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(2
Determinants of Bank Lending Behaviour in Ghana

Jonas +adime
1,
Emmanuel Sarpong--uman.oma
2
-ofi /. &sei
2

1. Department of 0an.ing and 1inance) 2et3odist 4niversit5 6ollege) ". &. 0o7 D6 8() Dansoman)
93ana
2. Department of 1inance) 4niversit5 of 93ana 0usiness Sc3ool) ". &. 0o7 +9 7$) +egon) 93ana
, E-mail of t3e corresponding aut3or: ladime2002@hotmail.com

Abstract
;3is paper investigates t3e determinants of ban. lending be3aviour in 93ana. 4sing t3e 922-S5stem estimator
developed b5 /rellano and 0over !188%# and 0lundell and 0ond !188$#) we find t3at ban. si<e and capital
structure 3ave a statisticall5 significant and positive relations3ip wit3 ban. lending be3aviour. =e also find
evidence of negative and significant impact of some macroeconomic indicators !central ban. lending rate and
e7c3ange rate# on ban. lending be3avior. /gain) competition in t3e industr5 was found to 3ave a positive and
significant impact on ban. lending be3aviour. 1inall5) relations3ip ban.ing was found to 3ave a positive
correlation wit3 ban. lending be3aviour in 93ana. ;3us) policies aimed at maintaining stable macroeconomic
fundamentals would greatl5 accelerate ban. lending decision.
Keywords: 0an.s) lending be3aviour) 93ana

1. Introduction
;3e ban.ing industr5 is one critical component of t3e financial s5stem in developing countries capable of
facilitating capital accumulation and economic processes. ;3is is possible t3roug3 efficient financial
intermediation. ;3e ban.s mobili<e funds from t3e surplus spending units in order to bring financial costs down.
0an.s mostl5 transform li>uid assets li.e deposits into illi>uid assets li.e loans !Diamond and ?a@an) 188$#.
;3is transformational process of ban.sA activit5 is at best influenced b5 a 3ost of factors) namel5)
macroeconomic) ban. level !"ee. and ?osengreen) 188%# and industr5 level c3aracteristics !0oot and ;3a.or)
2#. 0oot and ;3a.or !2# indicate t3at t3e level of ban.ing industr5 competition greatl5 influences ban.
lending strateg5 positivel5. /gain) -as35ap and Stein !2#) find a strong case t3at in situations w3ere a ban. is
3andicapped in terms of credit) it will onl5 ta.e t3e ban. capital to measure its abilit5 of lending.
93anaAs rapid economic growt3 in t3e past was supported b5 t3e good performance of its financial institutions.
Indeed 93anaAs macroeconomic performance 3as been ver5 significant wit3 ma@or indices en@o5ing relative
stabilit5. ;3e national output grew at an annual average of about B.*C. /lt3oug3 macroeconomic stabilit5 is
3ig3l5 regarded as a ma@or condition for sectorial credit flow) gross credit to t3e private sector 3as remained
relativel5 stagnant and difficult to access !=orld 0an.) 2$#. 6redit to t3e /griculture sector actuall5 declined
b5 about *C wit3 total flow to t3e manufacturing subsector of t3e industrial sector remaining relativel5 low. /
total of D2%)187.B billion credit facilit5 was allotted to t3e private and t3e public sectors b5 t3e deposit mone5
ban.s representing a growt3 rate of (.%C in t3e 5ear 2B. &verall) total credit increased b5 27.1C in real terms
b5 t3e end of 2B as against a 21.8C in 2% !0an. of 93ana) 2B#. ;3e ban.ing industr5 in /frica and
93ana in particular forms a strategic 3ub of t3e financial s5stem. +ending decisions b5 ban.s cannot be
overloo.ed as t3e5 are t3e principal providers of funds to governments) corporate bodies and individuals as a
w3ole !stoc. mar.ets are @ust recent developments in t3e financial s5stem#. E7isting literature provides paucit5
of empirical evidence on ban. lending be3aviour in emerging mar.ets li.e 93ana. In a developing econom5 li.e
;3ailand) Suwanaporn !2*# provides t3at ban.s consider ris. and relations3ip factors in t3eir ban. lending
decisions. ;3is wor. tries to fill t3is gap and find evidence of t3e determinants of ban. lending be3aviour in
93ana. Specificall5) we investigate t3e effect of ban. specific) macroeconomic factors and industr5
c3aracteristics on ban. lending be3aviour.
;3e rest of t3is paper is organi<ed as follows: section two discusses e7isting ban.-lending be3aviour literature.
Section t3ree focuses on met3odolog5 and t3e estimation approac3 w3ile section four discusses t3e results)
provides conclusions and polic5 implications of t3e stud5.

