Ghana Telecom University College/Coventry University

PROGRAMME: MODULE: NAME: ID NUMBER: MSc Information Technology for Management Research Methods Emmanuel Sam COVITM0511002

SUBMISSION DATE: 17/09/2011 LECTURER: Dr. Armah

TOPIC: ASSESSMENT OF UNIVERSAL BANKING ON GHANAIAN BANKS

Table of Contents

INTRODUCTION ................................................................................................................ 3 RESEARCH QUESTION ................................................................................................. 3 JUSTIFICATION .............................................................................................................. 3 LITERATURE REVIEW ...................................................................................................... 4 Universal Banking and Bank Concentration ...................................................................... 4 Empirical Review .............................................................................................................. 4 REFERENCES ..................................................................................................................... 5

INTRODUCTION
The banking sector has recently seen a number of reforms in the amendment of banking acts. In February, 2003, Bank of Ghana formally introduced Universal Banking Business License (UBBL), which is expected to bring more competition within the industry. To operate under the policy, existing banks must have a minimum capital requirement of seventy billion Cedis. The act was introduced to address the inefficiencies and competitiveness in specialized banking system. Specialized banking system had inefficiencies in the mobilization of resources and the quality of investment, and also provided limited range of financial services by banks. The general conclusions of various empirical studies before and after the financial reforms have been that inadequate finance remained the single major constraint facing industrial development and enterprise growth in Ghana. The restricted clientele base of specialized banks does not give them the opportunity to reach a wider market. Another deficiency in specialized banks is high corporate financing and administrative costs. This study will seek to assess the impact of Universal Banking on banks performance in Ghana. Specifically, the influence of Universal banking on market share and banks profitability, and challenges facing banks operating Universal Banking in Ghana. The financial system in Ghana is dominated by the banking sector, which are all majoring in retail banking business, dealing mostly in short-term money instruments. The capital market is little developed to help mobilize long-term capital for economic development. The development banks, such as Agricultural Development Bank, Bank for Housing and Construction etc., that were set up to mobilize long-term funds and enhance the development of specific sectors of the economy, could not keep up to these objectives due to the low level of savings in the Ghanaian economy. The integration of activities in universal banking can be achieved at the lowest cost and resources can be shared among the organizations various departments with maximum flexibility allowing the banks to realize informational advantages and economies of scope and scale. The introduction of universal banking also comes with an improved and a high sense of responsibility and transparency amongst the supervisory authorities and operators in the financial system than in specialized banking system. RESEARCH QUESTION The following research questions will aid in achieving the objectives set for this study: y How has universal banking policy impacted on banks market share? y How universal banking policy impacted on banks profitability? y Has universal banking policy influenced banks performance on the stock market? y Does universal banking policy pose challenges to banks y What is customers perception of universal banks concerning; service delivery, flexible bank transactions, and level of satisfaction? JUSTIFICATION According to Dr. Addison, Acting Director of the Research of Bank of Ghana (The fourth ISSER-Merchant Bank Annual Economic Lectures, 2003), The kind of banks the country has and their capital cannot move the economy forward. If you go to any of the banks and ask for a one million dollar guarantee, I dont think any of them could give you, he said. Universal Banking according to him will boost the capital rate of the banking industry, and help offer a wide range of products and services with bigger investment financing. The significance of the study therefore, is to establish the importance and benefits of Universal Banking and its contributions to the economy, as policy makers seek to streamline the operations of the banking industry in realizing the macro-economic objective of growth and development The study also seeks to include policy makers and players of the industry the need to, create more effective platform (strengthening regulatory and supervisory capacity) to make it more effective and mitigate any adverse effects of Universal Banking.

