Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?
Affiliation(s)
1 School of Management and Economics, University of Electronic Science & Technology of China (UESTC), Chengdu, China. 2 Faculty of Business and Management Studies, Koforidua Polytechnic, Koforidua, Ghana.
1 School of Management and Economics, University of Electronic Science & Technology of China (UESTC), Chengdu, China. 2 Faculty of Business and Management Studies, Koforidua Polytechnic, Koforidua, Ghana.
ABSTRACT
This research paper examines the effect of interest rate liberalization on bank deposits in a developing country Ghana. A deposit function model was specified with long term deposit as the main dependent variable with real savings rate, real treasury bill rate, exchange rate movement and gross domestic product as independent variables while controlling for inflation. Ordinary Least Squares (OLS) method was used to estimate the specified model which covered seasonally adjusted quarterly data drawn from Bank of Ghana and Ghana Statistical Service. The data were input into a spreadsheet and exported into Econometric View 7 which was used for processing the data. The results of the study revealed that the interest rate liberalization and gross domestic product jointly accounted for about 78% of the variation in the level of bank savings deposits in Ghana. The study has also shown that the liberalization of the interest rates has made it attractive for people with idle funds to save with financial institutions especially the banks. It also revealed a negative relationship between real savings rate and the real treasury bill rate expected in a high inflationary environment. All the independent variables were significant. It is therefore recommended that the Bank of Ghana remains resilience on interest rate liberalization so that surplus funds can be made available for investors and also to reduce the level of inflation in Ghana.
This research paper examines the effect of interest rate liberalization on bank deposits in a developing country Ghana. A deposit function model was specified with long term deposit as the main dependent variable with real savings rate, real treasury bill rate, exchange rate movement and gross domestic product as independent variables while controlling for inflation. Ordinary Least Squares (OLS) method was used to estimate the specified model which covered seasonally adjusted quarterly data drawn from Bank of Ghana and Ghana Statistical Service. The data were input into a spreadsheet and exported into Econometric View 7 which was used for processing the data. The results of the study revealed that the interest rate liberalization and gross domestic product jointly accounted for about 78% of the variation in the level of bank savings deposits in Ghana. The study has also shown that the liberalization of the interest rates has made it attractive for people with idle funds to save with financial institutions especially the banks. It also revealed a negative relationship between real savings rate and the real treasury bill rate expected in a high inflationary environment. All the independent variables were significant. It is therefore recommended that the Bank of Ghana remains resilience on interest rate liberalization so that surplus funds can be made available for investors and also to reduce the level of inflation in Ghana.
KEYWORDS
Bank Deposits, Real Savings Rates, Exchange Rate Movements, Real Treasury Bill Rate and Gross Domestic Product
Bank Deposits, Real Savings Rates, Exchange Rate Movements, Real Treasury Bill Rate and Gross Domestic Product
Cite this paper
Boadi, E. , Li, Y. and Lartey, V. (2015) Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?. Modern Economy, 6, 990-1000. doi: 10.4236/me.2015.69094.
Boadi, E. , Li, Y. and Lartey, V. (2015) Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?. Modern Economy, 6, 990-1000. doi: 10.4236/me.2015.69094.
