Impact of Inflation on the Ghanaian Banking Industry: A Blessing or a Curse?

David Kwashie Garr

Abstract


The purpose of this research was to determine the effect of the volatility of the macro economy on credit risk, interest rate spread and the performance of banks using inflation volatility as a proxy for the macro economy. The study used both secondary and primary data for the analysis. The research covered all the thirty-three banks that operated in Ghana between 1990 and 2010. The GARCH model was adopted in modelling inflation volatility. Analysis was carried out in three scenarios: analysis of questionnaire, descriptive data analysis and regression analysis. Regression analysis was ran using the panel root, co-integration and Fully Modified Ordinary Least Square methods. Primary data source was questionnaire completed by 853 bank customers. The results established a positive relationship between past volatility of inflation and current period inflation. It was also confirmed that inflation influenced credit risk, interest rate spread and bank performance significantly. The results suggest that policymakers must pay attention to both the macro and microeconomic variables to achieve efficiency in the industry and the economy.


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