Effects of Deposit Mobilization on Performance of Commercial Banks in Ghana

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A bank is a financial institution that accepts deposits and gives out loans. The development of any economy relies upon capital accumulation, which thus relies upon investment and a comparable measure of savings to coordinate with it. Banks collect the savings of the individuals in the economy and lend them out to businesses and borrowers for investment, hence the importance of banks in the economy.

Banks play a significant role in developing the economy. In as much as the financial market is broad, a well-functioning banking institution has the potency to improve the growth of a developing economy (IMF 2015) as cited in Tuyishime, R., Memba, F., & Mbera, Z. (2015). As indicated by Sani et al (2004), banks play the role of facilitating economic transactions between several domestic and international economic units; hence they improve trade, commerce, and industrial operations. Comparatively, to other countries in the sub-regions, Ghana`s banking sector appears to be very vibrant (Quartey and Mensah, 2015).

In the 21st century era, banking is being improved with the adoption of channels like Automated Teller Machines (ATM), credit and debit cards, web banking, and online cash transaction.

In Ghana, mobile banking is at an early stage with just a few grown-ups are having mobile accounts and the number of mobile-based financial transactions is still developing. While the presiding group of small and medium entities adopts the formal account, many of them depend on internal finance for the investment, with just around 23% having bank advance or credit extension. Private area credit to GDP is low at around 19% in 2014.

Banking over the years has satisfied its definition of safekeeping of clients’ funds and guaranteeing that the clients get the cash upon demand. Furthermore, this has been the essential function of banking similar as a raw material is for a business; to the banking establishment is cash.

The performance of the banking industry is essential, considering the tremendous role banks play in the economy. As already stated above, the financial intermediation of the banks has increased economic growth and development by providing credit facilities to both the public and private sectors of the economy.

As a result of the intense competition in the banking sector, most managers, and administrators of commercial banks have had their attention drawn to improving the mobilization of cash. In developing countries, banking systems have lacked in undertaking the necessary functions needed to facilitate growth and to perform the vital economic development functions required for speedy growth and capital increase efficiently. One major way of addressing this issue is by looking into maximizing deposits (Agu, 1994).

Deposit mobilization is the accumulation of funds from the public by financial institutions. This is an integral part of banking activity. Without deposits, banks cannot function. Deposits are considered an effective source of capital for the bank. The bank’s ability to loan more significantly centers on its deposit mobilization. Lending activities are the major source of funds for banks. Banks loan out deposits received, and the interest on these loans thus is their income. Hence, without a deposit, banks cannot function.

Since commercial banks rely on depositors’ funds, it is proposed that there exist a relationship between the banks to mobilize deposit and the measure of credit allowed to the clients. The productivity of playing out this capacity relies upon the degree of advancement of the monetary framework. Per Kasekende, (2008), countries with enhanced and efficient financial systems develop quickly, while an inefficient financial system takes the risk of failure.

In the current setting bank`s performance is assessed on several indicators, inculcating the deposit mix, and the quantum of low-cost deposits in the mix among others. In the current time of competition as well as the development of private and multinational banks, an ideal mix of deposits is an absolute necessity to survive. Since the premium paid forms a major burden on the bank, the globalization of low-cost deposits, like current accounts and savings bank deposits, is the earnest requirement for the bank.

Problem statement

Bank performance has been a topic of interest in finance and economics since the performance and growth of banks results in the economic growth of a country. Its study has become very relevant in the context of deposit mobilization theory. Deposit mobilization is an integral part of banking activity. Without deposits, banks cannot function. Deposits are considered an effective source of capital for the bank. The bank’s ability to loan more significantly centers on its deposit mobilization. Lending activities are the source of income for commercial banks. Commercial banks rely on depositors’ money as a source of funds. This fund is then used for lending activities. This proposes that there is a relationship between the financial institution`s effort to mobilize deposits and the measure of credit given to the clients. Without deposits, banks cannot perform literally. A higher measure of credit results in a higher rate of income for the bank, and a higher rate of income result in a high financial performance of banks. Since deposit forms the major source of bank capital, it has become very necessary to study it effect on the financial performance of commercial banks in Ghana banks.

The available literature about banks’ performance in Ghana mainly focused on the role of banks, how to improve savings efficiency, challenges of deposit mobilization, credit risk and profitability of banks, how inflation, interest rate, age of banks, and size of banks affect the performance of banks.

For instance, Bright Adu Gyamfi Antwi (2015), examined mobilizing deposits as the role of commercial banks in Ghana. According to him, This study reveals certain basic facts about commercial banks in Ghana in their struggle to mobilize greater domestic deposits. Firstly, Commercial banks’ deposits mobilization in Ghana from 2000 to 2004 indicates an upward trend, however, the present level of deposits as a ratio of the total amount of money in circulation is woefully inadequate. Secondly, the methods or the design of products and services, like initial deposits as a precondition for a bank account as well as ways of promoting products, have tended to benefit formal sector workers who earn regular income than the informal workers such as artisans, farmers, and other small-scale operators who are the majority.