References
[1] Fama, E.F. (1980) Banking in the Theory of Finance. Journal of Monetary Economics, 6, 39-57. http://dx.doi.org/10.1016/0304-3932(80)90017-3 [2] King, R. and Levine, R.G. (1993) Finance, Entrepreneurship and Growth: Theory and Evidence. Journal of Monetary Economics, 32, 513-542. http://dx.doi.org/10.1016/0304-3932(93)90028-E [3] Maes, T. and Timmermans, K. (2000) Measuring the Interest Rate Risk of Belgian Regulated Savings Deposits. [4] Cohen, B.C. and Kaufman, G.G. (1965) Factors Determining Bank Deposit Growth by State: An Empirical Analysis. Journal of Finance, 20, 59-70. [5] Mosley, P. (1999) Micro-Macro Linkages in Financial Markets: The Impact of Financial Liberalization on Access to Rural Credit in Four African Countries. Journal of International Development, 11, 367-384. http://dx.doi.org/10.1002/(SICI)1099-1328(199905/06)11:3<367::AID-JID589>3.0.CO;2-W [6] Pattillo, C. (1998) Investment, Uncertainty, and Irreversibility in Ghana. Staff Papers—International Monetary Fund, 45, 522. http://dx.doi.org/10.2307/3867414 [7] Shaffer, S. (1994) Bank Competition in Concentrated Markets. Business Review—Federal Reserve Bank of Philadelphia, 3-16. [8] Gropp, J., Sorensen, R. and Lichtenberger, C.K. (2007) The Dynamics of Bank Spread and Financial Structure. No 714, Working Paper Series from European Central Bank. [9] Berger, A.N. (1995) The Profit-Structure Relationship in Banking—Tests of Market-Power and Efficient-Structure Hypotheses. Journal of Money Credit and Banking, 27, 404-431. http://dx.doi.org/10.2307/2077876 [10] Tokle, J.G. and Tokle, R.J. (2000) The Influence of Credit Union and Savings and Loan Competition on Bank Deposit Rates in Idaho and Montana. Review of Industrial Organization, 17, 427-439. http://dx.doi.org/10.1023/A:1007894216526 [11] Hutchinson, D.E. (1995) Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach. Journal of Money, Credit and Banking, 27, 217-231. http://dx.doi.org/10.2307/2077860 [12] Neumark, D. and Sharpe, S.A. (1992) Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits. The Quarterly Journal of Economics, 107, 657-680. http://dx.doi.org/10.2307/2118485 [13] De Graeve, F., De Jonghe, O. and Vander Vennet, R. (2007) Competition, Transmission and Banking Pricing Policies: Evidence from Belgian Loan and Deposit Markets. Journal of Banking & Finance, 31, 259-278. http://dx.doi.org/10.1016/j.jbankfin.2006.03.003 [14] Martin-Oliver, A., Salas-Fumas, V. and Saurina, J. (2008) Search Cost and Price Dispersion in Vertically Related Markets: The Case of Banks Loans and Deposits. Review of Industrial Organization, 33, 297-323. http://dx.doi.org/10.1007/s11151-008-9192-x [15] Onwumere, J.U.J. and Okore Amah Okore, I.G.I. (2012) The Impact of Interest Rate Liberalization on Savings and Investment: Evidence from Nigeria. Research Journal of Finance and Accounting, 3, 130-136. [16] Yalta, A.Y. and Yalta, A.T. (2012) Does Financial Liberalization Decrease Capital Flight? A Panel Causality Analysis. International Review of Economics & Finance, 22, 92-100. http://dx.doi.org/10.1016/j.iref.2011.09.003 [17] Akinlo, A.E. and Egbetunde, T. (2010) Financial Development and Economic Growth: The Experience of 10 Sub-Saharan African Countries Revisited. The Review of Finance and Banking, 2, 17-28. [18] Pill, H. and Pradhan, M. (1997) Financial Liberalization in Africa and Asia. Finance & Development, 34, 7-10. [19] Nowak-Lehmann, F. (2003) Trade Policy and its Impact on Economic Growth: The Chilean Experience in the Period of 1960 to 1998. Applied Econometrics and International Development, 3, 25-53. [20] Fry, M.F. (1978) Money and Capital or Financial Depeening in Economic Development. Journal of Money, Credit and Banking, 10, 464-475. http://dx.doi.org/10.2307/1991576 [21] Ikhide, S.I. (1993) Positive Interest Rates: Financial Deepening and the Mobilisation of Savings in Africa. Development Policy Review, 11, 367-382. http://dx.doi.org/10.1111/j.1467-7679.1993.tb00047.x [22] Nkusu, M.M. (2003) Interest Rates, Credit Rationing, and Investment in Developing Countries, No. 3-63. International Monetary Fund. [23] Gupta, K.L. (1987) Aggregate