Expansion in sight: Deposits and lending continue to grow while regulatory standards are being tightened

With a sizable group of actors Ghana has an impressively developed financial infrastructure. However, capacity tends to be fragmented as a result, and broader integration of the population into formal financial markets is slow. This is largely due to the opaque nature of credit and high interest rates.

A relatively large number of banks are active in the Ghanaian banking sector, though the universal banking market is mainly dominated by a small number of major players. In addition to universal banks, rural and community banks – which are much smaller than universal banks but also much more numerous – play an important role. Banking penetration is strong by regional and lower-middle-income country standards, though banks remain reluctant to lend deposits to the economy and despite growing competition, the move towards technology-driven banking has been slow.

PERFORMANCE: Ghana has hundreds of financial institutions, with 27 universal banks, as well as 135 rural banks and 49 non-bank financial institutions, including leasing firms, mortgage providers, finance houses, and savings and loan institutions; and that is without counting the thousands of susu collectors, who serve as informal, small-scale depository institutions for market traders and shopkeepers. Of the 27 universal banks, 10 are locally owned, while the remainder are backed by international owners – a mixture of European, American and African banking groups.

Although a number of private banks occupy the top slots in the sector by asset share – including heavyweights such as South Africa’s Stanbic, British bank Barclays, and Togo’s Ecobank (see analysis) – the state continues to play a large role in the industry. Ghana’s largest bank, Ghana Commercial Bank (GCB), remains majority publicly owned, for example, with the state holding a 51.17% share, divided between the government (21.36%) and the state-run Social Security and National Insurance Trust (SSNIT). Agriculture Development Bank (ADB), the fifth-largest bank by assets in 2010, is wholly state-owned. Parastatal organisations such as the SSNIT also own significant stakes in numerous other banks; for example, as of December 2010 SSNIT owned a majority stake of 68.75% in Merchant Bank as well as significant stakes in CAL Bank (34.49%), HFC (24.36%), SG-SSB (22.14%), Standard Chartered (14.34%), Fidelity Bank (15%), and several other banks and non-bank finance houses.

The contribution of the banking and insurance segments to GDP has been rising rapidly in recent years, from 2.7% of GDP in 2006, to 5.2% in 2010 (or GHS2.24bn, $1.3bn), according to figures from the Bank of Ghana (BoG). The total assets of banks and non-bank financial institutions stood at GHS24.99bn ($14.8bn) at the end of 2011, up 28% on a year previously; banks accounted for the bulk of the total, with assets standing at GHS22.06bn ($13.1bn).

Deposits have been growing steadily, from GHS4.4bn ($2.6bn) in December 2007 to GHS12.87bn ($7.6bn) as of September 2011. Between December 2007 and December 2010, deposits grew at a compound annual growth rate (CAGR) of approximately 24%. However, bank loans have failed to keep pace, rising from GHS4.15bn ($2.5bn) at end-2007, when they almost matched deposits, to GHS8.57bn ($5.1bn) at the end of the third quarter in 2011. From end-2007 to end-2010 credit grew at a CAGR of just under 18%.

The slower growth of credit in comparison to deposits is accounted for in large part by greater investment on the part of banks in government bonds, a trend that began in the wake of the 2008 global financial crisis and was sustained by the impressive returns on Ghana’s sovereign debt, which – over a variety of maturities – regularly offers double-digit yields. Bank investments in government securities have risen sharply in recent years according to BoG figures, growing from GHS1.15bn ($681.8m) at the end of 2007 to GHS4.13bn ($2.5bn) by September 2011. The rapid increase in banks’ government bond purchases and the related slower growth of lending compared to deposit-taking has led to concerns that government domestic borrowing could crowd out lending to the private sector. However, direct government debt to the banking sector has been falling significantly in recent years, dropping from GHS1.07bn ($634.4m) in September 2009 to GHS624.5m ($370.3m) in September 2011, according to figures from the BoG.

Thanks in part to a push for improved credit transparency and collateral registries, the non-performing loan rate improved substantially over the same period, from 17.2% to 14.2%, but remained high, helping to explain, in part, why banks were reluctant to lend additional money to the economy (see analysis).

REGULATION: In terms of legislation, the banking industry is regulated by the BoG Act and the Banking Act, which empower the BoG to oversee the banking system through its Banking Supervision Department. The Banking Act requires that every bank to be subject to on-site supervision by the BoG at least once a year, in addition to off-site supervision based on returns submitted by the banks on a daily, weekly, monthly, quarterly and semi-annual basis.

