023. A stochastic cost function was used to estimate scale economies, while the determinants of scale economies were estimated using panel regression. The study found that scale economies and technological progress are widespread across various banking groups, with an average scale elasticity of 1.15, indicating that a 100% increase in output quantities results in an average rise in total cost of only 85%, and that Ghanaian banks, on average, recorded a cost reduction of about 3.3% over the sample period due to technological progress. The results also show that factors such as net interest margin and technological progress have a positive influence on scale economies. In contrast, investment banking activities have a negative impact, while capitalisation has a non-linear inverted U-shape relationship with scale economies. The study concludes that the consolidation that occurred in Ghana's banking sector may have led to stronger banks that allow them to enjoy larger economies of scale. Nevertheless, the non-linear relationship between capitalisation and scale economies suggests that policymakers must be mindful that excessive capitalisation may eventually lower scale economies. Policymakers should also pursue policies that will encourage and facilitate the adoption of new banking technologies to improve business processes and the delivery of banking services.