Savings, Financial Intermediation, and Interest Rate. The Review of Economics and Statistics, 69, 303-311. http://dx.doi.org/10.2307/1927238 [24] Rittenberg, L. (1991) Investment Spending and Interest Rate Policy: The Case of Financial Liberalisation in Turkey. The Journal of Development Studies, 27, 151-167. http://dx.doi.org/10.1080/00220389108422190 [25] Greene, J. and Villanueva, D. (1991) Private Investment in Developing Countries: An Empirical Analysis. IMF Staff Papers, 38, 33-58. http://dx.doi.org/10.2307/3867034 [26] Gelb, A.H. (1989) Financial Policies, Growth, and Efficiency. [27] Cardoso, E. (1993) Private Investment in Lantin America. Economic Development and Cultural Change, 41, 833-848. http://dx.doi.org/10.1086/452050 [28] Ramirez, M.D. (2000) The Impact of Public Investment on Private Investment Spending in Latin America: 1980-95. Atlantic Economic Journal, 28, 210-225. http://dx.doi.org/10.1007/bf02298362 [29] Lanyi, A. and Saracoglu, R. (1983) Interest Rate Policies in Developing Countries. Occasional Paper 22, Washington DC, International Monetary Fund. [30] Brock, P.L. and Suarez, L.R. (2000) Understanding the Behavior of Bank Spreads in Latin America. Journal of Development Economics, 63, 113-134. http://dx.doi.org/10.1016/S0304-3878(00)00102-4 [31] Masson, P.R., Bayoumi, T. and Samiei, H. (1995) International Evidence on the Determinants of Private Saving. [32] Hadjimichael, M. and Ghura, D. (1995) Public Policies and Private Savings and Investment in Sub-Saharan Africa: An Empirical Investigation. [33] Loayza, N., Schmidt-Hebbel, K. and Servén, L. (1999) What Drives Private Savings around the World? Central Bank of Chile. http://dx.doi.org/10.1596/1813-9450-2309 [34] Servén, L. (1997) Uncertaintainty, Instability, and Irreversible Investment: Theory, Evidence, and Lessons for Africa. World Bank Policy Research Paper No. 1722. [35] Aizenman, J. and Marion, N.P. (1993) Policy Uncertainty, Persistence and Growth. Review of International Economics, 1, 145-163. http://dx.doi.org/10.1111/j.1467-9396.1993.tb00012.x [36] McKinnon, R.I. (1973) Money and Capital in Economic Development. Brookings Institution Press, Washington DC. [37] Khatkhate, D. (1991) The Central Bank’s Role in Financial Sector Development. In: Downes, P. and Vaez-Zadeh, R., Eds., The Evolving Role of Central Banks, International Monetary Fund, Washington DC, 16-29. [38] Amonoo, E., Acquah, P.K. and Asmah, E.E. (2003) The Impact of Interest Rates on Demand for Credit and Loan Repayment by the Poor and SMEs in Ghana. IFLIP Research Paper 03-10, International Labor Organization. [39] Smith, A.W. (1991) Understanding Economics. 2nd Edition, Macmillan/McGraw-Hill Company Inc., New York. [40] Miller, D.D. and Van Hoose, R.L. (2007) Money, Banking and Financial Markets. South-Western Cengage Learning, Mason. [41] Clayton, G.E. and Brown, J.E. (1983) Economics Principles and Practice. Charles E. Merill Publishing Company, Columbus. [42] Adams, S. and Agbemade, J. (2012) Financial Liberalization and Banking Sector Performance in Ghana. African Journal of Business Management, 6, 11598-11608. [43] Asare, E. (2013) The Impact of Financial Liberalization on Private Investment in Ghana. The International Journal of Business and Finance Research, 7, 77-90. [44] Williamson, J. and Mahar, M. (1998) A Survey of Financial Liberalization. Princeton Essays in International Finance, No. 211 [45] Burns, N. and Grove, S. (2005) The Practice of Nursing Research: Conduct, Critique, and Utilization. 5th Edition, Elsevier Saunders, St. Louis. [46] Gupta, K.L. (1984) Finance and Economic Growth in Developing Countries. Vol. 37, Taylor & Francis, UK. [47] Giovannini, A. (1985) Saving and the Real Interest Rate in LDCs. Journal of Development Economics, 18, 197-217. http://dx.doi.org/10.1016/0304-3878(85)90054-9 [48] Hendry, D.F. (2000) Explaining Cointegration Analysis: Part I. Energy Journal, 21, 1-29. http://dx.doi.org/10.5547/ISSN0195-6574-EJ-Vol21-No1-1 [49] Rose, P.S. (1994) Money and Capital Markets. Irwin, Boost. [50] Levine, R., Loayza, N. and Beck, T. (2000) Financial Intermediation and Growth: Causality and Causes.
