Financial Intermediation and the Cost of Credit in Ghana

A study was carried out by the IEA regarding financial intermediation and the cost of credit in Ghana. The first part of the study involved measurement of financial intermediation/financial deepening using a number of standard indicators. The second part involved a survey of banks to investigate how industry costs, competition, efficiency, borrower risks, and credit allocation decisions, among others, affect the cost of credit. It was determined in this study that the number of bank branches per 100,000 people as of 2012 was about 3.5. This ratio is a standard measure of access to bank services and varies from country to country. Ghana’s figure of 3.5 compares with 4.6 for Cote d’Ivoire, 5.5 for Kenya, 5.8 for Nigeria, 10.4 for South Africa, 18.4 for South Korea, 19.9 for Malaysia, and 21.6 for Mauritius. Ghana’s ratio is clearly low, even by the standards of our African peers, let alone our non-African middle-income peers. Moreover, as in other countries, to the extent that the concentration of banks tends to be higher in urban areas, the ratio will be lower in rural areas. The low number of bank branches per the population suggests that financial intermediation/financial deepening is low. Traditional measures of financial intermediation and financial deepening include credit-to GDP, money-to-GDP and bank financial assets-to-GDP ratios. The study measured private sector-credit-to-GDP and money-to-GDP ratios for 1980-2011. The private sector-credit-to GDP ratio increased from 2.1% to 15.2% during the period while the money-to-GDP ratio rose from 18.6% to 30.9%. The study also measured private sector credit/GDP, total credit/GDP and bank financial assets/GDP for a more recent period, June 2011-June 2013. The first indicator rose from 16.2% to 16.6%, the second from 18.8% to 19.1%, and the third 39.7% to 40.5%.