Ghana: Managing banking growth

Ghana’s banking sector has seen substantial expansion in recent years, after a central bank push for higher recapitalisation requirements led to a quadrupling of bank capitalisation from end-2008 to end-2011. The Bank of Ghana (BOG) is now encouraging banks to list on the stock exchange to spur growth in the wider economy.

Though Ghana’s banking industry is moderately sized, given the country’s GDP, it is nevertheless competitive and sophisticated. There are 27 commercial banks – more than Nigeria, which has around six times the population – as well as more than 100 rural banks or community banking associations, in addition to various savings and loans houses, leasing firms and microfinance outfits.

A BOG requirement that all commercial banks in the country maintain a minimum capitalisation of GHS60m (€27m) has proven profitable for the country’s financial institutions. Bank capitalisation has increased from GHS445.8m (€200m) at the end of 2008 to GHS1.65bn (€740m) at the end of last year, while reserves doubled from GHS666.9m (€300m) to GHS1.38bn (€619m) over the same period.

However, of the country’s 27 banks, only seven are listed on the Ghana Stock Exchange (GSE), the governor of the BOG said in early February. Speaking at the Euromoney Conference in Accra, Kwesi Amissah-Arthur urged the nation’s 20 unlisted banks to list on the exchange, adding that this would increase the number of listed equities on the GSE to 54.

Amissah-Arthur also noted that sufficient risk management protocols must be in place for banks to exercise their full potential, which is why the bank has introduced risk-based supervision in its oversight of banks along with a re-capitalisation process for all banks, he said.

The BOG’s prudent oversight and regulation of late appears to be paying off: for the first 10 months of 2011 – the last period for which figures were available – let loans and advances reached $4.37bn, up 16.3% year-on-year, according to the BOG, while total assets rose 26.1% to $11.87bn.

Sector leaders are upbeat about the future outlook, identifying a number of positive factors, including economic growth, foreign investment, increasing diversification and a number of big-ticket projects in both the private and public sectors.

That banks could do considerably more to increase banking penetration is another source of optimism, as it indicates substantial scope for growth. In an interview with the local press in February 2012, Daniel Asiedu, the managing director and CEO of Zenith Bank Ghana, the local subsidiary of Nigeria’s Zenith Bank, said that factors such as increased use of technology and better coordination and information sharing between banks would strengthen the industry.

However, the single-biggest factor holding the industry back is high interest rates, which make borrowing very expensive. The BOG policy rate is 13.5% at present, down from recent highs of 18.5% in mid-2009, but it is very difficult to find a commercial loan for less than 20%, which is considered too high for many enterprises and households.

The BOG and other institutions are thus working towards interest rate normalisation – that is, bringing rates down to single figures. One of the most important factors will be keeping inflation in check. Lower long-term inflation rates should allow the bank to lower its base rate incrementally. This will take some time, however, not least due to the current rapid rate of economic growth, which will keep the BOG wary of overheating. The IMF forecasts that GDP growth will be 7.3% in 2012, keeping inflation at January’s figure of 8.7%. Recent increases in fuel costs and international risk factors may push prices higher, however.

The BOG and commercial lenders may look to address the other factors that are keeping rates high, including poor risk management and high costs. Difficulties in the former have led to banks charging higher rates to cover the level of defaults and non-performing loans; better provisioning and loan evaluation processes are being put in place to address these issues.

Banks also face high costs, both for labour in a market short on expertise and high on competition and for maintaining costly nationwide networks of branches and ATMs in rural areas in which transaction volumes can be low. With the prudent management of the BOG, however, Ghana’s banks should be able to handle these risk factors and capitalise on the sector’s increasing growth opportunities, both on the stock exchange and in the wider market.