Ghana: Strengthening financial fundamentals

Although Ghana has an unusually high loans-to-deposits ratio and household lending rates in excess of 20%, the banking sector has been enjoying strong growth of late, on the back of the country’s macroeconomic success. Due in part to a mix of both rising capital inflows and a large unbanked population, the potential for long-term profitability, both in corporate and in retail, continues to attract international attention and investment.

Foreign players ranging from UK’s Barclays to Togo’s Ecobank have long played a role in Ghana’s financial sector but, in recent years, their presence has increased dramatically. Most recently, FirstRand, one of South Africa’s four biggest financial institutions, announced it would pay $91m to take a 75% stake in Merchant Bank Ghana (MBG), the international press reported on August 22. The deal involves a subscription of R154m ($18.41m) of new shares, and the acquisition of shares valued at R592.2m ($70.78m) has been approved by MBG’s shareholders but awaits the green light from the Bank of Ghana, the central bank.

FirstRand operates in retail, wholesale and investment banking, as well as in insurance in a number of other countries including Namibia, Mozambique and Botswana, through its subsidiary, First National Bank. The firm, through its acquisition of a majority stake in MBG, hopes to tap into a banking market that currently has relatively low penetration but substantial growth potential – particularly as Ghana has one of the world’s fastest-growing economies.

GDP is expected to expand at 8.8% this year and 7.4% in 2013, according to the IMF, following record-setting double-digit growth of roughly 14% in 2011. The rapid increase is partly due to Ghana’s fledgling oil industry, which has attracted substantial investment and has catalysed growth in other sectors.

This excellent economic climate has helped support the growth of the banking sector. In the first three months of 2012, total banking assets rose by almost 21% to GHS23.2bn ($11.92bn), with deposits rising 29.1% to GHS16.9bn ($8.69bn). Private sector credit grew by 37.4% to reach GHS9.3bn ($4.78bn), or 25.9% in real terms, the local press reported.

Admittedly, growth is from a rather low base. High interest rates, which for households reach an average of 24%, have proved stubbornly resistant to any attempts to bring them down. By comparison, the Bank of Ghana’s policy rate had dropped to around 12.5% earlier in the year, although concerns over inflation prompted it to raise the rate up to 15% last month. Furthermore, broader retail lending is still in its infancy, with penetration estimated at around 29% - higher than the average for Sub-Saharan Africa but still offering significant room for expansion.

Capitalising on this may not be as challenging as it first seems, particularly in comparison to other emerging markets. Ghana benefits from a diverse financial infrastructure that has helped expand the reach of formal or semi-formal services to new demographics. Many SMEs and those on low and middle incomes are served by “rural banks”, small institutions with limited operations, of which there are roughly 135 in Ghana. As elsewhere in Africa, microfinance is a growing interest, though questions remain over its regulation.

In a competitive, somewhat fragmented, and internationalised market, commercial banks cannot rely on oil-related business forever. The expectation is that they will increasingly seek retail and SME business that has until now been the preserve of rural banks and informal lenders. This should also help oil the wheels of the broader economy.

Still, greater retail lending is likely to be, at least in part, dependent on higher real incomes – not just good GDP figures, but rising incomes among the middle classes that are not immediately eroded by persistently high inflation. Similarly, a number of senior bankers have told OBG that SME lending growth will be contingent on businesses leaving the semi-regulated “grey” economy and moving into the formal sector, solidifying their legal and tax status, and property rights.

Ghana’s banking sector is currently growing quickly, and the high level of foreign participation is indicative of substantial potential. But as the system expands, it will also need to be reinforced. Current levels of non-performing loans, while down from 17% a couple of years ago, are still around 14%, suggesting that risk management should be improved. Over the past two years, the country has licensed three private credit agencies to begin operations, which together with a collateral registry, will help improve credit transparency, but it will take years before the effects are felt.

The somewhat fragmented nature of the sector has led to calls for consolidation, with smaller institutions (which may be less able to manage risk) either merging or being taken over. The entry of the likes of FirstRand, bringing investment, technology, skills and economies of scale, should help strengthen the system over the medium to long term.