Information sharing in bank diversification channels of bank stability in Ghana

The unfavourable macroeconomic situation in Ghana has ignited innovations in the strategic direction of the banks especially in their loan portfolio allocation. In the wake of information sharing services provided by credit scoring agencies, this study examines the effect of banks’ asset and income diversifications on banking system stability in Ghana. We sourced the bank specific data from 14 banks. The credit scoring data were obtained from XDS Data Ghana. The period of the study is from 2010 to 2019. The paper used the system GMM approach to account for reverse causality/endogeneity. We found that income diversification reduces the systemic risk of the Ghanaian banking system. Also, the study found that asset diversification strategies of the banks have a meaningful effect on bank stability when financial institutions augment their diversification decisions with information from Credit Scoring Agencies. The implication of the study is that banks which employ the services of credit scoring agencies are more likely to alleviate information asymmetry in their intermediation process and therefore induce asset quality. The improvement in asset quality due to information sharing reduces the risk-taking behaviour of Ghanaian banks. The study recommends that the Bank of Ghana as a matter of urgency should make it compulsory for all banks to access and use the services of Credit scoring Agencies to induce the soundness of the banking system.The study examines the role of information supplied by credit reference bureaus in Ghana in the banks’ diversification and banking system stability nexus. We collected data from 14 banks and XDS Data Ghana between the period 2010 and 2019 inclusively. We employed a data analytical method that accounts for reverse causality and produces efficient estimates of smaller observations. We found that information provided by credit scoring agencies can help the banks to do effective asset diversifications that can translate into the soundness of the Ghanaian banking system. The results of the study call on all stakeholders to strengthen the activities of the credit scoring agencies to induce the stability of the banking system.