. !eview of Literature
;3e fundamental role of a ban. is intermediation b5 wa5 of collecting savings from depositors and ma.ing t3ese
savings available as loans to borrowers. 0an.s are more efficient in t3e collection of information and loan
production to dispel doubt on as5mmetric information !Suwanaporn) 2*#. /gain) ban.s are in t3e rig3t
position to evaluate t3e future potentials of good investments as t3e5 3ave muc3 more e7perience in doing t3at
wit3 similar investments. Notwit3standing) t3ese specialties) ban.s are more circumspective about t3eir lending
decisions. +ending decisions are influenced b5 a 3ost of factors as e7plained below.
&ne of t3e underl5ing factors for lending decision is t3e level of ban. capital. ;3e effects of ban. capital on
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lending be3aviour 3ave been widel5 debated since t3e 18$$ 0asel 6apital /ccord !9ambacorta and 2istrulli)
2(#. Diamond and ?a@an !1888# also s3ow t3at t3ere is a positive relations3ip between loan growt3 and capital
re>uirements and its regulations. ;3e real impact of ban. capital on its lending be3aviour 3as received more
attention in t3e 4S/ ban.ing s5stem. / clear e7ample is -is3an and &piela !2#. ;3e general conclusion is
t3at t3ere is a connection between ban. capital and ban. lending be3aviour. Eowever) t3e empirical literature on
European countries is rat3er inconclusive. E3rmann et al. !2*# find t3at monetar5 tig3tening 3as a severe
negative impact on rat3er undercapitali<ed ban.sA lending. ;3us) one can conceive t3at) t3e precise relations3ip
between ban. capital and lending is mi7ed. Empirical evidence from emerging economies would t3erefore
enric3 our understanding of t3e ban. capital-lending ne7us.
0an. interest rate spread 3as also been s3own to affect lending be3aviour. 2onetar5 polic5) t3roug3 a prime rate
!6entral 0an.As rate# 3as a transmission mec3anism on interest rates in t3e financial mar.et !0orio and 1rit<)
188%#. 0an. lending rates are mostl5 seen as being rigid for t3e reason t3at t3e5 do not move in tandem wit3 t3e
mar.ets. / number of e7planations 3ave been suggested to account for t3e rigidit5 in ban. lending rates. In t3e
case of loans) t3e rigidit5 3as been as a result of t3e rationing of credit to borrowers owing to t3e fact t3at t3ere
are problems of as5mmetric information !0linder and Stiglit<) 18$*#. Indeed) financial mar.ets are not perfectF
in t3e presence of adverse selection and moral 3a<ard issues) ban.s are more li.el5 to opt for credit rationing
t3an to ad@ust t3eir lending rates in a situation w3ere t3ere 3as been an upward ad@ustment of interest rates b5 t3e
central ban.. It ma5 also be possible t3at w3en large ban.s capture large mar.et s3are) t3e impact of tig3t
monetar5 polic5 on ban. lending will be minimal. Eowever) 0erger and 4dell !1882# could not find concrete
support for t3e rationing of credit as a reason for t3e rigidit5 of lending rate.
0an. si<e is considered as an important determinant of ban. lending decision !0erger and 4dell) 2B) 4c3ida et
al. 27#. 0erger and 4dell !2B# provide t3at large and comple7 ban.s tend to lend few loans to small scale
firms. Stein !2# e7plains t3at small ban.s 3ave comparative advantages in producing soft information
w3ereas large ban.s also 3ave comparative advantages in lending based on 3ard information. &n t3e ot3er 3and)
w3en large and comple7 ban.s are able) t3roug3 tec3nical e7pertise) to process soft information about small
scale firms) t3en t3ere would be positive relations3ip between ban. si<e and lending.
/dditionall5) t3e macroeconomic environment wit3in w3ic3 a ban. operates matter for its lending decision. 1or
instance) in t3e period of economic boom) businesses demand for loans to ta.e advantage of e7pansion and