Since 2007, the BoG has pursued a risk-based system of supervision, in place of the compliance-based system. The BoG assesses each bank’s capital quality and earning quality and weighs it against residual risks to come up with a composite risk rating for each bank. “Enforcement is good,” said Anthony Yaw Oppong, the CEO of the Chartered Institute of Bankers. “The BoG carries a big stick and enforces sanctions.”

In 2012 the BoG undertook an outside review of Ghana’s banking legislation in order to identify weaknesses and bring it further into line with Basel requirements. Another reason for the review, according to the Banking Supervision Department, is to ensure the Banking Act adequately regulates savings and loans institutions, which were brought under the purview of the act in 2008, having previously been covered by legislation on non-bank financial institutions.

The act was originally designed just to cover banks but now also regulates other deposit-taking institutions, a BoG spokesman told OBG. The review began in late 2011 and, speaking in May 2012, the Banking Supervision Department informed OBG that it expects the process to be complete in the near future.

In another important regulatory change, in 2008 the BoG decided to raise the capital requirements of banks to GHS60m ($35.6m). Internationally owned institutions were required to meet the requirements by the end of 2009; however, local banks were given until the end of 2010 to reach a GHS25m ($14.8m) benchmark, and 2012 to reach GHS60m ($35.6m). The BoG expects all banks will reach the requirements by the end of 2012, according to a spokesperson for the Banking Supervision Department of the BoG.

Two or three show signs of potentially not meeting the requirements, but all have submitted capital buildup plans and the BoG is hopeful. The Banking Supervision Department told OBG that the main reason behind the increase was that several banks were repeatedly asking for special dispensations to exceed the maximum amount they were allowed to lend to a single customer – currently set at 10% of their loan book – which in its view signalled that the banks’ capital base was not adequate. “If banks continue to ask for such waivers, we will consider raising the minimum requirements further,” said the spokesman, adding that the BoG has made a decision in principle to no longer entertain such requests. “If banks want to do higher tickets, they need to build up their capital,” he added.

Capital requirements for non-bank financial institutions have also been increasing, from the previous rate of GHS1m ($592,900), and GHS1.5m ($889,350), for savings and loans, to GHS4m ($2.4m) at the end of 2011 and GHS7m ($4.2m) by end-2012, with leasing companies required to reach GHS10m ($5.9m).

BANKING PENETRATION: The banking penetration rate, defined as the percentage of the adult population (above 15 years of age) with an account at a financial institution, stood at 29% in 2011, according to data from the World Bank. This compares favourably to an average of 24.1% for sub-Saharan African countries and 28.4% for lower-middle-income countries, among which the World Bank now classifies Ghana. However, the overall figure hides socioeconomic discrepancies throughout the region. The rate falls to 15% for the poorest 40% of the population and rises to 52.47% among city-dwellers, pointing to a very low rate in rural areas. “In the countryside, 80% of the economy is cash-based,” said Gilbert Hie, the managing director of SG-SSB.

The steady expansion of the country’s GDP, on the back of rising capital inflows and hydrocarbons production, is expected to only further formal financial penetration over the medium term. The penetration rate is likely to continue to increase as more Ghanaians move into the ranks of the middle classes, and high-street banks are also increasingly opening branches in the countryside to compete with the rural banks, which should increase penetration outside of the cities.

Some 16% of Ghanaians saved money at a financial institution during 2011 and 6% took out a loan from a financial institution. Ghanaians still rely heavily on informal credit, with 28.8% having taken a loan from family or friends and a further 3.4% having borrowed from an informal financial institution.

ELECTRONIC & MOBILE BANKING: A host of new technological advances have also helped spread banking services to an ever-wider swathe of the population. ATMs are widely available in main cities such as the capital, Accra. However, only 11% of the population has a debit card – lower than the sub-Saharan average of 15.5% – according to research firm Findex, while only 2% has a credit card. Payment by card is not yet well developed. “Payment systems in retail outlets are still weak and very fragmented,” said Alhassan Andani, the managing director of Stanbic Bank. “The central bank is trying to expand it but there is still some way to go.”

