Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?

Abstract

This research paper examines the effect of interest rate liberalization on bank deposits in a developing country Ghana. A deposit function model was specified with long term deposit as the main dependent variable with real savings rate, real treasury bill rate, exchange rate movement and gross domestic product as independent variables while controlling for inflation. Ordinary Least Squares (OLS) method was used to estimate the specified model which covered season ally adjusted quarterly data drawn from Bank of Ghana and Ghana Statistic al Service. The data were input into a spreadsheet and exported into Econometric View 7 which was used for processing the data. The results of the study revealed that the interest rate liberalization and gross domestic product jointly accounted for about 78% of the variation in the level of bank savings deposits in Ghana. The study has also shown that the liberalization of the interest rates has made it attractive for people with idle funds to save with financial institutions especially the banks. It also revealed a negative relationship between real savings rate and the real treasury bill rate expected in a high inflationary environment. All the independent variables were significant. It is therefore recommended that the Bank of Ghana remains resilience on interest rate liberalization so that surplus funds can be made available for investors and also to reduce the level of inflation in Ghana.