[1] Fama, E.F. (1980) Banking in the Theory of Finance. Journal of Monetary Economics, 6, 39-57. http://dx.doi.org/10.1016/0304-3932(80)90017-3 [2] King, R. and Levine, R.G. (1993) Finance, Entrepreneurship and Growth: Theory and Evidence. Journal of Monetary Economics, 32, 513-542. http://dx.doi.org/10.1016/0304-3932(93)90028-E [3] Maes, T. and Timmermans, K. (2000) Measuring the Interest Rate Risk of Belgian Regulated Savings Deposits. [4] Cohen, B.C. and Kaufman, G.G. (1965) Factors Determining Bank Deposit Growth by State: An Empirical Analysis. Journal of Finance, 20, 59-70. [5] Mosley, P. (1999) Micro-Macro Linkages in Financial Markets: The Impact of Financial Liberalization on Access to Rural Credit in Four African Countries. Journal of International Development, 11, 367-384. http://dx.doi.org/10.1002/(SICI)1099-1328(199905/06)11:3<367::AID-JID589>3.0.CO;2-W [6] Pattillo, C. (1998) Investment, Uncertainty, and Irreversibility in Ghana. Staff Papers—International Monetary Fund, 45, 522. http://dx.doi.org/10.2307/3867414 [7] Shaffer, S. (1994) Bank Competition in Concentrated Markets. Business Review—Federal Reserve Bank of Philadelphia, 3-16. [8] Gropp, J., Sorensen, R. and Lichtenberger, C.K. (2007) The Dynamics of Bank Spread and Financial Structure. No 714, Working Paper Series from European Central Bank. [9] Berger, A.N. (1995) The Profit-Structure Relationship in Banking—Tests of Market-Power and Efficient-Structure Hypotheses. Journal of Money Credit and Banking, 27, 404-431. http://dx.doi.org/10.2307/2077876 [10] Tokle, J.G. and Tokle, R.J. (2000) The Influence of Credit Union and Savings and Loan Competition on Bank Deposit Rates in Idaho and Montana. Review of Industrial Organization, 17, 427-439. http://dx.doi.org/10.1023/A:1007894216526 [11] Hutchinson, D.E. (1995) Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach. Journal of Money, Credit and Banking, 27, 217-231. http://dx.doi.org/10.2307/2077860 [12] Neumark, D. and Sharpe, S.A. (1992) Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits. The Quarterly Journal of Economics, 107, 657-680. http://dx.doi.org/10.2307/2118485 [13] De Graeve, F., De Jonghe, O. and Vander Vennet, R. (2007) Competition, Transmission and Banking Pricing Policies: Evidence from Belgian Loan and Deposit Markets. Journal of Banking & Finance, 31, 259-278. http://dx.doi.org/10.1016/j.jbankfin.2006.03.003 [14] Martin-Oliver, A., Salas-Fumas, V. and Saurina, J. (2008) Search Cost and Price Dispersion in Vertically Related Markets: The Case of Banks Loans and Deposits. Review of Industrial Organization, 33, 297-323. http://dx.doi.org/10.1007/s11151-008-9192-x [15] Onwumere, J.U.J. and Okore Amah Okore, I.G.I. (2012) The Impact of Interest Rate Liberalization on Savings and Investment: Evidence from Nigeria. Research Journal of Finance and Accounting, 3, 130-136. [16] Yalta, A.Y. and Yalta, A.T. (2012) Does Financial Liberalization Decrease Capital Flight? A Panel Causality Analysis. International Review of Economics & Finance, 22, 92-100. http://dx.doi.org/10.1016/j.iref.2011.09.003 [17] Akinlo, A.E. and Egbetunde, T. (2010) Financial Development and Economic Growth: The Experience of 10 Sub-Saharan African Countries Revisited. The Review of Finance and Banking, 2, 17-28. [18] Pill, H. and Pradhan, M. (1997) Financial Liberalization in Africa and Asia. Finance & Development, 34, 7-10. [19] Nowak-Lehmann, F. (2003) Trade Policy and its Impact on Economic Growth: The Chilean Experience in the Period of 1960 to 1998. Applied Econometrics and International Development, 3, 25-53. [20] Fry, M.F. (1978) Money and Capital or Financial Depeening in Economic Development. Journal of Money, Credit and Banking, 10, 464-475. http://dx.doi.org/10.2307/1991576 [21] Ikhide, S.I. (1993) Positive Interest Rates: Financial Deepening and the Mobilisation of Savings in Africa. Development Policy Review, 11, 367-382. http://dx.doi.org/10.1111/j.1467-7679.1993.tb00047.x [22] Nkusu, M.M. (2003) Interest Rates, Credit Rationing, and Investment in Developing Countries, No. 3-63. International Monetary Fund. [23] Gupta, K.L. (1987) Aggregate