INTERNAL DETERMINANTS OF PROFITABILITY OF COMMERCIAL BANKS IN GHANA
This study investigated internal determinants of commercial banks' profitability in Ghana. A mixed approach (primary and secondary methods) was used in collecting data from (16) commercial banks via purposive sampling approach out from a total of 26. Primary data was obtained through interviews and questionnaires administered to the respondents whiles secondary data was obtained from published materials particularly from the annual financial reports of the selected commercial banks. The study revealed that capital adequacy, credit risk, deposit, Liquidity, Loans and advances, expenses management, efficiency and productivity, bank size, and non interest income management (bank specific variables) are the key internal determinants of commercial banks. Through regression analysis on the effect of the identified determinants based on return on asset (ROA) and net interest margin (NIM) it becomes clear that profitability is influenced by the identified determinants. Specifically, ROA as a measure of banks profitability indicated that all the bank specific variables were found to be significant in determining profitability. The results revealed that well capitalized banks are more profitable as capital adequacy had a positive and significant impact on bank profitability. The results also indicate that there is a positive relationship between liquidity and profitability implying that the more liquid a bank is the more profitable it becomes. Concerning asset quality and bank profitability, asset quality measured in terms of the ratio of provision for bad debt to advances has a significant negative impact on bank profitability. This implies that as the asset quality deteriorates (i.e. credit risk increases) the profitability of the bank also decreases. The study also found a significant negative relationship between operating expense and bank profitability implying that banks are not efficiently managing their expenses. The findings of the study also suggest that large banks tend to enjoy economies of scale as size is positively related to bank profitability. Similarly, when profitability was measured with NIM, the effects of the identified variables were not very much different from the results of the model with ROA. The only difference was in terms of the capital adequacy variable. Surprisingly this variable was negatively related to profitability contrary to the case of ROA where capital adequacy was impacting positively on profitability. Based on the findings of the study, it will be advantageous for policy makers to establish steps that would encourage revenue diversification, reduce operational costs, minimize credit risk and encourage banks to minimize their liquidity holdings.