Does Economic Freedom Matter for Bank Performance and Energy Consumption?

Introduction

For decades, economists have tried to unearth the fundamental forces that stimulate economic growth. It was earlier assumed that cultural standards and institutions explicate why some countries are more affluent than others (Landes, 1998). In recent times the effect of economic liberty or economic freedom has also been noted as a motivating factor of growth. According to Hafer (2013), economic growth is significantly influenced by the development of the financial sector and greater economic freedom. Countries with greater economic freedom develop faster and reach higher per-capita income levels compared with those economies with less freedom (De Haan et al., 2006). According to the growth literature, economic freedom is associated with higher real per capita income levels, and increase living standards of the poor in developing economies.

Evidently, the growth-enhancing effect of economic freedom is somehow settled in the literature. Aside from the economic growth implications of economic freedom, its consequence may be greater in other contexts. Nevertheless, researchers have done little in examining the influence of economic freedom and other factors. In this regard, we seek to look at how economic freedom affects energy demand and the performance of banks in Ghana. Until now, there has been a significant body of existing research on energy consumption in developing economies especially its determinants. Given that energy is key in the production processes, understanding the factors that influence energy demand is crucial. We argue that economic freedom promotes efficiency in firms’ operations as they have access to state-of-the-art technologies which can influence energy demand as consumption increases. The effect of economic freedom on energy consumption remains elusive as it has received far less attention in the literature. This study thus fills a huge gap in the literature by looking at the effect of economic freedom on energy consumption in the Ghanaian context.

Our second objective is to assess whether economic freedom fosters firm performance. In the case of this study, only banks are considered given the aggregate data availability of the banking sector. The significance of banks is reflected in the fact that they serve as the primary channel of deposits and credit allocation in the economy (Levine, 1997). By transforming deposits into viable investments, the banking sector plays an essential economic role in financial intermediation and economic stimulation. The financial system as a whole, as well as the entire economy, are therefore severely impacted by the performance of the banking sector.

Undoubtedly, a stable and efficient banking sector is best equipped to deal with adverse disruptions and contributes to the financial system's resilience. As a result, the factors determining bank profits have drawn the attention of researchers as well as bank management and regulatory authorities. The recent literature has illustrated that banks' profitability in both developed and emerging economies is influenced by bank-related factors, market or industry indicators, and macroeconomic conditions (see Davydenko, 2010; Sufian, 2012; Dietrich and Wanzenried, 2011; Messai et al., 2015; Menicucci and Paolucci, 2016; Yakubu, 2016; Islam and Rana, 2017; Salike and Ao, 2018; Yakubu, 2019; Hasan et al., 2020; Jilenga and Luanda, 2021; Ozili, 2021). In the banking literature, the relationship between economic freedom and bank performance is virtually missing as few studies have examined this nexus (Sufian and Habibullah, 2010; Smimou and Karabegovic, 2010; Chortareas et al., 2013; Sufian, 2014; Aziz and Knutsen, 2019). The scanty attempts in this area are quite unexpected, considering the position of banks in fostering economic development and the possible effect of economic freedom on the operations of banks (Sufian and Habibullah, 2010). This study seeks to show how economic freedom affects bank profitability in Ghana, hence adding to the few findings on the economic freedom-profitability relationship.