Thirdly, the concentration of commercial banks in urban areas coupled with the insufficient instruments used for deposit mobilization make them battle the problem of how to effectively harness the volume of deposits left in the rural areas. Moreover, the attitude of bank personnel towards rural savers in Ghana has not been customer-friendly to entice more depositors.

Finally, even though there is a significant difference as far as the bank’s general deposit growth rate is concerned, in terms of the annual average deposit growth rate, there is no significant difference.

Quarshie Joseph (2011), examined how to improve the efficiency of Savings Mobilization in Ghana. According to him, The failure of the current system of mobilizing savings does not only lie with banking institutions but also with widespread perception in the informal sector that banks especially are 105 for some caliber of people (so-called high class in the society). This perception over the years can be said to have been fuelled by the concentration of banks tailoring their services to meet the needs of high-income earners (the urban rich). Sporadically the sheer interior decoration and clothes of personnel or clients in the banking hall intimidate potential savers in the informal sector. The path this research has chartered for mobilizing savings in the informal sector including the rural population will ensure that these excesses are mitigated,, especially within the framework where potential savers will carry out transactions at local Post Offices, Bank-licensed outlets, or mobile bankers in their communities, markets and other places of work, area or district revenue offices, just to mention a few.

Oduro Asamoah Joyce (2015) also examines the challenges of deposit mobilization at agricultural development banks. According to her research, evidence of Cumbersome Loan Applications, Poor Customer Service, Cumbersome Account Opening Requirements and Processes, Less functional modern ICT Facilities among others. The outcomes of such challenges are the inability of the bank to mobilize enough funds for their operations and also to support the development of the economy of Ghana. It is, therefore, necessary that pragmatic measures are adopted to regulate the efficiency and effectiveness of ADB in increasing the deposit mobilization of the bank.

John, A. et al (2017) also examined the credit risk, deposit mobilization and profitability of Ghanaian banks. The result of their findings unveils a positive relationship between credit risk, deposit mobilization, and profitability of Ghanaian banks.

Studies above have not taken into consideration deposit mobilization together with the financial performance of banks, while deposit mobilization is literally the greatest source of capital for commercial banks.

This research is conducted because of our interest in deposit mobilization and the financial performance of banks. Related research has not taken into consideration the deposit mobilization factors together with the performance of commercial banks and how it can be improved as means of increasing their financial performance in Ghana, whiles others have considered it in a very narrow light. After the gap in this area has been observed, we then decided to conduct our research on the topic of the effects of deposit mobilization on the financial performance of commercial banks in Ghana.

Main objective

The main objective of the research is to assess the effect of deposit mobilization on the performance of commercial banks in Ghana.

Specific objectives

To examine the impact of deposit mobilization on the performance of commercial banks in Ghana.
To examine the trend behavior of bank performance in the banking industry.
To ascertain the level of deposit mobilization of commercial banks in Ghana.

Research Question

What is the impact of deposit mobilization on the performance of commercial banks in Ghana?
What is the trend behavior of bank performance in the banking industry?
What is the level of deposit mobilization of commercial banks in Ghana?

Significance of the study

The significance of study has a great contribution to the existing knowledge around the effects of deposit mobilization on the financial performance of commercial banks in Ghana.

The study is used to know the effect of deposit mobilization on banks, enabling banks to develop and design strategies to improve upon deposit mobilization.

The other significance of this study is, serves as a basis for other researchers to use as a reference in investigating a similar project. Since studies conducted in this area are not sufficient, it will help other researchers by revealing issues for further research.

The study will also be of importance in many ways to policymakers, government, and other important stakeholders. These include; aiding in promoting Capital Formation, increasing Financial Reliance, and assessing the relationship between growth in banking and economic development.

Scope of studies

The study will center on the effects of deposit mobilization on the financial performance of commercial banks in Ghana. The proposed study will be based on Ghanaian Commercial Banks in the various selected region where information will be derived. Useful and needed data for the accomplishment of the study will be retrieved from these commercial banks. However, any useful material which will be needed to make the research work better will be employed.

Methodology

The aim of the research is to examine the effect of Deposit Mobilization on the financial performance of commercial banks in Ghana.

This study will employ the quantitative research design. Secondary sources will be used for data collection.

Secondary sources, ten years of annual reports and financial statements from 10 commercial banks, they include Barclays bank of Ghana Limited(ABSA), Agricultural Development Bank of (Ghana) Limited (ADB), Zenith Bank (Ghana) Limited, Access bank (Ghana) Limited, CALL Bank, Fidelity Bank, Ghana Commercial Bank, Prudential Bank Limited, Stanbic bank, and Societe Generale Ghana, as well as reports issued by the central bank, Article, Journals, books, and previous research works relevant to this topic will be applied. These banks were chosen because of the availability of materials to conduct the study.

Panel regression analysis will be used, using Return on Assets(ROA) of the banks as a basis of performance measurement being the dependent variable and deposits as the main independent variable.

The regression technique is a very important tool in econometrics. This technique is concerned with examining the relationship and linkages between a given variable and one or more other variables, that is, the change in one variable as a result of a corresponding change in another variable.