LITERATURE REVIEW
Universal Banking and Bank Concentration The recent literature on commercial banking has stressed advantages of allowing banks to be large. A concentrated banking system permits greater portfolio diversification of banks and allows banks to coordinate their response to crises by forming credible mutual-insurance arrangements, which would not be possible in a system of many geographically isolated banks. These theoretical propositions receive ample support from the comparative history of banking systems and their performance. In the context of universal banking, there are further advantages to becoming a large bank operating a branching network. Firstly, if industrial firms find it advantageous to operate large-scale enterprises over a wide geographic area (as Chandler 1977 argues), then monitoring the activities of the firm will be easier if a bank has a similarly wide geographic scope. Second, large branching banks are better able to take advantage of long-term relationship economies of financing firms through a universal bank because of their access to both securities purchasers and depositors. Unit banking laws that prohibit the establishment of deposit-taking branches effectively limit banks access to deposits on a large scale and, therefore, limit large-scale lending to firms. Empirical Review The empirical work by Winton (1999) sought to re-examine the debate concerning the decision of banks to either diversify or specialize their lending activities. Though it is well known that diversification tends to reduce the chance of bank failure due to the reduction in variance of loan returns. Winton suggests several potential problems inherent in diversification. First, given that the bank has limited human resources, diversification means that credit is provided in economic and geographic areas outside the banks home base. This expanded lending responsibility can diminish the quality of loan monitoring. Since delegated monitoring is central to the existence of banks and makes them special relative to other lenders by virtue of their access to private (inside) information about borrowing firms see Diamond, (1984), Fama (1980, 1985), Sharpe (1990), Rajan (1992), and others), weaker monitoring in diversified banks could be a critical factor affecting loan portfolio quality. An implication of this problem is that diversification is most beneficial among banks with only moderate downside risk. Then too, diversification may require increased size and added management to handle the broader risk exposure of the bank. On the other hand, specialization allows the bank to focus loans in its areas of expertise, thereby contributing to more effective loan monitoring. In the issue of financial stability, Rime and Strioh (2001) who examine the financial system in Switzerland in which universal banking are becoming more important, state that difficulty in monitoring large universal banks is a major concern. This is the reason why universal bank has to spend more money in monitoring cost and develop an advanced system in information technology. In other words, one could say that the consequence of inefficient monitoring could lead to financial instability, (Cheang, 2004). A wider range of universal banks in financial system makes the fund channels of banks to the customer are larger than specialized institutions. So, the economy will improve because universal banks will support more funding. This can be seen by the fact that a universal bank practice in Germany has triggered the progress of some enterprises performance in this country (Stiglitz, 1985). Research findings conducted by Vender, R. (2002, cited in Cheang, 2004) about the efficiency of revenue in financial conglomerates and the level of both profit and costs in universal banks, have proven that both financial conglomerates and universal banks contain good performance in several indicators of banks profitability. His findings also suggest that the sustained expansion of financial conglomerates and universal banks practices may increase efficiency in the financial system. This opinion is strengthened by other experts like George Rich and Christian Walter (1993), who state that universal banks, who pose benefits over specialized institutions, are able to take advantage of reduction in the average cost of production and scope in banking. They mention a classic example of how, universal banks in some countries such as Switzerland, Germany and more European countries have experienced benefits by operating universal banking. In addition, they also stated that, the fear of universal banking threatening specialized institutions has not proven. In Switzerland and Germany for example, specialized institutions could achieve a better improvement in terms of cooperating with big banks. Universal banks are one of the potential market channels which can sell their products directly to the customers, so specialized institutions also get additional return due to the increases in the number of universal banks. Therefore, this proves that universal banks do not threat other institutions. In fact, they support specialized institutions to market their products.

REFERENCES
Addison, E. (2003), Managing the Constraints To Development Finance: Is Universal Banking the Solution, 4th ISSER-Merchant Bank Annual Economic Lectures. Chandler, Alfred D., Jr. (1977). The invisible Hand: The Managerial Revolution in American Business. Cambridge: Harvard University Press. Cheang, N (2004) Practices Of Universal Banks And Macao's Banking Activities, International Monetary Funds, viewed 16 September 2011 from http://www.amcm.gov.mo/publication/quarterly/Oct2004/Universa_en.pdf Diamond,D. (1984) Financial Intermediation and Delegated Monitoring, Review of Economic Studies 59, pp. 393 414. Georg Rich, Christian Walter & Cato Institute (1993). The future of universal banking .Swiss National Bank Fama, E.F. (1985). Whats Different about Banks? Journal of Monetary Economics 15, 29- 39. Rajan, R. (1992) Insiders and outsiders: The Choice between Relationship and Arms Length Debt, Journal of Finance 47, 1367 1400. Rime, B. and K.J. Stiroh (2001), The Performance of Universal Banks: Evidence from Switzerland, Stiftung Der Schweizerischen Nationalbank Working Paper, No.01.03.

Sharpe, S. (1990) Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships, Journal of Finance 45, 1069 1087. Stiglitz, J.E. (1985).Credit Markets and the Control of Capital, Journal of Money, Credit and Banking,Vol. 17, No. 2, 133-52. Winton, A. (1999). Dont Put all Your Eggs in One Basket? Diversification and Specialization in Lending, Working Paper, University of Minnesota.