ban.s investment opportunities e>uall5 soar. &n t3e ot3er 3and) in periods of economic recession) demand for
credit plummets. ;3is provides a pro-c5clical relations3ip between economic growt3 and ban. lending.
DellA/riccia and 2ar>ue< !2B# find t3at ban. credit e7pansions tend to be pro-c5clicalF t3at is) 3ig3 rates of
growt3 in 9D" tends to induce a 3ig3 rate of growt3 in ban. credit. ;3is is because in t3e period of economic
boom) ban.s rela7 t3eir criteria and lend to bot3 good and bad pro@ects) t3en in times of economic recession most
loans become non-performing and t3e source of credit dries up) rationing out even good pro@ects. In Ital5)
'a<a.idis and /damopoulos !28# indicated t3at economic growt3 3ad a positive effect on credit mar.et
development. /gain) t3e central ban.As prime rate serves as an indicator to t3e movement in .e5 economic
variables li.e inflation w3ic3 in turn affects interest rates. ;3roug3 t3e transmission mec3anism) an increase in
prime rate negativel5 affects ban.sA lending be3aviour. E7c3ange rate fluctuations) specificall5 currenc5
depreciation in a 3ome countr5 results in ban.sA assets being valued less in foreign currencies as against t3eir
liabilities. /dditionall5) +indgren et al. !188B# find t3at fluctuation in e7c3ange rate is a prime cause of poor
performance of ban.sA borrowers) w3ic3 subse>uentl5 affects ban. profitabilit5. ;3is situation is more certain in
developing economies w3ic3 are e7posed to foreign trade. E7cessive e7c3ange rate variation wea.ens economic
and financial growt3 in a countr5 and is seen to be t3e most significant cause of t3e ban.ing crises in a lot of
countries !+indgren et al. 188B#. In a developing and open econom5 li.e 93ana) one e7pects t3at e7c3ange rate
depreciation will negativel5 affect ban. lending be3aviour.
=it3 regards to industr5 structure) t3e precise relations3ip between ban. industr5 structure and lending is moot.
1rom an economic t3eor5 perspective) e7ercise of mar.et power in ban.ing will lead to a 3ig3er rate of interest
and a lower suppl5 of available credit t3an in a perfectl5 competitive mar.et. &n t3e ot3er 3and) t3ere seems to
be no consensus in literature as to t3e precise impact of ban. mar.et structure on t3e suppl5 of lendable funds.
&ne sc3ool of t3oug3t argue t3at in t3e presence of mar.et power !3ig3 concentration#) ban.s 3ave more
incentive to invest in t3e ac>uisition of soft information t3roug3 relations3ip ban.ing !b5 establis3ing close
relations3ips# wit3 borrowers over time t3ereb5) en3ancing t3e suppl5 of credit and conse>uentl5 reducing firmsA
financial constraints !DellG/riccia and 2ar>ue<) 2(#. /dditionall5) 0oot !2# argued t3at) even t3oug3 a
borrower runs t3e ris. of pa5ing 3ig3er interest rates in a conte7t of non-competitive ban.ing mar.ets) t3e
borrower can benefit from a greater availabilit5 of finance. /not3er sc3ool of t3oug3t posits t3at in a mar.et
c3aracteri<ed b5 competitive conditions) lending rates are lower 3ence more financing for firms. In ot3er words)
concentration 3eig3tens financing obstacles to firms) especiall5 from developing countries li.e 93ana !0ec. et
al. 2(#.
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". Data and #ode$ %&ecification
;3e stud5 uses panel data) w3ic3 involves pooling of seventeen !17# ban.s over t3e period 1887 H 2B) and
furt3er adopts t3e model used b5 /lfaro et al. !2*#. ;3is model assumes t3at ban. lending be3aviour toda5 is
e7plained b5 past lending e7perience !lag of t3e dependent variable#) ban.ing industr5 c3aracteristics)
macroeconomic and ban.-specific variables. ;3us we formulate t3e model in t3e following wa5:
it
st
i
s
s
j
jit
i
j t it it
MAC BC HHI y y + + + + =