Mobile banking is even more under-developed in Ghana by regional standards. For example, just 1% of Ghanaians sent and 1.5% received money by mobile phone in 2011, compared to an average of 11.2% and 14.5% respectively across the sub-Saharan African population. Although Ghana’s figures are more closely in line with those of lower-middle-income countries worldwide of 2.4% and 3.8% respectively, the decision by the organisers of the Ghana Banking Awards for 2011 not to award any bank prizes in the “Best Bank: Product Innovation” and Best “Bank: Mobile Banking” categories illustrated that, even from a local perspective, the state of mobile services remains underdeveloped.

However, sector operators are working to improve their offering. For example, UT Bank and mobile network operator Airtel Ghana in April 2012 announced plans to together launch a mobile banking platform called UT FONBANK that will enable customers to carry out transactions, such as opening an account, without having to go to a bank branch, as well as paying bills, among other services. “The switch to mobile banking is happening gradually,” said Nii Anyetei Ampa-Sowa, the vice-president and head of research at Databank. “At the moment it is not growing as fast as it should, but it will pick up and eventually be a major growth segment in the industry.” The arrival of new players is also having an effect; the entry of Nigerian banks, for example, has brought in new skills to the country, such as more in-depth knowledge of electronic banking.

CREDIT REFERENCING: Credit referencing is a relatively new phenomenon in Ghana, and its effects have yet to be fully felt. “It will take between five and 10 years for Ghana’s credit reference bureaux to fully establish themselves and be able to execute the full range of their functions,” Sulemana Mohammed, a research analyst at Ecobank Capital, told OBG.

XDS Data, the first credit reference bureau to launch operations in the country, was licensed in 2003 but did not begin business until enabling legislation was passed in 2010. In the interim, the firm worked with banks to acquire data and analyse it in advance of the launch. During that time, the underdeveloped nature of overall financial transparency and bookkeeping in Ghana became clear, said George Ahiafor, the CEO of the company. “Some banks initially provided us with data that our system rejected as much as 90% of the time for being incomplete; however, in these cases we managed to reduce rates to 60%, and some of the better-performing banks, in particular the foreign banks, have rejection rates as low as 5%.”

However, credit referencing offers the promise of facilitating bank lending and addressing one of the economy’s major challenges, namely difficulty accessing credit (see analysis) – though a lack of mandatory participation and overall enforcement limits their impact. “We have seen some improvements over the last year but the situation could be much better if the enforcement side was improved,” Ahiafor told OBG, explaining that none of the country’s insurance firms and only one of the country’s microfinance firms were taking part. “The law prescribes penalties if firms fail to provide us with data or do a check before advancing any credit, but these have yet to be applied.”

According to Ahiafor banks could also take better advantage of the system in order to help themselves. The banking and financial sectors may not be using credit transparency to all its potential, relying on it mainly for collection purposes as opposed to account management. Banks could also be running checks on their good customers as well as bad ones to make sure they do not have bad debts elsewhere and to see in which direction their loans might be heading.

“In practice credit referencing is a nightmare as the banks are unwilling to share their data,” said Ampa-Sowa. “Banks have been reluctant to give information on their best customers away out of fear that other banks might poach them,” Kofi Boateng Agyen, the senior operations officer for finance and private sector development at the World Bank’s Accra office, told OBG.

In addition to XDS Data, Hudson Price Data Solutions was awarded an operating licence in 2011, while Dun & Bradstreet was given a provisional operating licence. The push for greater transparency is certainly warranted, although there are concerns about competition, according to Ahiafor. “Other companies coming in could kill the entire business. In Nigeria there are three bureaux and they are all facing problems because of price competition; the market is too small for that and needs to become well established first.”

HUMAN RESOURCES: Training and education institutions include the Chartered Institute of Bankers (CIB), whose core activities are training professional bankers for the local industry and conducting professional examinations. The CIB is hoping to expand into the academic arena by offering a BA programme, and later an MA programme, in addition to its already existing professional training opportunities.

“Ghana is far ahead of most of the rest of the region in terms of training and competencies,” said Oppong. “The only other West African country that can compare is Nigeria. Most universities in Ghana offer degrees in banking and finance and there is no general shortage of qualified human resources or graduates for the banking sector, but there is a shortage of graduates with professional qualifications in the industry.”

RURAL & COMMUNITY BANKS: Ghana’s banking sector is not limited to universal banks; the regulatory system also provides for the existence of rural and community banks, which form an important element of the sector. Rural banks are limited to doing business and opening agencies within one region, have vastly lower capital requirements and face a prohibition on carrying out foreign business, such as letters of credit for imports and exports, apart from money transfers.

