FACTORS INFLUENCING BANKING DISTRESS IN GHANA: A CASE STUDY OF SELECTED RURAL BANKS

Abstract

Banking institutions play a vital role in developing economies especially from the perspective of mobilization of funds and subsequent provision of capital for economic development. The saving and investment gap in rural regions of developing economies has led to the establishment of rural banks in these developing economics. Specifically, in Ghana, there has been an upsurge in the establishment of rural banks currently standing at 140. A major constraint facing rural banks is financial distress. By and large. distressed banks face liquidity and solvency problems. This phenomenon has the potential to affect the smooth operation of the banking sector. Building on current research, this study was primarily undertaken to identify the determinants of financial distress among selected rural banks in Ghana. Related objectives were to assess the measures employed by regulatory authorities to curb financial distress and to assess the degree of distress among selected banks. To achieve the research objectives, both primary and secondary data spanning 2010- 2014 were collected from the published financial statements and management staff population units of the respective banks respectively. Specifically, management staff of the sampled rural banks were interviewed to get their views about the financial distress as well as the relative effectiveness of distress management measures. Additionally, the logit model was used to assess the level of distress of selected rural banks. Based on the outcome of the study, it was established that the determinants of distress is poor management, adverse economic conditions, inadequate supervision, information asymmetry regarding customers, and under capitalization. AIso distress management measures were identified as financial assistance, poor supervision. change in composition of management, liquidation of distressed banks and the formation of mergers and acquisitions. Two banks out of the four banks selected in the study were found to be in distress. From a policy and practical perspective, the findings of the study demonstrate the need for proper banking supervision, collaboration among financial institutions to reduce the level of information asymmetry, proper management decisions, the creation of a stable macro-environment and adequate level of capitalization to curb banking distress.