= =

*
1
*
1
1 1

=3ere 5
it
represents t3e log of ban. lending be3avior pro7ied b5 total loan portfolio of ban. i at a given period) t.
06 is a vector of ban. specific variables including si<e) ban. spread and capital structure !measured b5 total debt
over s3are3oldersA funds#. EEI represents t3e industr5 c3aracteristic w3ic3 is an inde7 of competition) and 2/6
is macroeconomic variables including prime rates) t3e growt3 rate of real gross domestic product and log of
e7c3ange rate. ;3e variables I) J
1)
K and L are vectors of estimators or coefficients and M is an error structure
defined below:
it i it
v + =

e
t
is t3e disturbance wit3 :

t3e unobserved ban.Hspecific effect and

t
t3e idios5ncratic error.
;3e lag of t3e dependent variable was included as an independent variable on assumption t3at for ever5 current
loan suppl5 or ban. lending) t3ere is a credible past relations3ip !in ot3er words ban. lending will depend on t3e
previous credit relations3ip# and t3e ban. will re-assess t3e borrower for t3e current level of information
as5mmetr5. =3en t3e lag of t3e dependent variable coefficient assumes a value of 1 t3en t3e relations3ip could
be termed as good and a value close to <ero will represent a fairl5 good relations3ip between lenders and
borrowers. ;3e si<e of t3e ban. is measured b5 t3e log of total assets or t3e si<e of deposits. Si<e is e7pected to
3ave a positive influence on ban. lending be3avior. =it3 regards to 6apital structure) it is measured as t3e debt
to capital or e>uit5 ratio and it is e7pected to move in tandem wit3 ban. lending be3aviour. ;3e ban. spread is
measured b5 t3e net interest margins of t3e ban.s as a percentage of t3e net interest income of ever5 ban.. ;3e
spread represents a premium c3arged b5 t3e ban.s as an additional cost to borrowers and t3e numerous ris.s
levels t3at are faced b5 t3e ban.s. ;3erefore) 3ig3er spread depicts t3e volatilit5 among borrowers and t3at
ma.es it difficult for ban.s to give out loans to individuals and firms. Eence) ban.s will onl5 lend if and onl5 if
borrowers are willing and able to pa5 more premium. =e also used e7c3ange rate consistent wit3 !/lfaro et al.
2*#. =e measured e7c3ange rate as t3e 93anaian 6edi per 4nited States Dollar. ;3e e7c3ange rate is e7pected
to 3ave a negative effect on ban. lending be3avior) especiall5 on t3e domestic ban.s.
=e also control for t3e level of economic activities li.el5 to influence ban. lending using t3e growt3 rate of real
gross domestic product. 9D" growt3 is e7pected to 3ave a positive impact on ban. lending be3avior. 0an.
lending be3aviour in response to monetar5 polic5 from t3e central ban. was captured using central ban.As
primeNlending rate. ;3is rate measures 3ow 0an. of 93ana loosens and tig3tens t3e monetar5 polic5 t3at eit3er
eases up credit or tig3tens up credit. ;3e prime rate in t3e regression e>uation is e7pected to move negativel5
wit3 ban. lending be3aviour. ;3e macroeconomic variables were obtained from t3e 0an. of 93ana website
w3ereas ban.-specific variables are from t3e audited financial reports of t3e ban.s.
3.1 Estimation Method
;3e stud5 used 9enerali<ed 2et3od of 2oments !922# estimators) w3ic3 was propounded b5 /rellano and
0ond !1881#) particularl5 t3e 922-S5stem estimator developed b5 0lundell and 0ond !188$#. ;3e d5namic
model is t3e most appropriate model specification for t3e general form of t3e first-differenced 922 estimation.
Several merits inform our c3oice of d5namic model estimations. It is preferable in situations of omitted variables.
In addition) t3e variables used as instruments permit t3e estimators to be estimated 3armoniousl5 in models t3at
3ave t3e problem of endogeneit5. +ast but not t3e least is t3at instruments are able to permit 3armonious
estimation in times w3ere t3ere mig3t 3ave been some measurement error !0ond et al.) 21#. ;3e
appropriateness of t3e model is tested using t3e Sargan and t3e serial correlation tests. ;3e Sargan test) tests for
t3e over-identif5ing restrictions. ;3is stud5 tests t3e sample analog of t3e moment conditions t3at were engaged
in t3e process of t3e estimation to test for t3e overall validit5 of t3e instruments. ;3e test statistic 3ere is a _
(m)
2