In 2000 ARB Apex Bank, which is jointly owned by the country’s rural banks, was incorporated as a “mini-central bank” for the segment – though it remains under the regulatory supervision of the BoG – in order to carry out functions including cheque clearing and cash movement; the bank entered into full operation in 2002 and has 10 branches.

There are currently 135 rural banks, though the geographical distribution of the banks is highly imbalanced. “In the south, most communities have their own rural bank, and in areas where that is not the case other community banks have generally opened agencies,” said Kwadwo Konadu Asiamah, the executive director of the Association of Rural Banks (ARB). However, at the moment there are only 15 in the poorer northern region of Ghana, where the ARB, in cooperation with northern development agency SADA, is advocating for further openings. According to the BoG, total segment assets grew by 42.9% on a year-on-year (y-o-y) basis to GHS963.3m ($571.1m) at the end of the second quarter of 2011, according to BoG data. Total deposits stood at GHS738.8m ($438m), a y-o-y rise of some 48.1%, amounting to 7.9% of total domestic currency deposits in Ghanaian banks, up from 7% a year earlier. Total loans and advances stood at GHS356.5m ($211.4m), with the bulk of remaining funds (GHS313.6m, $185.9m) invested in Ghanaian government securities. Primary reserves as a proportion of deposits stood at 19.96%, well above legal minimum requirements.

Rural banks may offer a number of advantages over conventional banks. “Rural and community banks (RCBs) are close to the people they serve and understand their needs and demands,” said Asiamah of the ARB. “Profits also stay in the area and are reinvested, so local people see the rural banks as theirs.” The expansion of RCBs has also spurred the wider development of banking more generally in the countryside. “Before the rural banking concept, universal banks weren’t going into the rural areas. Now they are, and there is significant competition taking place between them and the RCBs,” he told OBG. That said, the sector also faces challenges; for example, approximately 25 of the rural banks have collapsed over the past decade or so and three are currently facing significant difficulties.

Rural banks are represented by the ARB, which carries out advocacy for the sector, negotiates salary scales for segment employees and, in consultation with the BoG and ARB Apex, gives recommendations regarding the opening of new rural banks.

The organisation also carries out important training for the segment. The ARB is currently looking into opening a training school, for which it has already acquired land. Examples of the organisation’s advocacy work include achieving a corporate tax rate of 6% for rural banks, compared to a standard rate of around 27%. The association is also currently lobbying the BoG to maintain the capital requirement for rural banks at GHS150,000 ($88,935), to which it was recently raised. The BoG, as with universal banks, has raised the minimum capital requirements for RCBs from GHS50,000 ($29,645) to GHS150,000 ($88,935) in a decision made in 2008. However, unlike in the full-service banking segment the BoG has not mandated a deadline by which RCBs are required to do so, at the risk of losing their licences. Instead, the BoG has prohibited RCBs from opening additional agencies or paying out dividends to their shareholders until they have reached the new threshold. As a result, since late 2011, around 80% of RCBs had met the requirement.

A project to computerise and network all RCBs is currently under way, supported by $25m of aid from the US-backed Millennium Challenge Account Ghana Programme. The project began in 2008 and involves an infrastructure phase based on the installation of a central data centre at ARB APEX Bank and the distribution of network infrastructure to banks, which is largely complete, as well as the deployment of banking software. Computerisation will also offer a sound platform from which the RCBs will be able to compete with the nation’s universal banks.

OUTLOOK: In the medium term, the country’s rapid economic growth is expected to fuel continued expansion of the banking sector. “2012 is likely to be a mixed bag for the industry, given factors such as the elections,” said Andani. “However, the medium-term outlook is positive, especially given that by 2013-14 gas will have come fully on-line, offering more opportunities and further boosting the economy.”

Deposits and lending are set to continue to grow rapidly, especially as lending to small and medium-sized enterprises begins to take off, thanks to government initiatives and the emergence of banks specialising in the segment (see analysis). However, it is less clear if lending as a proportion of deposits will increase. The sector may see some further consolidation, though this is likely to be limited, unless there are major regulatory changes (see analysis). Among the challenges facing the sector overall is the need to expand provision of technology-enabled services, boost the ability of local banks to finance major projects in such sectors as infrastructure and oil, while reducing operating costs (and by extension, lending rates) and increasing deposit terms, both of which would enable longer-term lending. The last of these will depend to a great extent on the government’s success in maintaining the nation’s macroeconomic stability during this period of global uncertainty, and on whether the authorities decide to proceed with plans to issue longer-term bonds.