Funding structure and technical efficiency

Purpose - The purpose of this paper is to examine the effect of funding structure on technical efficiency of banks in Ghana, between 2011 and 2016. Design/methodology/approach - Employing the random-effect and the truncated panel data of 25 banks, the results present new evidence. Findings - The findings reveal that Ghanaian banks are less technically efficient, as the average efficiency scores generated is below the threshold of 1. Furthermore, the results show that banks in Ghana finance their operations mainly with deposit source of funding. The results reveal a significantly positive relationship between funding structure and technical efficiency. However, internally generated source of funds was negatively linked with technical efficiency. This is not surprising because banks that rely on external funds attract higher costs than internally generated funds, and this puts pressure on managers to perform. The results are relevant to emerging economies when the authors use additional macroeconomic factors. Research limitations/implications - Thus, a proportionally larger deposit base funding would typically lead to an overall increase in technical efficiency of banks in Ghana. Shareholders should put pressure on managers to plough back earnings in order to increase the use of internally generated funds, thus, increasing technical efficiency. Banks that are inefficient should make some adjustments to their weights of inputs and/or outputs combinations by following their benchmark banks (efficient banks) to improve their efficiency. Practical implications - The results of this study have important implications for regulators, investors and policy makers, particularly an emerging economy. The implication of the study to investors is that investors should be able to identify an appropriate source of funds that can be used efficiently to maximize their wealth in emerging markets. It is important for regulators and managers of banks to improve technical efficiency by considering the role that macroeconomic and monetary environment play when identifying and using various sources of funds as a strategy to improve bank efficiency. Social implications - Consequently, future research should investigate the impact of funding structure on technical efficiency for other regions and considering their interactions with institutional quality, macroeconomic factors and financial stability. Originality/value - To the best of the authors’ knowledge, the study is the first to fulfill an urgent need to explore a robust approach of measuring technical efficiency and funding structure within the context of banks over six-year period, prompting insightful avenues to the survival, growth and performance of financiers in emerging economy.

Daniel Ofori-Sasu & Joshua Yindenaba Abor & Lord Mensah, 2019. "Funding structure and technical efficiency," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 15(4), pages 425-443, March.

Handle: RePEc:eme:ijmfpp:ijmf-01-2018-0003
DOI: 10.1108/IJMF-01-2018-0003

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