distribution w3ere m is t3e number of degrees of freedom obtained from t3e difference between t3e number of
instruments and regressors. / test for serial correlation is loo.ed at b5 formulating a null 35pot3esis t3at t3e
error term is not seriall5 correlated. ;3e null 35pot3esis formulated as t3e error term in t3e differenced e>uation
s3ows no second-order serial correlation.

'. (m&irica$ !esu$ts
;able 1 provides t3e results of t3e d5namic model. ;3e coefficient of t3e lag variable is statisticall5 significant)
positive and less t3an unit5 !1#. ;3is implies a fairl5 good relations3ip among ban.s and borrowers and could be
furt3er reinforced b5 previous lending relations3ip) giving 3ig3 li.eli3ood t3at ban.s will lend more in a current
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period. ;3e ban. si<e 3as a positive and statisticall5 significant influence on ban. lending. 0igger ban.s t3us
lend more t3an smaller ones. ;3is is consistent wit3 e7isting studies suc3 as /lfaro et al. !2*# t3at ban. si<e
indeed contributes significantl5 to loan suppl5.
)ab$e 1: Dynamic #ode$ !esu$t
Dependent variable:
+oans and advances 6oef. O "P O
+lad
+1. .18( *.(B .1
Bank characteristics
+og of Si<e .7*1 1.B8 .
6apital Structure .$2$ *.B .2
Spread -.*(% -1.2B .28
#acroeconomic indicators
"rime rate -B.(8* -7.1 .
+og of E7c3ange -.7* -(.(% .
?eal 9D" growt3 -.78$B -.1% .$$1
Industry characteristic
EEI 11.8( *.81 .
6ons B.8828 *.8 .
=ald c3i2!$# Q %(B7.%B
"rob P c3i2 Q .
*ote: /?!1# is -*.1B and /?!2# is -.$%8 wit3 p-values .1B and .8*1% respectivel5. Sargan test R
2
!2#
Q8.117 wit3 p-value .7721.
=3at t3is means is t3at if ban.s are able to raise enoug3 capital from t3e capital mar.et) it is most li.el5 t3is will
en3ance t3eir lending decision and economic development because ban.s and t3e stoc. mar.et pla5 a
complementar5 role in economic growt3 as 3as been found b5 Ou.arnain !2$#. =it3 regards to t3e capital
structure) t3e coefficient reports a positive and statisticall5 significant effect on ban. lending be3aviour. /gain)
because maturit5 mismatc3 3as a great negative impact on ban. profit as well as capital) if all doors are s3ut for
ban.s to raise some additional capital) t3e5 are forced to reduce lending as regulation re>uires t3at ban. capital
3as to be around a certain minimum percentage of loans !'an den Eeuvel) 21#. In addition) t3e stud5 confirms
studies done on 4S ban.s w3ic3 suggest t3at t3ere is an impeccable necessit5 of ban. capital 3aving some sort
of relations3ip wit3 ban. lending be3aviour !-is3an and &piela) 2#.
+og of e7c3ange rate and 0an. of 93ana prime rate 3ave negative coefficients and are significant in all
estimations. /s e7pected) an5time t3e central ban. tig3tens monetar5 polic5) ban. lending is narrowed or