The regression model will modify as follows:

ROA it= Î²0 + DepitÎ²1 + SIZEitÎ²2+ InfitÎ²3+ GrowthitÎ²4 + Âµitâ¦â¦

Where ROA it represents the performance of the bank at time t, Debit represents the independent variable, deposit mobilization at times t, the control variable includes the Size of the bank proxied by SIZEit, Inflation proxied by Infit, Growth of the bank proxied by Growth. Î²0 is the intercept of the regression that is, the constant term, Î²1-Î²4 are the coefficient of variables and Âµit is the error term.

These variables will be chosen because they are majorly the key variables that could affect the performance of banks.

Organization of the study

This study is organized into five chapters. Chapter one will deal with the Introduction of the study. Chapter two will cover the reviews’ literature on both theoretical and empirical studies on the link between bank deposits and performance. Chapter three will elaborate on the methodology to be employed in carrying out the study. Chapter four will revolve around the findings from the study. Chapter five will cover the conclusion and recommendations about the findings.

Summary of literature review

Per Gockel and Brow (2007), the money deposited in a banking firm is very safe. Savings Accounts, Checking Accounting and money market accounts are the very places where deposits have been effectual. Per the banking conditions, the holder of the accounts must follow the same accepted procedure in case he wants to make deposits. The bank’s view on the deposit is perceived as a liability anytime the depositor makes the deposit.

It is factual, deposits are made only when a person opens an account, and this involves placing funds in the accounts for long-term use. To be able to make a proper deposit, the depositor should walk to the bank. Filling in a person`s details on the bank deposit slip, the person can also make a deposit. By adopting a wire transfer, or direct deposit plan, an employer can make a bank deposit.

Financial firms attempt to retrieve more deposits or funds, they give out a series of saving packages that are a channel to their targeted customer (Laura, Alfred, Sylvia, 2009). In giving out better-saving packages, it makes their client easily assess liquid products, or semi-liquid accounts or time deposits with a proportionally massive rate of interest.

According to Katang and Nui (2008) cited in Tuyishime, R., and Memba (2015), The approach of commercial banks is accepting deposits from individual clients and extending credits to different targeted groups. They accrue by retrieving a lot of interest from borrowers than paying interest to the clients whose deposits they accept.

In financial institutions that focus on banking, to induce more customers in saving more in the bank, they use the approach of deposit mobilization (Kazi, 2012). This money generated by the bank will be used in giving out loans to the customers in return.

Performance is a measure of how well an entity is. The quantitative and qualitative approaches used in assessing the well-being of an entity is termed the Performance measure. For the organization to attain success, they employ performance measures tools that are used to monitor progress in attaining the set objectives of the firm. Guest et. al (2003) explain performance as a result, of attainment sprouting out of the firm`s activities.

Oduro Asamoah Joyce (2015) also examines the challenges of deposit mobilization at agricultural development banks. According to her research, evidence of Cumbersome Loan Applications, Poor Customer Service, Cumbersome Account Opening Requirements and Processes, and Less functional modern ICT Facilities among others. The outcomes of such challenges are the inability of the bank to mobilize enough funds for their operations and also to support the development of the economy of Ghana. It is, therefore, necessary that pragmatic measures are adopted to regulate the efficiency and effectiveness of ADB in increasing the deposit mobilization of the bank.

References

Aug, C. C. (1994). The role of commercial banks in mobilization and allocation of development in Nigeria. Savings and Development.
Bright Adu Gyamfi Antwi (2015). Mobilizing deposits as the role of commercial in Ghana.
Guest, D. E., Michie, J., Conway, N., & Sheehan, M. (2003). Human resource management and corporate performance in the UK. British journal of industrial relations, 41(2), 291-314.
John, A., Isaac, O. & Nathaniel, A. (2017) Credit Risk, Deposit Mobilization and Profitability of Ghanaian Banks.
Kasekende, L. (2008). Developing a sound banking system. InÂ IMF Seminar, TunisiaÂ (Vol. 37).
Kazi, A. M. (2012). Promoting deposit mobilization and financial inclusion.Â Journal of Marketing, 5.
Laura, E., Alfred, H., & Sylvia, W. (2009).Â CGAP Working on Savings Mobilization Comparative Analysis of Savings Mobilization Strategies (Vol. 30). Discussion Paper Series No.
Oduro Asamoah Joyce (2015). Challenges of deposit mobilization at Agricultural Development Banks.
Sani, R.M.; Abubakar, M.M. and Kushwaha, S.(2004). Economic Analysis of Crop Residue under Different Methods of storage in the Northern Guinea Savannah Ecological Zone of Nigeria. Journal of Research in Agriculture,1:17-20.
Tuyishime, R., Memba, F., & Mbera, Z. (2015). The effects of deposit mobilization on financial performance in commercial banks in Rwanda. A case of equity bank Rwanda limited.Â International Journal of small business and entrepreneurship research, 3(6), 44-71.
Quarshie Joseph (2011). Improving the efficiency of Savings Mobilization in Ghana.
Quartey and Mensah( 2015): Financial development and economic growth in Ghana.

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