Savings, Financial Intermediation, and Interest Rate. The Review of Economics and Statistics, 69, 303-311. http://dx.doi.org/10.2307/1927238 [24] Rittenberg, L. (1991) Investment Spending and Interest Rate Policy: The Case of Financial Liberalisation in Turkey. The Journal of Development Studies, 27, 151-167. http://dx.doi.org/10.1080/00220389108422190 [25] Greene, J. and Villanueva, D. (1991) Private Investment in Developing Countries: An Empirical Analysis. IMF Staff Papers, 38, 33-58. http://dx.doi.org/10.2307/3867034 [26] Gelb, A.H. (1989) Financial Policies, Growth, and Efficiency. [27] Cardoso, E. (1993) Private Investment in Lantin America. Economic Development and Cultural Change, 41, 833-848. http://dx.doi.org/10.1086/452050 [28] Ramirez, M.D. (2000) The Impact of Public Investment on Private Investment Spending in Latin America: 1980-95. Atlantic Economic Journal, 28, 210-225. http://dx.doi.org/10.1007/bf02298362 [29] Lanyi, A. and Saracoglu, R. (1983) Interest Rate Policies in Developing Countries. Occasional Paper 22, Washington DC, International Monetary Fund. [30] Brock, P.L. and Suarez, L.R. (2000) Understanding the Behavior of Bank Spreads in Latin America. Journal of Development Economics, 63, 113-134. http://dx.doi.org/10.1016/S0304-3878(00)00102-4 [31] Masson, P.R., Bayoumi, T. and Samiei, H. (1995) International Evidence on the Determinants of Private Saving. [32] Hadjimichael, M. and Ghura, D. (1995) Public Policies and Private Savings and Investment in Sub-Saharan Africa: An Empirical Investigation. [33] Loayza, N., Schmidt-Hebbel, K. and Servén, L. (1999) What Drives Private Savings around the World? Central Bank of Chile. http://dx.doi.org/10.1596/1813-9450-2309 [34] Servén, L. (1997) Uncertaintainty, Instability, and Irreversible Investment: Theory, Evidence, and Lessons for Africa. World Bank Policy Research Paper No. 1722. [35] Aizenman, J. and Marion, N.P. (1993) Policy Uncertainty, Persistence and Growth. Review of International Economics, 1, 145-163. http://dx.doi.org/10.1111/j.1467-9396.1993.tb00012.x [36] McKinnon, R.I. (1973) Money and Capital in Economic Development. Brookings Institution Press, Washington DC. [37] Khatkhate, D. (1991) The Central Bank’s Role in Financial Sector Development. In: Downes, P. and Vaez-Zadeh, R., Eds., The Evolving Role of Central Banks, International Monetary Fund, Washington DC, 16-29. [38] Amonoo, E., Acquah, P.K. and Asmah, E.E. (2003) The Impact of Interest Rates on Demand for Credit and Loan Repayment by the Poor and SMEs in Ghana. IFLIP Research Paper 03-10, International Labor Organization. [39] Smith, A.W. (1991) Understanding Economics. 2nd Edition, Macmillan/McGraw-Hill Company Inc., New York. [40] Miller, D.D. and Van Hoose, R.L. (2007) Money, Banking and Financial Markets. South-Western Cengage Learning, Mason. [41] Clayton, G.E. and Brown, J.E. (1983) Economics Principles and Practice. Charles E. Merill Publishing Company, Columbus. [42] Adams, S. and Agbemade, J. (2012) Financial Liberalization and Banking Sector Performance in Ghana. African Journal of Business Management, 6, 11598-11608. [43] Asare, E. (2013) The Impact of Financial Liberalization on Private Investment in Ghana. The International Journal of Business and Finance Research, 7, 77-90. [44] Williamson, J. and Mahar, M. (1998) A Survey of Financial Liberalization. Princeton Essays in International Finance, No. 211 [45] Burns, N. and Grove, S. (2005) The Practice of Nursing Research: Conduct, Critique, and Utilization. 5th Edition, Elsevier Saunders, St. Louis. [46] Gupta, K.L. (1984) Finance and Economic Growth in Developing Countries. Vol. 37, Taylor & Francis, UK. [47] Giovannini, A. (1985) Saving and the Real Interest Rate in LDCs. Journal of Development Economics, 18, 197-217. http://dx.doi.org/10.1016/0304-3878(85)90054-9 [48] Hendry, D.F. (2000) Explaining Cointegration Analysis: Part I. Energy Journal, 21, 1-29. http://dx.doi.org/10.5547/ISSN0195-6574-EJ-Vol21-No1-1 [49] Rose, P.S. (1994) Money and Capital Markets. Irwin, Boost. [50] Levine, R., Loayza, N. and Beck, T. (2000) Financial Intermediation and Growth: Causality and Causes.