reduced. ;3e results suggest t3at increases in inflation reduces t3e real return to t3e ban.s and 3ence restrict t3e
amount of mone5 t3e ban.s wis3 to lend. ;3e log of e7c3ange rate wit3 a negative coefficient indicates t3at
depreciation of t3e domestic currenc5 against a foreign currenc5 tends to reduce t3e volume of loans ban.s ma.e.
;3is is because ban.s tend to invest more in foreign currenc5 if t3e5 e7pect t3e domestic currenc5 to depreciate
3ence reducing t3e amount available for loans and advances. 4ne7pectedl5) t3e results indicate t3at real gross
domestic product 3as a negative coefficient and is not significant in all regressions. Eowever) t3is ma5 suggest
t3at ban. lendersA e7pectations do not depend on t3e current p3ase of business activities) w3ic3 confirms
findings of Danilows.a !2$#. =it3 regards to EEI) t3e results indicate t3at t3e ban.ing industr5 structure 3as a
positive and significant effect on ban. lending be3aviour. 05 implication) a competitive ban.ing environment is
li.el5 to en3ance ban. lending be3aviour in 93ana. ;3is confirms a stud5 b5 0ec. et al. !2(#.

+. ,onc$usions
;3e stud5 observes a relations3ip between ban. lending be3aviour and a set of macroeconomic indicators)
industr5 and ban. level c3aracteristics. 0igger ban.s seem to be in a better position to lend more t3an ot3erwise.
;3is mig3t be due to enoug3 resources t3e5 3ave to cus3ion lending. Similarl5) 3ig3 level of ban. capital is
found to support muc3 3ig3er volumes of ban. lending. / strong and resilient financial s5stem is necessar5 for
economic growt3. It restores confidence and determines t3e elasticit5 of t3e s5stem to s3oc.s as well as
en3ancing t3e credibilit5 of t3e financial institutions in t3e s5stem. ;3erefore) t3e 0an. of 93ana recapitali<ation
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polic5 must be encouraged so as to 3elp t3e econom5 prepare against an5 disastrous macroeconomic s3oc.s. It
will also enable well-capitali<ed financial institutions to respond to increased demand for credit. 2oreover) t3e
central ban. must adopt a pragmatic approac3 t3at would ensure t3e stabilit5 of t3e local currenc5 against t3e
foreign currencies to en3ance ban. lending decision in 93ana. Eowever) in as muc3 as tig3t monetar5 polic5
would be considered favorable in certain situations) it 3as negative implications on ban. lending decision. ;3us)
as a polic5 guide) t3e central ban. s3ould criticall5 weig3 all t3e outcomes and t3e trade-off of tig3t monetar5
polic5 so as not to dampen t3e lending decision of ban.s to firms since t3is would 3ave dire conse>uences on
economic development of t3e nation. /gain) a competitive ban.ing industr5 structure en3ances ban. lending
decision. ;3is mig3t be due to associated low lending rate t3at c3aracteri<es competitive ban.ing s5stems.

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