European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.6, No.12, 2014 168 The Relationship between the Percentage Share of Industry Deposits and the Percentage Share of Industry Loans and Advances: The Case of Ghanaian Banking Industry Victor Curtis Lartey, Boakye Agyemang Koforidua Polytechnic, P.O.Box KF981, Koforidua, Ghana vclartey@yahoo.com Abstract The purpose of the study was to describe the relationship between the percentage share of industry deposits taken by a bank and the percentage share of industry loans and advances given by such bank, using 2012 fiscal year as a reference point. The study made use of cross-sectional analysis. The population of this study was made up of all commercial banks operating in Ghana. They are twenty-six (26) in number. However, a sample size of twenty-four (24) of these banks was used for the study. Data was mainly collected from secondary sources including financial reports of the selected banks, scholarly journals, business and financial newspapers, corporate journals, and report of 2013 Ghana Banking Survey. Descriptive, inferential and exploratory data analyses were performed. The study revealed that there is a strong positive correlation between the percentage share of industry deposits and the percentage share of industry loans and advances. The regression model which establishes the relationship between percentage share of industry deposits and lending is given as Y = 0.423+ 0.899X, where Y is the percentage share of industry lending and X being the percentage share of industry deposits. The coefficient of determination (R-sq) is 85.6%. The study therefore confirms the findings by Olokoyo (2011) that commercial banks deposits have the greatest impacts on their lending. Keywords: Banks, Industry, deposits, loans and advances, relationship, percentage share 1.0 Introduction The business of banking involves the mobilization of funds from excess or surplus units of the economy and giving out to deficit units as loans and advances. This is called financial intermediation (Lartey et al, 2013). Hinson (2004) as cited by Amidu (2006) has noted that “before the passage of the Universal Banking Law, banking was conducted along such narrow scopes as commercial, developmental or merchant banking. With the passage of the Universal Banking Law however, all types of banking can be conducted under a single corporate banking entity and this greatly reorganizes the competitive scopes of several banking products in Ghana”. He further noted that banks in Ghana have been thrust “firmly into the competitive arena in terms of customers and products” and also that banks throughout Ghana are also “seeking unique ways of differentiating their offering”. 2.0 Literature Review Banking system plays a very important role in the economic life of a nation. The health of the economy is closely related to the soundness of its banking system (Chowdhury and Ahmed, 2009). According to Chowdhury and Ahmed (2009) a number of recent studies indicate that the banking sector plays a more important role than it was believed earlier. Banking is an essential part of our economic system. Modern trade and commerce would almost be impossible without the availability of suitable banking services. Loan facility provided by banks works as an incentive to the producer to increase the production (http://www.blurtit.com/q197532.html). Commercial banks happen to be the most important savings mobilization and financial resource allocation institutions in the economy (Olokoyo, 2011). These roles make the banks an important phenomenon in economic growth and development. In performing the above roles, the banks must be sure that they have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. Therefore, according to Olokoyo (2011), no matter the sources of the generation of income or the economic policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers. Credit constitutes the largest single income-earning asset in the portfolio of most banks. This explains why banks spend enormous resources to estimate, monitor and manage credit quality (Nwankwo 2000). Bank lending decisions generally are fraught with a great deal of risks, which calls for a great deal of caution and tact in this aspect of banking operations. Lending is undoubtedly the heart of banking business. Therefore, its administration requires considerable skill and dexterity on the part of the bank management (Adedoyin and Sobodun, 1996). Osayameh (1991) stressed that, the major objective of commercial banks’ lending is to maximize profit. According to Chodechai (2004) as cited by Olokoyo (2011), banks have to be careful with their pricing decisions as regards to lending as banks cannot charge loan rates that are too low because the revenue from the interest income will not be enough to cover the cost of deposits, general expenses and the loss of revenue from some borrowers that do not pay. Moreover, charging too high loan rates may also create an adverse selection situation